When Japan was an emerging country

Recent wild swings in Japan’s financial markets — stocks, bonds and the yen — make Japan look almost like an emerging country.

Back in the 19th century, Japan was an emerging country, with its feudal society based largely on farming.

According to a paper by U.S. based researchers Chiaki Moriguchi and Emmanuel Saez, Japan’s GDP per capita in 1890 was at the level of U.S. GDP per capita in 1790, or about $1,200 in 2004 dollars. According to them, this is roughly comparable to the GDP per capita of the less developed countries today.

John Dower,  author of Pulitzer-prize winning ”Embracing Defeat” which covered the occupation of Japan by the American forces, describes the late 19th century Japan as “a small country with few obvious resources”.

For over two centuries, intercourse with foreigners had been largely prohibited by its feudal shoguns. Although the economy had become commercialised in those years of seclusion, no industrial revolution had taken place, nor had there been any striking advances in science.

After Japan (unwillingly) opened up in 1868, it quickly modernised, gaining one of the five major world power status by 1919. That reindustrialisation took the proportion of employment in agriculture down from 78 percent in 1876 to 65 percent in 1900 and 42 percent in 1940 (today, it’s less than 5 percent).

The World War Two came and went, and the country was forced to rebuild almost from scratch in August 1945.

Amidst the post-war chaos, it went through a period of hyper inflation as the authorities — under the U.S. occupation — printed money to finance a war-battered economy which saw a surge of population due to people returning from former colonies and the war zone.

Japan’s CPI index (100=1935) more than tripled to 350 when the war ended in August 1945, then rose to a whopping 29,000 in 1949.  On a different measure, consumer prices rose by 5,300% in just 4 years to 1948.

It’s famous history in my family that my great uncle who ran a rapeseed oil business in Kagoshima, southern Japan, took an overnight train to Osaka to sell oil during the post-war chaos, and he came back with pockets full of cash.

The economy began to stabilise. Then, thanks to an export boom during the Korean war, the Tokyo Olympics, and rapid economic reform, Japan enjoyed a period of super high growth which averaged 9.1 percent in 1955-1973. Its GDP per capita grew at an annual compound rate of 2.7 percent in 1886-1940 and at 4.6 percent in 1948-2005.

Much of Japan’s  post-war growth — kick-started with foreign capital — was based on private savings which were channelled by banks to finance massive infrastructure projects. People worked hard, saved and contributed to the development of their economy. By the time it surpassed West Germany to become the world’s second biggest economy in the 1960s, Japan’se economy no longer relied on foreign capital to grow. (A 1960 Japan is where China is at today given its GDP per capita is roughly at  $8,500-10,000)

As gyrations of recent weeks show, ebbs and flows of foreign capital can be damaging. The future for emerging economies today may lie on how they are successful in diversifying their source of growth.