A favourable world economy and the US alliance helped Japan grow. Later shocks tested it, and after 1985 they helped create the bubble.
The US alliance kept Japan's defence spending at about 1 per cent of national income. Resources could go into industry instead.
The USA opened its market to Japanese goods and licensed technology to Japanese firms. Japan joined GATT in 1955. As Japan grew more productive, the fixed rate of 360 yen to the dollar made its exports cheap.
The shocks of the 1970s tested Japan. The yen rose after the Nixon shock of 1971. The 1973 oil crisis hit Japan hard because it imported almost all its oil. Output fell in 1974 for the first time since the war.
Japan adapted well. Firms cut energy use and moved into high-value industries such as cars and electronics. Exports grew so fast that the USA pressed for limits, such as the car export restraint of 1981.
The Plaza Accord of 1985 roughly doubled the value of the yen against the dollar by 1988. To support growth, the Bank of Japan cut interest rates. Cheap money fuelled a "bubble" in shares and land, which burst in 1990-1991.
- Defence
- About 1 per cent of national income.
- 1974
- First fall in output since the war.
- Plaza Accord
- 1985: the yen roughly doubles by 1988.
- Bubble
- 1986-1990; burst 1990-1991.
Worked example: Weighing international factors
How far did the world economy shape Japan's growth?
- Help: the US alliance, open markets, technology and a cheap yen.
- Test: the Nixon shock and the oil crises.
- Response: Japanese firms adapted quickly.
- Harm: the Plaza Accord and cheap money led to the bubble.
Watch out for this
Japan simply rode a favourable world economy.
Many countries faced the same world economy but grew more slowly. Japan's policies, firms and workforce explain how it used these chances.
Check your understanding
Why did Japanese output fall in 1974?
- The oil crisis hit an economy that imported almost all its oil.
- The USA closed its market to Japan.
- The keiretsu were dissolved.