Category Archives: Japan

Whither Labor-Intensive Industrialization?

How Did Japan Catch-up On The West? A Sectoral Analysis Of Anglo-Japanese Productivity Differences, 1885-2000

By Stephen Broadberry (London School of Economics), Kyoji Fukao (Hitotsubashi University), and Nick Zammit (University of Warwick)

Abstract: Although Japanese economic growth after the Meiji Restoration is often characterised as a gradual process of trend acceleration, comparison with the United States suggests that catching-up only really started after 1950, due to the unusually dynamic performance of the US economy before 1950. A comparison with the United Kingdom, still the world productivity leader in 1868, reveals an earlier period of Japanese catching up between the 1890s and the 1920s, with a pause between the 1920s and the 1940s. Furthermore, this earlier process of catching up was driven by the dynamic productivity performance of Japanese manufacturing, which is also obscured by a comparison with the United States. Japan overtook the UK as a major exporter of manufactured goods not simply by catching-up in labour productivity terms, but by holding the growth of real wages below the growth of labour productivity so as to enjoy a unit labour cost advantage. Accounting for levels differences in labour productivity between Japan and the United Kingdom reveals an important role for capital in the catching-up process, casting doubt on the characterisation of Japan as following a distinctive Asian path of labour intensive industrialisation.


Distributed by NEP-HIS on 2015-5-30

Reviewed by Joyman Lee

Broadberry, Fukao, and Zammit focus our attention on productivity comparisons between the UK and Japan, departing from existing works on U.S.-Japan comparisons.

Broadberry, Fukao, and Zammit focus our attention on productivity comparisons between the UK and Japan, departing from existing works on U.S.-Japan comparisons.


Broadberry, Fukao, and Zammit argue that previous authors such as Pilat’s reliance on a U.S.-Japan comparison to measure Japan’s productivity has greatly distorted our periodization of Japan’s economic growth (Pilat 1994). This was partly because like Japan, the U.S. grew very quickly between 1870 and 1950, and the effects of the Great Depression in the U.S. also blunted our perception of the relative stagnation of the Japanese economy between 1920 and 1950. By comparing the Japanese data with that of the UK, Broadberry, Fukao, and Zammit show that Japanese catch-up began in the late nineteenth century during the Meiji period, and stagnated in the interwar period before resuming again after the Second World War.

In contrast to Pilat, the authors find that manufacturing played an important role in Japanese growth not only after but also before the Second World War. Whereas strong U.S. improvements in manufacturing (the U.S. itself was undergoing catch-up growth vis-à-vis the UK) might have obscured our view of Japanese performance in these areas, comparison with the UK reveals that Japanese manufacturing performed strongly until 1920. In terms of methodology, Broadberry, Fukao, and Zammit emphasize their use of more than one benchmark for time series projections to provide cross checks, and they selected 1935 and 1997 as benchmarks.

One of the most intriguing aspects of the paper is the suggestion that capital played a crucial role in Japan’s experience of catch-up growth. The authors challenge the growing view among economic historians that Asia pursued a distinctive path of economic growth, based on a pre-modern “industrious revolution” (Hayami 1967) and labor intensive industrialization (Austin & Sugihara 2013) in the modern period. Broadberry, Fukao, and Zammit’s data (table 12) shows that across our period, Japan caught up with the UK not only in terms of labor productivity but also capital intensity. Crucially, “by 1979, capital per employee was higher in Japan than in the United Kingdom” (p17). The authors explain this phenomenon by observing that “capital deepening played an important role in explaining labour productivity growth in both countries, but in Japan, the contribution of capital deepening exceeded the contribution of improving efficiency in three of the five periods” (p18). Contrary to the view put forward by those in favor of labor-intensive industrialization, the authors argue, “Japan would not have caught up without increasing [capital] intensity to western levels” (p19).

The authors contend that capital played as important a role as labor in shaping Japan's productivity growth.

The authors contend that capital played as important a role as labor in shaping Japan’s productivity growth.


This paper provides a valuable quantitative contribution to our knowledge of labor productivity in two countries that are highly important in studies on global economic history. The greater intensity of Japan’s external relations with the U.S. in the period after the Second World War has led to scholars’ greater interest in comparisons with the U.S., whereas as Broadberry, Fukao, and Zammit point out, the UK remains one of the main yardsticks in terms of productivity before the Second World War. In this respect, a comparison with the European experience is valuable, and offers a good quantitative basis for illustrating the character of Japan’s industrialization efforts in the period before the Second World War. The conclusion that manufacturing played a key role in Japan’s catch-up growth vis-à-vis the UK is consistent with the historical literature that has foregrounded manufacturing, and in particular exports to Asia, as the main driver of pre-WW2 Japanese economic growth.

What is more surprising in this paper, however, is the authors’ contention that capital was the primary factor in Japan’s productivity growth. The authors note that until 1970 Japan enjoyed lower unit labor costs vis-à-vis Britain largely because real wages were artificially repressed beneath the level of labor productivity. It was in the 1970s when Japan started seeing increases in real wages, and as a result its labor cost advantage disappeared until faster real wage growth in the UK in the 1990s (p15). In other words, the authors suggest that Japan’s export success was due not so much to improvements in labor productivity as it was to artificially low labor costs. While Japanese labor productivity growth was not exceptional except between 1950 and 1973, the contribution of capital deepening in Japan (2.29% and 1.32% for 1950-73 and 1973-90, as opposed to 0.67% and 0.58% for the UK; table 13) was on the whole greater or at least as much as that of the UK.

While few commentators would dispute the importance of capital in driving economic growth, it is unclear whether the data presented here sustains the conclusion that Japan did not follow a distinctive path of labor-intensive industrialization. The authors cite Allen’s paper on technology and global economic development (Allen 2012) to support their claim that western levels of capital intensity were necessary for productivity-driven growth that is characteristic of advanced industrial economies. While that latter point is well taken, aggregate measures of “capital intensity” do not on their own reflect the types of industries where capital (and other resources) is invested, or the manner in which labor is deployed either to create growth or to generate employment for reasons of political choice or social stability. In fact, proponents of the labor-intensive industrialization argument acknowledge that post-WW2 Japan witnessed a step-change in its synthesis of the labor and capital-intensive paths of industrialization, at the same time that Japanese industries often opted for relatively labor-intensive sectors within the spectrum of capital-intensive industries, such as consumer electronics as opposed to military, aerospace, and petro-chemical sectors (e.g. Austin & Sugihara 2013, p43-46).

Labor-intensive industrialization does not itself preclude high levels of capital investment, e.g. consumer electronics, which employs a great number of individual workers.

Labor-intensive industrialization does not itself preclude high levels of capital investment, for example consumer electronics, which employs great numbers of individual workers.

The key arguments in labor-intensive industrialization are not the role of capital per se, but the constraints imposed by initial factor endowments (e.g. large populations) and the transferability of the model through national industrial policies and intra-Asian flows of ideas and institutions. Broadberry, Fukao, and Zammit do not challenge these core ideas in the model, and confine their critiques to labeling Japan’s technological policy breakthroughs as changes in “flexible production technology” (p. 19). Doing so ignores the basic fact that the balance between population and resources in Japan has little similarity to that in the West, either at the eve of the Industrial Revolution or in the present day. In other words, there is little inherent contradiction between the need for capital accumulation and the selection of industries that make better use of the capital and technology (e.g. “appropriate technology”, Atkinson & Stiglitz 1969 and Basu & Weil 1998).

Finally, it seems to me that basing a critique primarily on a comparative study of the advanced economies of the UK and Japan misses a broader point that labor-intensive industrialization is as much about exploring paths that have been overlooked or inadequately theorized because of our simplistic insistence on “convergence” in economic growth. From this angle, foregrounding the subtle but profound differences between successful models of economic development, e.g. the experience of Japan in East Asia, and dominant Western models seems to be at least as valuable as attempts to reproduce the “convergence” argument.

Additional References

Allen, R 2012. “Technology and the Great Divergence: Global Economic Development since 1820,” Explorations in Economic History, vol. 49, pp. 1-16.

Atkinson, A & Stiglitz, J 1969. “A New View of Technological Change,” Economic Journal, vol. 79, no. 315, pp. 573-78.

Austin, G. & Sugihara, K (eds.) 2013. Labour-Intensive Industrialization in Global History. Abingdon, Oxon.: Routledge.

Basu, S & Weil, D, 1998, “Appropriate Technology and Growth,” The Quarterly Journal of Economics, vol. 113, no. 4, p. 1025-54.

Hayami, A, 1967. “Keizai shakai no seiretsu to sono tokushitsu” (The formation of economic society and its characteristics”) in Atarashii Edo Jidai shizō o motomete, ed. Shakai Keizaishi Gakkai. Tokyo: Tōyō Keizai Shinpōsha.

Pilat, D 1994. The Economics of Rapid Growth: The Experience of Japan and Korea. Cheltenham, Glos.: Edward Elgar Publishing.

Failed by #EconomicGrowth?

Asia’s Little Divergence: State Capacity in China and Japan before 1850

by Tuan-Hwee Sng (National University of Singapore) and Chiaki Moriguchi (Hitotsubashi University)

Abstract: This paper explores the role of state capacity in the comparative economic development of China and Japan. Before 1850, both nations were ruled by stable dictators who relied on bureaucrats to govern their domains. We hypothesize that agency problems increase with the geographical size of a domain. In a large domain, the ruler’s inability to closely monitor bureaucrats creates opportunities for the bureaucrats to exploit taxpayers. To prevent overexploitation, the ruler has to keep taxes low and government small. Our dynamic model shows that while economic expansion improves the ruler’s finances in a small domain, it could lead to lower tax revenues in a large domain as it exacerbates bureaucratic expropriation. To test these implications, we assemble comparable quantitative data from primary and secondary sources. We find that the state taxed less and provided fewer local public goods per capita in China than in Japan. Furthermore, while the Tokugawa shogunate’s tax revenue grew in tandem with demographic trends, Qing China underwent fiscal contraction after 1750 despite demographic expansion. We conjecture that a greater state capacity might have prepared Japan better for the transition from stagnation to growth.


Reviewed by Joyman Lee


This paper was distributed by NEP-HIS on 2014-09-25 and 2014-10-03. In it Sng and Moriguchi ask why China – with its large population and high levels of technological prowess – was not the first country to industrialize. Existing studies of “divergence” have not explained differences in economic performance between China and Japan. Despite the similarities between the two economies in levels of proto-industrialization, political and legal structures, and living standards. Sng and Moriguchi argue that differences in public finance accounted for important differences in the two countries’ ability to promote economic growth.

In this paper Sng and Moriguchi focus on the important question of size and geography as the central explanatory variable. In particular, the authors develop a context-specific model which suggests that rulers’ need to rely on agents to govern (principal-agent problem) in a pre-modern dictatorship meant that “agency problems increase with its geographical size and heterogeneity” (p5), owing to information challenges which precluded close supervision by rulers of their agents. The model predicts that the larger the polity, the higher the corruption rate, and the lower the tax rate out of fear that subjects will revolt, as expropriation reduces the ruler’s ability to provide social goods commensurate to the tax levied. The higher level of corruption also reduces rulers’ incentives to invest, and hence the provision of public goods per capita. Graft and inefficiencies mean that population and economic growth actually reduces the proportion of the economic surplus available to the ruler. As a result, the size of the polity lowers the tipping point where the negative effects of growth outweigh the positive effects.

Qing military officials. Qing China had a chronic corruption problem.

Qing military officials. Qing China had a chronic corruption problem.

Sng and Moriguchi test their hypothesis against a pool of primary and secondary data, which confirms that tax rates were higher in Japan than China, averaging around 34% in Japan (rising to 50-55% in some domains, p29): more than twice of China’s level in 1700 and approximately six times by 1850. Population growth was far greater in China than Japan, where the population stagnated after 1700. Compared to the Qing, Tokugawa Japan enjoyed a higher level of public services in terms of coinage, transportation, urban management, and environmental management (forestry), and in famine relief the Qing’s strengths were cancelled out by 1850. The authors conclude that the large size of China “imposed increasingly insurmountable constraints on the regime’s capacity to collect taxes and provide essential local public goods as its economy expanded,” and that “this factor alone might have been sufficient in holding back China’s transition from stagnation to growth even in the absence of Western imperialism” (p38). In line with the existing scholarship, Sng and Moriguchi contend that Japan’s healthier tax system provided the Westernizing Meiji regime (1868-1912) with revenues to conduct far-reaching reforms.


Despite its significance in global history, the comparative history of China and Japan is surprisingly overlooked. The “California school,” for instance, has focused largely on the economic “divergence” between China and the West, whereas Japanese economic historians have labored over Japan-Europe differences (Saito 2010). Sng and Moriguchi’s focus on the comparative history of China and Japan is thus relatively new. The authors join political scientist Wenkai He, whose recent book Paths toward the Modern Fiscal State also explores China’s failure to develop a modern fiscal state in the nineteenth century, in comparison with early modern England and Meiji Japan (He 2013). China’s “failure” is especially puzzling in view of the Qing’s overall success in raising revenue in the late nineteenth century (Wong 1997, 155-56).

Sng and Moriguchi’s argument that a state’s ability to increase revenue is inversely affected by size is persuasive. In the absence of institutions to monitor graft, China had seldom been able to pursue rational fiscal strategies – especially at the county level – since the Tang-Song transition (Hartwell 1982, 395-96). In contrast, Japan’s decentralized polity in the early modern period bore close resemblance to Europe. Perhaps unsurprisingly, early modern Japan’s experiences of proto-industrialization and industrious revolution had clear parallels both in England and in the Netherlands.

A magistrate's office in Jiangxi province. Arguments on the Qing's inadequacies hinge partly on the Qing's ideological goals.

A magistrate’s office in Jiangxi province. Arguments on the Qing’s inadequacies hinge partly on the Qing’s ideological goals.

What this narrative does not explain, however, is why China pursued such an inefficient mode of fiscal management. Given the challenges of graft and the fear of revolt, Sng and Moriguchi assume that it was the most rational or “optimal” course. The authors point to but dismiss lightly the question posed by Qing historians that the goals of the late imperial Confucian state might not have been compatible with “rational” state expansion. In other words, rather than fearing peasant revolt, the choice of tax rate might have to do with ideological reasons. Similarly, the idea that the Japanese state shared a “Confucian” outlook (p4) is overly simplistic, especially as consistently high levels of taxation in Tokugawa Japan undermine the idea that Tokugawa Japan was a “benevolent” state.

While size might have been a key variable in China’s state “weakness,” this does not in itself explain the strengths or weaknesses of China’s overall economy. The large size of China’s internal market, for example, allowed differentiation and specialization which appear to have sustained economic growth even in the absence of an active state. This was true both in the Qing and more recently in China’s informal and private sectors since 1978. Thus there is no reason to assume that the adoption of a “modern” fiscal apparatus was a natural goal for the Qing before 1850. Similarly, by focusing on the state’s fiscal abilities to the exclusion of other factors, Sng and Moriguchi also sidestep an important Japan-centered literature that considers how similarities in economic structures between China and Japan enabled the results of Westernizing experiments in Japan after 1850 to be transferred to China. This point is important because revenues from Japan’s trade with Asia propelled Meiji Japan’s economic growth, no less than the revenues collected by Japan’s indigenous tax structures. Moreover, this was a form of self-sustaining growth built upon constant competitive pressures from below, i.e. from China which was rapidly reproducing strategies developed in Japan (ed. Sugihara 2005).

Despite these criticisms, Sng and Moriguchi’s model offers clear quantitative analysis on an important aspect of a greatly understudied topic, and is recommended for anyone interested in the longue durée economic development of the two countries.

Additional References

Hartwell, R. 1982. “Demographic, Political, and Social Transformations of China, 750-1550,” Harvard Journal of Asiatic Studies, vol. 42, no. 2, pp. 365-442 [Dec, 1982].

He, W 2013. The Paths toward the Modern Fiscal State: Early Modern England, Meiji Japan, and Qing China. Cambridge, MA: Harvard University Press.

Saito, O. 2010. “An Industrious Revolution in an East Asian Market Economy? Tokugawa Japan and Implications for the Great Divergence,” Australian Economic History Review, vol. 2010, vol. 50, issue 3, pp. 240-261.

Sugihara, K. (ed.) 2005. Japan, China, and the Growth of the Asian International Economy, 1850-1949. New York: Oxford University Press.

Wong, R. 1997. China Transformed: Historical Change and the Limits of European Experience. Ithaca, NY: Cornell University Press.

They must have done something different: currency controls, industrial policy and productivity in postwar Japan

Effects of Industrial Policy on Productivity: The case of import quota removal during postwar Japan

Kozo KIYOTA (Keio University and RIETI) and Tetsuji OKAZAKI (University of Tokyo and RIETI)


Abstract This paper attempts to provide a systematic analysis on the effects of industrial policy in postwar Japan. Among the various types of Japanese industrial policy, this paper focuses on the removal of de facto import quotas through the foreign exchange allocation system. Analyzing a panel of 100 Japanese manufacturing industries in the 1960s, we find that the effects of the quota removal on productivity were limited—the effects were significantly positive, but time was required before they appeared. On the other hand, the effects of tariffs on labor productivity were negative although insignificant. One possible reason for this is that the Japanese government increased tariff rates before removing the import quotas and maintained high tariff rates afterward. As a result, the effects of the Japanese industrial policy in the 1960s might be smaller than widely believed in the Japanese economic history literature.

Reviewed by Sebastian Fleitas

“I haven’t got anything against open competition. If they can build a better car and sell it for less money, let ’em do it. But what burns me up is that I can’t go into Japan. We can’t build, we can’t sell, we can’t service, we can’t do a damn thing over there … I think this country ought to have the guts to stand up to unfair competition” Henry Ford II (1969)

People used to say that a miracle happened in Japan during the sixties. By 1960, the Gross Domestic Product per capita (GDPpc) of the US was 2.8 times that of Japan. In the same year, the GDP per capita of Chile was the same of the Japanese while Argentinian was 40% higher. One decade later the situation had dramatically changed. By 1970, US GDPpc was only 1.5 times greater than the Japanese. In addition, Japan GDP pc was 85% higher than the Chilean and 33% higher compared to the Argentinian. While comparison of GDPpc actually raise more questions than answers, the comparison with these Latin-American countries can be appealing because Japan and these countries had very aggressive currency controls and industrial policies during this period. The difference of results makes us think that Japan must have done something different, something better. To find these differences it is needed to evaluate separately the effects of each of the policies applied during those times, understanding the incentives that they provided to the firms. As Lars Peter Hansen – recent Nobel Prize in Economics- suggested, one key important thing in Economics is that we can do something without doing everything.

This paper, circulated in NEP-HIS 2013-11-09, focuses on the removal of de facto import quotas through the foreign exchange allocation system during the sixties in Japan. This system was used as a powerful tool for industrial policy in the 1950s, and hence their removal was supposed to have a substantial impact on industries. After direct control of international trade by the government ceased in 1949 as a part of the “Dodge Plan,” the Japanese government regulated trade indirectly through the allocation of foreign exchange. This implies that, given the prices, there was a de facto import quota for some goods, since the upper limit of the import quantity was determined by the foreign exchange budget. Under continuing pressure from the IMF, the Japanese government swiftly removed the de facto import quotas.  However, this process was different from what the literature in economics refers to as trade liberalization. The removal of import quotas did not necessarily constitute trade liberalization because tariff protection was substituted for import quotas. Therefore, to correctly quantify the effects of the quota removal, it is needed to control for the effects of the tariff protection.

In order to estimate the effect of quota removal, this paper utilizes detailed industry-level data from the Census of Manufactures (100 Japanese manufacturing industries in the 1960s) and data on trade protection. This enables them to control for industry (not firm) heterogeneity while covering the majority of manufacturing industries. Based on governmental information, the authors precisely identify the timing of the quota removal for each commodity, using original documents of the Ministry of International Trade and Industry (MITI). The authors estimate the parameters of interest (effect of the quota removal and the tariffs) using least square estimation including industry and time fixed effects. In this sense, the identification strategy of the effect of the quota removal is based on the variation in the timing of the quota removal across industries.

The authors find that the effects of the quota removal on productivity were limited. None of the industry performances are systematically related to the removal of the import quotas. Additionally, an increase in tariffs generally has significantly negative effects on the number of firms, output per establishment, and industry value added. The concern about reverse causality (higher tariffs were imposed on small industries in terms of the number of establishments and value added) is addressed using leads of the tariff and quota variables. The authors also check the effects on the growth rate of the result variables, finding that the quota removal had significantly positive effects, but time was required before they appeared. One explanation they provide for this is that the Japanese government increased tariff rates before removing the import quotas and maintained high tariff rates afterward.

I think that the main takeaway from the paper is that it suggests that the effects of the Japanese industrial policy in the 1960s might be smaller than widely believed in the Japanese economic history literature. However, I think the paper will benefit if the authors discuss more clearly some aspects. First, it is important to clarify what are the intended effects of the policy and what are the mechanisms for the effect of the quota removal on productivity. A clear discussion about mechanisms and intended effects could help the reader to understand the evaluation of the policy and what are the expected results. For example, is it a good or a bad result to see increases in productivity along with a decrease in the number of establishments? It seems natural to think that the government could impose de facto quotas to limit external competition and provide a handicap for the firms during the learning process. However, it is not clear what the intention of the government was when they removed the quota. Sometimes, the quota removal could be the result of the government thinking that some firms of the industries already have an appropriate level of productivity and that the less productive firms need to exit to allocate the resource to more productive production. But sometimes, the quota removal compensated with an increase in tariffs could be just a way to update the protectionism against the lobby of the new world financial institutions.

Second, I think the paper would benefit from a more detailed discussion about the identification strategy used and its suitability. A relevant challenge to the identification is the potential endogeneity of the timing of the quota removal. Since the Outline of the Plan for Trade and Foreign Exchange Liberalization was announced before the actual liberalization took place, the firms should have had incentives and time to adjust their behavior. Additionally, as mentioned above the criteria of the government could have been based on the observed trends of the industries. Suppose that the government decided to increase more the tariffs in those sectors that already have the lowest increases in productivity and that they suppose would be the most affected from the quota removal. Since the authors do not control for the pre-existing trends of the productivity of the industries, this issue can undermine the identification strategy, which is based on the idea that the timing of the quota removal varied exogenously across industries. Controlling for time trends per industry could help to capture these potential trends, and help to control for at least this potential source of endogeneity.

just an American cartoon. Jan 1969

Finally, a third issue is related to the identification of the coefficients for tariffs and quota removal. Even assuming that the timing of the quota removal was exogenous, an issue raises from the fact that while the tariff rate is a continuous variable the quota removal is a binary variable. However, this quota removal binary variable tries to represent a treatment effect that is potentially different by industry. In this sense, the dummy variable is only a proxy for the actual severity of the removed protection. At the same time, as it was discussed before, the loss of protection via quota removal could be correlated with the tariff increases since the authorities would have tried to compensate the affected industries. If this is the case, the tariff effect is not precisely identified since it can be capturing the unobserved heterogeneity on the severity of removed protection. In this sense, maybe the use of a continuous variable that represents the magnitude of the removed protection via the quota removal could help to better identify the effects of those variables separately.

To sum up, I think this and other papers from the same authors are making important contributions to better understand the effects of the industrial policy during postwar Japan. In this paper the authors point out that the effects of quota removal might be smaller than widely believed in the Japanese economic history literature. Even more, they point out that the effects of different policies generally overlap and that any assessment of these effects needs to take care of this fact. I cannot stress enough how important industrial policy was for postwar Japan, but if you still have doubts, you should have asked Henry Ford II.

Managing the Greater East Asia Co-Prosperity Sphere

Strategies and Organizations for Managing “Greater East Asia Co-Prosperity Sphere”

Tetsuji Okazaki (The University of Tokyo)

Abstract: During the World War II, Japan occupied a large part of East and South East Asia, called “Greater East Asia Co-Prosperity Sphere” (Daitoa Kyoei Ken). This paper overviews what the Japanese military authorities and the government did to develop the occupied areas in the 1930s and the early 1940s. It is remarkable that different development policies and organizations were applied across occupied areas. In Manchuria, which Japan occupied earlier, after trial and error, a system of planning and control was introduced. By this system, more or less systematic development of industries was undertaken. Meanwhile, in China Proper, the Japanese military authorities and the government prepared the statutory holding companies as channels for investment from Japan, but industrial development was basically entrusted to those holding companies and individual companies affiliated to them. Finally in South East Asia, development was almost totally entrusted to existing Japanese firms.


Review by Masayoshi Noguchi

This paper by the leading authority on the history of Japanese wartime economy was distributed by NEP-HIS on September 13th, 2013. It provides a very interesting general overview and understanding of the process behind the formation of the Greater East Asia Co-prosperity Sphere. Thanks to a very thorough and detailed literature review, the paper provides a comprehensive overview of “what the Japanese military authorities and the government did to develop the occupied areas [called Greater East Asia Co-Prosperity Sphere] in the 1930s and the early 1940s” (p. 1); while also summarising and contrasting different approaches taken by the Japanese authorities to the development of Japanese interests in Manchuria, mainland China and South East Asia. Comments are also offered as to the consequences of these different approaches.

Between 1915 and 1945, the Manchurian region was one of the major locations of China’s steel industry. The development of steel industry in that region was closely related to the Japanese invasion of China. Following the establishment of the (puppet) State of Manchuria in 1932, the Japanese government encouraged the formation of iron-steel factories with national capital to help transform Manchuria’s steel industry into a typical export-oriented industry. The main features of the development policy for Manchuria were the establishment of “special corporations” and so called “one industry, one corporation policy”. The five-year industrial plan for the State of Manchuria recognised the need for a business entity to administrate the overall development. It thus encourage the Nissan zaibatsu to form the Manchuria Heavy Industry and Development (MHID) Corporation, which was established in December of 1936. Nissan also took over the management of the Showa Steel Factory and invested in the Benxihu Coal and Iron Company, thereby gaining control over the steel industry in Northeast China. However, the initial plan for the MHID was soon subjected to a major revision as the outbreak of the Second Sino-Japanese War in July of 1938 significantly increased the demand to supply the Japanese military. At the same time, control of the MHID transformed and it became subject of direct control by the state. Later, when the export of steel products to Japan turned out to be less than originally expected, the steel industry ceased to be operated as an export-oriented industry.

The promotion of the economic development of mainland China was based on “the Outline of Measures to deal with the Incident” (p. 4). In order to support this development and attract capital investments from Japan to China, in November 1938 the Japanese government established two entities, namely the North China Development Corporation and the Middle China Promotion Corporation. These two corporations made significant investments to their affiliated companies in the fields of transportation, telecommunication, electricity, and coal mining.

Immediately after the outbreak of the Pacific War in December 1941, “the Outline of Economic Policies in the South East Asia” was promulgated, but in South East Asia, unlike the other two cases, “a policy to develop the local economies in a systematic way was not taken” (p. 7) and the “development was almost totally entrusted to existing Japanese firms” (p. 8).

In summary, Okazaki’s study shows how the formation of Greater East Asia Co-prosperity Sphere was not unique or consistently applied across geographies as it was conditioned with several restrictions. These included geographical terms and conditions of each area to which the Japanese army advanced, the success or failure of the military strategies, the interaction of the military, the state and economic interests as well as the economic terms and conditions of Japan itself. Although it is not easy to agree with a part of description presented by Okazaki (for instance that the advance of the Army into Manchuria was primarily motivated by its own economic concerns (p. 7)), the paper is required reading in order to understand this very important phase of the Japanese wartime economy.

A History of Japanese Audit Firms, 1965–2010

Integrating Personal Expertise: A History of Japanese Audit Firms, 1965–2010


Masaru KARUBE (Institute of Innovation Research, Hitotsubashi University, Japan)

Hironori FUKUKAWA (Graduate School of Commerce and Management, Hitotsubashi University, Japan)


To examine empirically the knowledge integration process of professional expertise that individuals have in a professional firm, this paper examines the emergence and growth of four large audit firms (ShinNihon, Azusa, Tohmatsu, and ChuoAoyama) in Japan over a period from the mid-1960s to 2010. Known as the Big Four, these firms—the product of a series of mergers between more than 70 audit firms—handled the vast majority of audit services for listed companies during this period. After the dissolution of ChuoAoyama in 2006, the remaining three audit firms have dominated the market.

A longitudinal case study documents how these professional service firms were successful in providing nationwide services through mergers with domestic competitors and the provision of global services in alliance with large international firms, even though they did not sufficiently realize the systematic attainment of individual expertise. The historical account of this process suggests that the two driving forces underpinning the merger growth of the Big Four were strategic intent in (1) systematizing individual expertise and (2) establishing nationwide and global service networks in response to the increase in size and growing diversity and complexity of their client base. Finally, this paper discusses the knowledge tension between localized individual expertise and organizational knowledge in a global context.


Review by Masayoshi Noguchi

This paper is an interesting piece of work that intertwines management and accounting history with a focus on post-war developments in Japan. The paper was distributed by NEP-HIS on 2013-04-06.

The main issue is ‘how knowledge workers collaborate and create new knowledge through collaboration’ in general, and ‘how professional knowledge workers collaborate between themselves and how collaboration is organized’ (p. 2) in particular. Then the authors state the research question in this study as follows:

‘Our basic research question concerns why large audit firms through a series of mergers have replaced audit services, as initially provided by a single or limited number of individual accountants’ (p. 2).

The fieldwork in Karube and Fukukawa’s paper moves forward by exploring the official history of accounting firms while, at the same time, looking for stated motivations of mergers during the post-war period. As a result, they state the following views as motivation for mergers amongst accounting firms:

‘(1) to overcome the intrinsic contradiction between economic dependency and the independence of audit opinion,

(2) to enhance their systematized audit capabilities to meet the growing and diverse need for audit services by client firms, and

(3) to acquire new client firms by establishing a reputation for audit services’ (p. 2).

Point (3) above is the most interesting, particularly given the stated aim of Karube and Fukukawa. Point (3) seems to be an important driver that helps to explain the mergers between major large-scale firms, according to the authors; who also state that:

‘…such explicit differences did not exist between major firms in terms of the substance of competence. Rather, it seems that no explicit difference in terms of the substance of competence promoted further competition for scale expansion. In other words, scale itself came to serve as a symbol of competence in the competition process between audit firms, especially large major firms. Scale expansion through merger then emerged as a reflection of the intense competition for the social proof of competence’ (p. 27).

According to Karube and Fukukawa, audit firms expanded through the acquisition of the audit services for the Nippon Telegraph and Telephone Public Corporation, Japan National Railways and the Japan Tobacco & Salt Public Corporation. In this regard, greater detail as to the process and selection of these acquisitions would provide interesting case material and warrant further examination in order to deepen the business history of Japanese corporation. In this regard Karube and Fukukawa state that:

‘…these firms were all large, the expectation was that the designated auditor or auditors would have sufficient human resources to provide audit services for such large firms. Moreover, many audit corporations shared the understanding that audit service was in essence difficult to differentiate, so that the size of the audit firm mattered for gaining these sorts of clients’ (pp.17-18).

A key concept in this study is ‘the social proof of competence’, where acquiring reputation, social status and symbolic outputs is more important than actual results/outputs. Therefore, for Karube and Fukukawa during the post-war period Japanese professional auditors:

‘…are more concerned about gaining social proofs of competence than the substance of competence. To do this, they pursue strategies that win reputation from clients, acquire good clients regarded as having high status, and produce symbolic outputs that are visibly appealing to clients. Reputation also derives from each client’s own experience of audit services, or is inferred from the provider’s past experiences, including their courses of action and results. Thus, past courses of action and experience for providers matter in gaining reputation from clients’.

In spite of this profound understanding, the authors develop the following proposition:

‘…in contrast to consulting services, as audit services derive more from the formal audit procedures decided by government, it is more difficult to differentiate services. Thus, the most symbolic output is the scale of services, as exemplified by the number of clients, the number of good clients, revenues from audit services, and the geographic coverage in providing services’ (pp. 6-7).

To be sure, the author will also consent to the other elements, such as recognition from influential others, such as government, being important, though size is one of the important elements for acquiring reputation.

Finally Karube and Fukukawa find no evidence that expansion through mergers contributed to an improvement in organizational competence nor that it improved the quality of audit services (and reduce accounting fraud. Specifically the authors state that:

‘…in the light of the substantial integration of organizational competence, there should be efforts to remove such weak integration as soon as possible after the merger. In the case of Asahi-kaikeisha Audit Corporation, it took nearly 10 years to dissolve the personalized audit system and to systematize the job and client rotations of junior professionals among audit offices within the firm. … As a result, Japanese audit firms succeeded in gaining social proofs of competence by way of scale expansion through mergers rather than realizing the substance of competence, in that they still faced difficulties with the internal integration of the merged firms’ (pp. 25-26).

‘The fact that this mobility [of accountants caused by the demise of Misuzu Audit Corporation] was observed six years later when Chuo and Aoyama merged in 2000 implies not only the existence of insufficient integration but also the presence of strong relationships between clients and accountants in their operations, suggesting the possibility of insufficient systematization of the substance of organizational competence’ (p. 28).

If the social proof of competence and substance of competence are completely different and scale expansion pursues the former objective, this result of the merger of the audit firms is quite natural. Probably, the relationship of both would not be so simple. The merger between the audit firms should have offered an important opportunity to enhance organizational competence, such as wider risk diversification, enhanced economic independence, strengthened bargaining power, improvement through scale merit, nationwide services, etc. Rather it largely depends on the management after the merger whether this opportunity can be exploited or not. In this sense, the authors’ following indication is appropriate:

‘[w]hile merger can be the “easiest” way for a firm to grow, the process of post-merger integration remains a critical and ongoing issue for management’ (p.29).

The Samurai Company

The Samurai Company: Double Creative Response in Meiji Japan ― The Case of Onoda Cement
Seiichiro Yonekura
Institute of Innovation Research, Hitotsubashi University

No abstract is available


Reviewed by Masayoshi Noguchi

This paper is an interesting work on Japanese business history in the Meiji Period and was distributed by NEP-HIS on 2012-06-13. The author’s stated purpose is to help us better understand the emergence of capitalist firms in Japan during this period,

This paper examines how the financial issues that emerged out of foreign affairs made it necessary for them not just to become Restoration politicians and bureaucrats, but to dismantle samurai class (“shizoku”) from which they emerged. Restoration officials had an extremely creative response to the task of dismantling their own class for the purpose of rebuilding the country’s finances. Their idea was to use national bonds to purchase the status of having belonged to the former samurai class and to convert those national bonds to industrial capital. However, this idea would never have gotten off the ground had it not been for another creative response by those responsible for it –to transform the samurai into entrepreneurs, indeed, to create the “samurai entrepreneur.” (p.3)

Yonekura also suggests that, ‘few studies have attempted to empirically verify the role played by the samurai class in dismantling feudalism and promoting industrialization’ (p.3). The double creative response which the author refers to means (1) ‘the creativity of Restoration officials in institutional reform’ as represented by ‘the issue of hereditary pension bonds’ to eliminate the heredity stipends paid to the former samurai class and the creation of ‘a lending facility to provide necessary funds to the samurai entrepreneurs and (2) ‘the creative corporate activities of the former samurai class’ as represented by Junpachi Kasai’s tactfulness in establishing and managing Onoda Cement, the subject of Yonekura’s study.

The hereditary pension bonds was the public loan delivered by the Meiji Restoration as the compensation to the noble families and the samurai class that returned hereditary stipends in accordance with the abolition of the system. Therefore, as the author states, ‘the Meiji government purchased the privileges and status of the former samurai for a lump sum payment of 170 million yen, and the samurai likewise sold their status to the new government for that amount’ (p. 6). This exchange was disadvantageous of the dealings of the samurai and they became further destitute economically through the inflation brought about by the accelerated issuance of inconvertible paper money. This was made worse by increased dissatisfaction with the new government. To avoid the risk of rebellion, the government implemented the ‘Samurai Relief Plan (shizoku jyusan)’ to encourage (or redirect?) the samurai to have them work in industry by creating the system of a lending facility.

On the other hand, Kasai’s creativeness was summarized in the way of fund-raising to establish Onoda Cement Co. The company was established by issuing the shares to the samurai investors in the Choshu Fief who had possessed the hereditary pension bonds bearing 7% interest at the rate of one share per 50 yen face value of the bonds. Furthermore, the bonds provided were used as security to borrow funds and raise further capital money. In managing the company, Kasai faced difficulty many times, but it got through using the connection of Kaoru Inoue who was a renown Restoration politician. This evidence helps to support the idea that:

‘The role of samurai in industrial promotion policy has not traditionally been highly regarded. They were largely amateurs, and their moves into commerce coincided with the Matsukata deflation period went failure. However…little empirical research has been done on the processes involved. This paper attempts to fill in some of the blanks with empirical research on Onoda Cement, a representative samurai relief company.’ (p. 24)

As suggested in the title of the paper, it is considered that the success or failure of the author’s attempt relies on the extent of Onoda Cement representing the ‘samurai company’ and depends on that of Junpachi Kasai, the founder, representing the ‘samurai entrepreneur’ of those days. It can be said that the former is based on the ability to present more comparative cases other than Onoda Cement and the latter depends on the quality and quantity of evidence to confirm the extent of which Kasai actually shared the consciousness as antigovernment element with other complaint samurais besides his own statement “shamed by their births as samurai” (p.14). This paper will serve as a new contribution in these days when the relevance of the Samurai Relief Plan for the management of Japanese enterprises is being reexamined as represented by the example of Okamoto’s (2006) latest work.


Okamoto, Y. (2006) Shizoku Jusan to Keiei – Fukuoka niokeru Shizoku Jusan no Keieishi teki Kosatsu (The Samural Relief Plan and the Management: Review in Business History of the Samurai Relief Plan in
Fukuoka), Kyushu University Press.