Center for Strategic and International Studies (CSIS)
Report Part Title: Japan: Industrial Policy and the Economic Miracle
Report Title: From Industrial Policy to Innovation Strategy
Report Subtitle: Lessons from Japan, Europe, and the United States
Report Author(s): Dylan Gerstel and Matthew P. Goodman
Published by: Center for Strategic and International Studies (CSIS) (2020)
Stable URL: https://www.jstor.org/stable/resrep26046.5
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Japan: Industrial Policy and the
Economic Miracle
In the second half of the twentieth century, Japan experienced unprecedented
economic growth, with gross domestic product (GDP) rising from $44 billion in 1960
to $5.45 trillion in 1995, a 123-fold increase.16 During these “miracle” growth decades,
the state often intervened in private markets to direct resources to targeted sectors.
Economists have debated the effectiveness of Japan’s industrial policy: some argue
that state intervention underpinned national competitiveness, others claim that it
was inefficient and held back the private sector, while others conclude that it had
an insignificant net effect on economic growth but influenced which sectors Japan
became dominant in.
Japanese economist Masahiro Okuno-Fujiwara and U.S. economist Laura D’Andrea Tyson
identify three phases of Japanese industrial policy in which different tools were used:
▪ 1945–1960: postwar reconstruction, when officials directly regulated private sector
activity through price controls, rations, and priority production for coal and steel;
▪ 1960–1973: support for strategic industries through “hard” measures like tax
advantages, subsidies, preferential financing, and trade protection; and
▪ 1973–1990s: support for strategic industries through “soft” measures including
administrative guidance, state-facilitated industry research coordination associations,
and structural adjustment assistance for supply and foreign exchange shocks.17
Throughout the postwar period, Tokyo engaged in both strategic and corrective
industrial policy to promote the development of targeted sectors and fix market
failures, respectively. Japanese officials often targeted industries associated with future
productivity growth, such as semiconductors and supercomputers, although they also
selected industries to boost employment or based on political motivations. Beginning
in the 1970s, developed countries, led by the United States, attacked Japan’s industrial
policies as protectionist and unfair and took retaliatory measures. Facing external pressure
16. “GDP (current US$) – Japan,” World Bank, 2020, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=JP.
17. Masahiro Okuno-Fujiwara, Industrial Policy in Japan: A Political Economy View (Chicago: University of Chicago Press,
1991): 271–304, https://core.ac.uk/download/pdf/6900233.pdf.
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and changing market dynamics, Japan liberalized many of its trade, competition, and
financial rules and abandoned heavy-handed intervention by the 1990s.
Origins of Japan’s Postwar Industrial Planning
In a 1946 report, an advisory committee to the Ministry of Foreign Affairs warned
that Japanese companies would be overwhelmed by foreign competitors and proposed
public support for heavy industry and manufacturing. Reports like this established the
intellectual foundation for the “Japanese-style market system” of the next few decades,
which “emphasized building long-running relationships between economic agents.”18
Japan’s industrial strategy relied on several key elements: a centralized bank-dominated
financial system that offered subsidized lending to favored enterprises, intimate networks
among groupings of business conglomerates known as keiretsu (descendants of the
zaibatsu in imperial Japan), close coordination between the public and private sectors, and
protection of key industries from foreign competition.
Following Japan’s impressive growth in the 1960s and 1970s, a leading school of thought
emerged that identified government action as instrumental for growth. In MITI and the
Japanese Miracle, Chalmers Johnson credited the role of the “developmental state,” in
which bureaucrats from the Ministry of International Trade and Industry (MITI) used
a system of deliberation councils, or shingikai, to direct support to favored industries.19
A 1991 U.S. Office of Technology Assessment report echoed Johnson’s view, concluding
that “industrial policy has been a key ingredient” in Japan’s economic success, especially
in capital intensive industries such as steel, automobiles, and semiconductors.20
Developmental economist Ha-Joon Chang observed that Japanese industries often defied
market dynamics that should have precluded their success. For example, automobile
companies faced large obstacles including Japan’s relatively limited experience with
auto manufacturing, its lack of key resources like rubber and oil, and the entrenched
dominance of U.S. competitors.21 Chang remarked that the industry would not be globally
competitive without early protection from foreign competition, initial direct and indirect
subsidies, and a protected home market that effectively subsidized exports.
As Japan’s economy stagnated in the 1990s, some scholars began to argue that growth
during the miracle years had occurred despite inefficient industrial policies, which had
now become a drag on the economy.22 Writing in 1991, Okuno-Fujiwara argued that
18. Shigeru T. Otsubo, Post-war Development of war of the Japanese Economy (Nagoya: Nagoya University, 2007), https://
www.gsid.nagoya-u.ac.jp/sotsubo/Postwar_Development_of_the_Japanese%20Economy(Otsubo_NagoyaU).pdf.
19. Chalmers A. Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975 (Stanford: Stanford
University Press, 1982).
20. Office of Technology Assessment, Japanese Industrial Policy: The Postwar Record and the Case of Super-
computers (Washington, DC: Office of Technology Assessment, 1991), 239, https://www.princeton.edu/~ota/
disk1/1991/9112/911208.PDF.
21. Reda Cherif and Fuad Hasanov, The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy
(Washington, DC: International Monetary Fund, March 26, 2019): 37.
22. For example, see Michael E. Porter, Hirotaka Takeuchi, and Mariko Sakakibara, Can Japan Compete (New York:
HarperCollins, 2000) and Richard Beason and David E. Weinstein, “Growth, Economies of Scale, and Targeting in Japan
(1955–1990),” Review of Economics and Statistics 78, no. 2 (1996): 286–95.
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business dynamism and “strong entrepreneurial spirits” were the main factors behind
economic growth despite bureaucratic attempts to contain them, although he conceded
that the state did help coordinate strategic decision-making and knowledge-sharing.23
Later studies found that industrial policies lowered national income by funneling
investment to lower-growth sectors.24 For example, a 1993 St. Louis Federal Reserve Bank
paper observed that when MITI tried to consolidate domestic automobile producers, it
actively discouraged Honda, then a smaller company, from expanding its auto business.25
Skeptics of industrial policy instead attribute Japan’s miracle growth to favorable domestic
conditions, especially high investment and savings rates.26 Finally, critics allege that MITI’s
decision-making process was susceptible to political capture and benefitted firms with
insider access.27
More recently, scholars have revisited Japanese industrial policy and emphasized the
state’s effectiveness in strategically coordinating activities of industry and academia.28
Some repudiate the methodology of earlier econometric studies that found interventions
did not increase productivity—in particular, criticizing that older studies do not account
for positive social spillover effects through knowledge diffusion. Others emphasize a
holistic model of MITI acting alongside the private sector to transform entrepreneurial
firms into innovative ones.29
Japan’s support for the domestic semiconductor industry is emblematic of effective strategic
coordination. Japan began producing sophisticated semiconductors in the 1960s but was
far behind U.S. industry.30 To close the gap with foreign competitors, MITI required U.S.
companies to enter joint ventures with Japanese companies to sell certain products into
Japan. Like Chinese joint venture requirements today, Japanese policy facilitated transfer of
technology while protecting the domestic market for national champions.
To further spur development, the Japanese state organized temporary joint research
projects and inter-firm coordination, most notably through the Very Large Scale
Integration (VLSI) Technology Research Association. Authorized in 1976 for four fiscal
years, VLSI brought together five major Japanese technology producers to share know-
23. Okuno-Fujiwara, Industrial Policy in Japan: A Political Economy View.
24. Beason and Weinstein, “Growth, Economies of Scale, and Targeting”; Robert Lawrence and David Weinstein, “Trade
and Growth: Import-Led or Export-Led? Evidence from Japan and Korea” (National Bureau of Economic Research,
Working Paper 7264, July 1999); Michael E. Porter and Mariko Sakakibara. “Competition in Japan,” Journal of Economic
Perspectives 18, no. 1, (2004): 27–50.
25. In the 1960s, MITI promoted “orderly” domestic competition where firms specialized in different parts of the supply
chain, including a failed effort to consolidate the automobile industry into three companies.
26. Paul R. Krugman, “Targeted Industrial Policies: Theory and Evidence,” Industrial Change and Public Policy
(1983):123-155, https://www.kansascityfed.org/publicat/sympos/1983/S83.pdf; Arthur Alexander, “Japan’s Industrial
Policy for the U.S.? History Repeating Itself” (Presentation at CSIS, Washington, DC, December 12, 2019).
27. Okuno-Fujiwara, Industrial Policy in Japan.
28. Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths (New York: Public Affairs,
2015): 43–46.
29. Dani Rodrik, “Industrial Policy: Don’t Ask Why, Ask How,” Middle East Development Journal (2008): 1–29, https://
drodrik.scholar.harvard.edu/files/dani-rodrik/files/industrial-policy-dont-ask-why-ask-how.pdf; William Lazonick,
“Entrepreneurial Ventures and the Developmental State: Lessons from the Advanced Economies,” World Institute for
Development Economics Research, 2008, https://www.econstor.eu/bitstream/10419/84670/1/659519895.pdf.
30. For example, in 1971, Japanese chip makers had to sell at 20 percent below cost to compete with U.S. companies.
Office of Technology Assessment, Japanese Industrial Policy, 249.
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how: Fujitsu, Hitachi, Mitsubishi Electric, Nippon Electric Company, and Toshiba. Tarui
Yasuo, who led VLSI from 1976 to 1979, remarked that the program aimed to “reduce
duplication of effort” by dividing up labor and avoid patents owned by U.S. firms.31 MITI
supported the VSLI by establishing a cooperative laboratory and extending $116 million in
subsidies. 32 VSLI produced more than 1,000 patent applications, especially in integrated
circuit technology.33 By the 1980s, Japanese companies had caught up to U.S. chipmakers
in nearly all areas of semiconductor technology, and state intervention, including through
VSLI, was recognized as a critical factor behind Japan’s success.34
Takeaways
During the high-growth era reviewed in this study, Japanese government policies were
generally successful in transforming the country’s economy and helping domestic
companies capture significant market shares of key global industries.35 Japanese
industrial policies were not infallible: some efforts failed out right and others were
inefficient, requiring heavy investments over a sustained period of time as well as
other supportive policies. However, despite marginal efficiency losses, Japanese
policies were effective in helping move the economy up the value chain.
Several observations emerge from Japan’s experience:
▪ Industrial policy relied on supportive structural features of the Japanese economy.
Without a highly educated workforce, a high savings and investment rate, and the
ability to import foreign technology, Japan would not have experienced miracle growth.
▪ Clear objectives helped focus development efforts. Initially, MITI was more
geared towards supporting heavy industry and utilities, to mixed effect. In the
1970s, MITI dramatically shifted towards advanced technology manufacturing to
compete with the United States and produce critical inputs to other sectors, with
greater success.
▪ Japan targeted foundational commercial technologies, not defense applications.
In contrast with U.S. and Soviet approaches to foster defense innovation bases,
MITI targeted foundational technologies, especially those that were vital inputs
for other industries, like steel and semiconductors—due in part to Japan’s
pacifist constitution. As Japan’s policy matured, MITI supported research and
development of pre-competitive technologies, including robotics and artificial
intelligence, to create a springboard effect for innovation.36
31. Ibid.
32. Kiyonori Sakakibara, ”From Imitation to Innovation: The Very Large Scale Integrated (VSLI) Semiconductor Project
in Japan,” (working paper, MIT Sloan School of Management, October 1983), https://dspace.mit.edu/bitstream/han-
dle/1721.1/47985/fromimitationtoi00saka.pdf?sequence=1.
33. Okuno-Fujiwara, Industrial Policy in Japan, 284.
34. Ibid., 300; Office of Technology Assessment, “Japanese Industrial Policy,” 249.
35. Robert H. Wade, “The Role of Industrial Policy in Developing Countries,” in Rethinking Development Strategies After
the Financial Crisis, United Nations Conference on Trade and Development, October 2015, 67–79, https://unctad.org/en/
PublicationChapters/gdsmdp20151wade_en.pdf.
36. For a partial list of targeted technologies, see Okuno-Fujiwara “Industrial Policy in Japan: A Political Economy View,”
299–300.
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▪ Successful interventions deepened coordination between public and private actors.
Japan’s most successful applications of industrial policy set strategic direction and
incubated inter-industry linkages to achieve medium-term goals with urgency.
These programs incentivized private sector buy-in through recognition of a common
industry challenge, public-private co-financing and ownership of research projects, and
supportive subsidies available through temporary technology research associations.37
▪ Successful strategy also required international competition. Export-oriented
companies in Japan were more productive than domestic-oriented firms, because
they were forced to out-innovate international competitors and had incentives to
learn and adapt foreign technology.38 Korea and Taiwan employed a similar strategy of
emphasizing export sophistication and priority on capturing international markets.39
▪ Unsuccessful interventions suppressed internal competition. In certain sectors, MITI
used administrative guidance to limit or discourage competition in order to create
domestic champions. Business often opposed these efforts, and studies have shown
that Japan was most competitive internationally in industries with fierce internal
competition, while Japan fell behind in sectors where competition was restricted.40
▪ MITI’s actions faced accusations of political capture and insider bias. Large,
incumbent Japanese firms were said by critics to have received disproportionate
support from MITI at the expense of smaller businesses, newer entrants, and
foreign firms in the Japanese market.
37. Technology research associations (TRAs) were made up of several companies and organized to conduct joint
research and development with state subsidies. TRAs were organized as temporary entities to solve specific challenges.
The VSLI is cited as an example of a successful Japanese TRA.
38. Joe Studwell, How Asia Works (London: Profile Books, 2013).
39. Reda Cherif and Fuad Hasanov, “The Leap of the Tiger: Escaping the Middle‐income Trap to the Technological Fron-
tier,” International Monetary Fund, July 16, 2019, https://onlinelibrary.wiley.com/doi/abs/10.1111/1758-5899.12695.
40. Porter and Sakakibara. “Competition in Japan.”
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