US occupation reforms and the Korean War boom laid the foundations for Japan's later growth.
In 1945 Japan was defeated and its cities were bombed out. Industrial output had collapsed, and inflation was severe.
The US-led occupation reformed the economy. Land reform turned most tenant farmers into owners, which raised rural incomes and spending. New laws allowed trade unions. The occupation also began to break up the zaibatsu, the giant family-owned business groups.
From 1947-1948 the Cold War changed US priorities. In this "reverse course", the USA wanted Japan to recover quickly as an ally against communism. The break-up of big business was scaled back.
The Dodge Line of 1949 balanced the budget, stopped inflation and fixed the yen at 360 to the dollar. The Korean War then brought a flood of US military orders from 1950 to 1953. These orders gave Japanese firms money to invest in new equipment.
By the mid-1950s output had passed pre-war levels. In 1956 a government report declared that the post-war period was over.
- Land reform
- 1946-1950: tenants became owners.
- Dodge Line
- 1949: inflation stopped; 360 yen to the dollar.
- Korean War boom
- 1950-1953: US military orders.
Worked example: Using international factors in an essay
Why did Japan recover so quickly after 1947?
- Reform: land reform and unions widened the home market.
- Cold War: the reverse course made recovery a US priority.
- Stability: the Dodge Line ended inflation.
- Demand: Korean War orders funded new investment.
Watch out for this
The occupation destroyed Japan's big business groups for good.
The zaibatsu holding companies were dissolved, but the reverse course scaled back the break-up. Many firms later regrouped as keiretsu around banks.
Check your understanding
What was the "reverse course"?
- A shift in US policy towards rebuilding Japan as a Cold War ally
- Japan's decision to leave the US alliance
- A return to Japan's pre-war constitution