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How Japan Revived its Economy to become a Developed Nation in just 23 years


Japan is one of the most incredible nations of the 21st Century, and while most of us know Japan as a fully developed country, what we don’t know is that in the 1940s, Japan faced every obstacle possible for its failure! They suffered a massive defeat in World War 2; the Hiroshima & Nagasaki bombing had shaken the spirits of the Japanese; they had very few natural resouces and their economy was suffering one of it’s worst setbacks in history.

But within just 23 years, something crazy happened! Japan went on to become the second largest economy in the world, beating countries like France, Britain and even Russia. Japan is today known as the economic miracle of the 20th Century due to this incredible growth.

How did this little country go from ruins to becoming the second largest economy in the world? How did they achieve this in spite of having a small population and very few natural resources? Most importantly, what are the lessons that India needs to learn from this extraordinary rise of Japan?

This is a story that dates back to 1945, this is when the devastating World War 2 came to an end, with the Japanese suffering a massive defeat at the hands of the Allied powers. The Hiroshima and Nagasaki bombings had killed 50 lakh people.

Japan as a nation was in complete ruins. Military forces were disbanded leaving 1.3 Crore people unemployed, the factories that supplied arms and goods to military lost business, the per capita GDP of the country dropped by 47% as compared to pre-war period, and the Industrial production reduced by 90%. As a result, there was hunger, starvation and poverty all across the country!

This is when the US occupied Japan, and empowered the government to revamp its economy! Japan had become an instrument for US control in Asia. It lost the right to have an army and was only allowed to have one for self defence purposes!

This became one of the most important moves that changed the face of the Japanese economy. I’ll tell you why.

If you look at defence in terms of return on investment, you will see that the government has to spend Rs. 10 lakhs per soldier per year to train them, pay them and feed them. But if the same 10 lakhs are invested into educating an engineer, he/she will be producing an income for the government by paying taxes.

You will see that this translates into a billion dollar impact on the economy of the country.

Military spending, although very necessary, leads to an enormous burden on the economy of the country. In this case, the military spending of Japan became so less that they were practically spending just about 1% of the entire GDP on military from 1960 all the way to 2018. As you can see from this graph, France was spending close to 3% , the US stood at 8% and Germany stood at more than 4%.

Now the question is, if Japan was in ruins after World War, then how did these people find jobs? This was solved with the Keiretsu model!

This system is what gave rise to the most powerful Japanese companies in the world which we know today as Nippon Steel, Toyota and Mitsubishi.

What is so special about this system and how did it work?

If you look at how automobile companies operated in America back in the 1960s, you will see cut throat dealings and cost efficiency.

Eg. A giant car company like General Motors would have multiple suppliers and these suppliers would further have raw material suppliers.

A sunroof supplier would get his raw materials glass, screws and semiconductors from other suppliers. They would further have their own suppliers for steel and silicon.

General motors would strike a deal with Sunroof company A, say, for 5 years at a cost $40 per sunroof. But after 5 years, if Supplier B offers a sunroof at a lower price of $35, Company A would be fired and B would be brought in.

But, if the glass price hikes, and the sunroof supplier’s manufacturing cost itself shoots up to $39 per sunroof, then he gets a profit of only $1, which is very bad. But Supplier will be pressured to keep his margins at just $1 because of the contract. So General Motors will not bear the burden of the supplier.

But if the supplier chooses to increase cost, General Motors will just move to a different supplier. The company acts as a completely different entity without supporting other subsidiaries.

But the dealings of the Japanese Keiretsu was the complete opposite of this! Let me explain.

The entire cluster of companies including contractors, subcontractors, manufacturers and suppliers are supported by a Core Company and a Major Bank. This group is what forms a Keiretsu.

All these entities own a stake in each other’s business.

For example: Toyota would own 4% of the Supplier’s business, the Supplier would own a 0.25% stake in Toyota.

The supplier would own 1% in the manufacturer’s company and a major bank would own stakes in all these companies.

Instead of having a short term contract of 5 years like the US companies, Toyota makes a long and solid relationship with its suppliers for 20–30 years.

Here is how they function together:

  1. Lets say, a supplier needs 10,000 tonnes of steel to manufacture parts for Toyota. If the cost of steel spikes, this part manufacturer’s cost would increase.

What Toyota would do is, since they order 100,000 tonnes of steel anyways, this time, they will place an order of 110,000 tonnes of steel. So if the manufacturer orders 10,000 tonnes of steel separately, he would get at 26,000 Yen but now that Toyota is placing a huge order of 110,000 tonnes, they would be able to procure it at just 20,000 Yen and after procuring it, Toyota will just pass on the extra 10,000 tonnes to the supplier. So if you see, the manufacturer gets steel at 6000 Yen cheaper cost, as a result, the cost of the part manufacturing gets lowered without hindering the profits of the supplier, at the same time, Toyota gets parts without price hikes.

  1. If the Part Manufacturer is having troubles with profits and they need to expand; the Bank in the Keiretsu very easily offers a low interest loan such that, as soon as the cash flow comes back to normal, the manufacturer could repay the bank loan. This way expansion becomes easier even if there is a cash crunch.

  1. Most astonishingly, these companies also share their research and development data and their engineers within the Keiretsu.

For example: Toyota spent millions of dollars to perfect the Just-In-Time model of manufacturing. It eliminated dead stock in the warehouse, produced at less cost, with less manpower, less land and less capital. This system was so efficient that companies saw a 50% decrease in their inventory, an 80% decrease in their lead times and eventually a massive increase in their profit margins.

They sent the entire blueprint to their manufacturers. So just like Toyota, even the manufacturer was able to produce parts with less land, less equipment, less manpower and less cost. Eventually what would have happened? The cost to Toyota decreased and they benefitted without hindering the profits of the manufacturer.

When this kind of incredible support and resources were provided by the Keiretsu companies to each other, it gave them 3 incredible superpowers:

  1. The suppliers boldly invested into their R&D (research and development), becoming better with cost and efficiency with each passing year.

  1. Because of consistent profits, the companies were able to pass on their profits to employees in the form of perks, increased salaries and extra benefits.

  1. Most importantly, because of close knit support, coordination and resource sharing, all the entities in the supply chain made money at the same time.

Keiretsu companies like Toyota, Sony, Nintendo went on to dominate not only Japan, but the entire world!

As a result, millions of people got jobs, exports shot up and Japan grew to become the second largest economy in the world.

The cherry on the cake was when the US let Japan sell products in their country, the Japanese ended up beating the best companies in the world in Electronics, Automobile and Ship-Building.

It is the incredible spirit of the Japanese people that made an extraordinary impact on their economy. The Japanese government, just like the Indian government, offered lifetime employment with benefits so that the workers could feel safe.

But while Indians became complacent and turned government organisations into sluggish bureaucratic and loss stricken companies, the Japanese people worked without compromising on their quality of work. This turned Japanese public and private companies into world class organisations.

This is how Japan rose from the ashes to become the second largest economy in the world!


What are the lessons that we Indians need to learn from this incredible rise of Japan?

1. Humility

Can you imagine how difficult it would have been for the Japanese to accept help from the same country that dropped nukes on them? But the Japanese swallowed their pride and used the US relations to get protection as well as access to the US market. This is what built the foundation for their growth.

2. Conscious Capitalism is the undisputed instrument of economic acceleration,

The Keiretsu model helped the growth of companies like Sony, Toyota, Nippon, Toshiba and Mitsubishi. Thus both the people and the government must work hard to foster businesses rather than nationalising everything.

3. Attitude towards work

No matter how many policies you come up with, if the people are complacent and don’t have the attitude to grow, the country will never progress. This difference in attitude could be very clearly seen with how government employees use or abuse their job security in Japan and India respectively.

You have the potential to change the future of your country as an individual. Decide for yourself what kind of citizen you want to be in the growth journey of India!


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