On April 15, 1945, the Emperor himself delivered a radio address to the nation of the Imperial Rescript accepting the Allies' Potsdam Declaration in his own voice. The eight years of war that began with the outbreak of the Sino-Japanese War in 1937, caused severe losses in human lives for all belligerent nations and dealt a heavy economic blow to Japan. Many cities in Japan were literally reduced to ash and the Economic Stabilization Agency estimated in 1949 that around one-fourth of the nation’s physical wealth was lost due to the war.
Fig. 1 is a graph using logarithmic axis that shows changes in the per capita Gross Domestic Product (GDP) (referred to as the Gross National Product (GNP) until 1954) evaluated at 2015 prices. Data for 1945 are not available, but the per capita GDP in 1946 decreased to 66% of the prewar level (the average between 1934 and 1936).
The scale of the decrease in industrial production was more severe. Based on the former Ministry of International Trade and Industry's industrial production index (base year 1955), production in 1946 was no more than 26% of the prewar level. As production shrank, currency expanded through fiscal channels, causing rapid inflation and wholesale prices increased by 364% in 1946. This was the starting point for the post-war Japanese economy.
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However, the reconstruction and growth of the Japanese economy thereafter were remarkable. When comparing the immediate post-war period to today, the real GDP per capita in 2023 was 16.7 times that in 1946. The improvement in economic affluence as shown in this figure corresponds with the rise in the average life expectancy, which reflects the people's welfare level. The average life expectancy for all people (males and females), which was 52.0 years in 1947, increased to 84.1 years in 2023.
Real GDP per capita is an indicator of affluence but is also a macro indicator of labor productivity. Productivity improvements were particularly notable in some industries.
In the iron and steel industry, labor productivity as the crude steel output per employee increased by 309.0 times from 1946 to 2022. Automobile production per employee, including those in the auto parts industry, increased by 63.3 times during the same period. In addition to productivity improvements in individual industries, the reallocation of resources from industries with relatively low productivity to highly productive industries had a significant impact on overall productivity.
The growth of the Japanese economy during this period was not constant. The growth path is divided into three phases, wherein the annual average per capita GDP was (1) 7.2% from 1946 to 1973, (2) 3.2% from 1973 to 1990, and (3) 0.8% from 1990 to 2023.
These phases correspond to (1) the post-war period of economic reconstruction and high growth, (2) the period of stable growth, and (3) the long stagnation period following the bursting of the bubble economy. The increase in the per capita GDP achieved during (3) was only a 1.3-fold increase. As mentioned earlier, the majority of the economic growth from 1946 to 2023 was achieved during the periods (1) and (2).
There are also significant differences between the industrial policies for periods (1) and (2), during which the economic growth continued, and those for period (3), during which the economy remained stagnant. To overcome the economic crisis, the “priority production” policy adopted immediately after the war aimed to concentrate resources in strategic industries, such as the coal and steel industries, using the wartime control mechanisms that had been carried through.
In the 1950s, when Japan transitioned to a market economy and resumed international competition, the Ministry of International Trade and Industry adopted “industrial rationalization” to modernize aging and outdated production facilities as its priority policy. Various measures were employed, including loans by the newly-established Japan Development Bank, special measures on taxation for new construction and renovation of facilities, and preferential foreign exchange allocation using the foreign exchange budget system.
In addition to modernization of facilities in existing industries, there were efforts to foster new industries, such as the synthetic fibers and petrochemical industries, and to support companies in withdrawing from industries that had lost their comparative advantage, such as the coal and natural fibers industries.
Following the Nixon shock and the oil crises, the industrial policies in the 1970s to the 1980s focused on support for companies for their withdrawal from energy-intensive basic materials industries, as Japan entered a period of stable growth.
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Since the 1990s, the nature of industrial policy has changed significantly due to various factors. First was external pressure from the United States. Faced with current account deficits and the decline of the manufacturing industry in the 1980s, the United States criticized Japan's industrial policies, especially those targeting individual industries. In the Japan-U.S. Structural Impediments Initiative and the Japan-U.S. Framework Talks that commenced in 1989, the United States expanded its criticism to cover the entirety of the Japanese economic system.
Second was the prolonged economic stagnation that began with the bursting of the bubble economy in 1991. The government began to recognize the need for structural reform to overcome the economic stagnation, independent from the criticism from the United States.
Third was the shift in awareness concerning the stage of Japan’s economic development. The "Vision for MITI Policy in the 1980s" compiled by a council of the Ministry of International Trade and Industry noted that Japan’s per capita national income had surpassed the average of European Community nations and had reached the global frontier. The council emphasized that Japan would need to pursue a new growth pattern.
Against this backdrop, since the 1990s, industrial policies of the former Ministry of International Trade and Industry (MITI) and current Ministry of Economy, Trade and Industry (METI) have shifted the focus from policy intervention in individual industries to regulatory reform and structural economic reform. The basic idea was to eliminate regulations that restrict market functions and to introduce a system to complement the market, enhancing market functionality, thereby getting a new pattern of economic growth off the ground.
What should be noted is that even as market functions were prioritized, the need for policy support for technological revolution and innovation was constantly emphasized. The "Vision for MITI Policy in the 1980s" adopted “a nation built on technology” as its slogan for new growth, recommending increased R&D expenditures and a higher share of government funding in R&D.
The promotion of technological innovation continued to be emphasized in the subsequent “growth strategies,” and is also included as one of the major pillars in the New Direction of Economic and Industrial Policy advocated at present by METI on the premise of the development of new technologies such as AI.
Nevertheless, reality has departed from the objectives set out in this series of policy documents. Fig. 2 shows the amounts of R&D expenses in Japan adjusted for inflation using GDP deflators (on a logarithmic scale), and the proportion of R&D expenses funded by the government, based on surveys conducted by the former Prime Minister’s Office and the Ministry of Internal Affairs and Communications since the 1950s.
Interestingly, the trend in R&D expenditure closely resembles the trend in per capita GDPs in Fig. 1. In other words, since the 1990s, when economic growth stagnated, R&D spending also stagnated. Furthermore, in the first half of the 1980s, immediately after the "Vision of MITI Policies in the 1980s" recommended raising the government’s share of R&D funding, the actual share showed a significant decline, and the figure has not recovered since.
The Vision contains a memorable sentence: "The 100 years of modernization to catch up with advanced countries has ended, and from the 1980s, an unprecedented new phase begins." This reminds us of the expression in the 1956 White Paper on the Economy: "The post-war era has ended. We are about to face different circumstances. Growth through recovery has ended. Future growth will be supported by modernization." Both statements expressed the determination of policymakers and their call on the public to recognize the changes underway in a new stage of economic growth.
Since the 1950s, Japan has successfully achieved its goal of modernization. On the other hand, since the 1990s, Japan has had problems that it has recognized, but has failed to resolve over 30 years. At the 80th anniversary of the end of World War II, Japan needs to make full-fledged efforts to address those challenges.
>> Original text in Japanese
* Translated by RIETI.
August 14, 2025 Nihon Keizai Shimbun
