4. Meiji (2): importing and absorbing technology

(See Handout no.4)

The preview of Meiji industrialization

The three salient features of Meiji industrialization were as follows. These will be explained more fully in this and the following lectures.

--Very strong private sector initiative, combined with appropriate official assistance
--Successful import substitution of the cotton industry (yarn, cloth and garment)
--Parallel development of the modern sector and the indigenous sector

As noted in the previous lecture, one of the principal policy objectives of the Meiji government was rapid industrialization. While official policies of building infrastructure, hiring foreign advisors, education and training, establishing research institutes and SOEs, trade fairs, assisting zaibatsu and so on were important, it should be stressed that private sector dynamism was even more essential. At the top, powerful business men such as Shibusawa, Iwasaki and Godai provided leadership and large zaibatsu emerged. At the grass-roots level, new and old merchants, skilled engineers, proud craftsmen and rich farmers all over the country became the driving force of broad-based technical absorption. Without this private sector capability, even good policies would have failed to produce results.

It should be remembered that many contributing factors were inherited from the previous Edo period, including nationally unified markets, transportation and distribution networks, strong merchant tradition, well-educated population, history of industrial promotion, and so on.

The cotton industry was one of the leading industries of the world in the 19th century. At first, British products dominated the global market. In Asia, India was the main producer. But Japan absorbed textile technology very rapidly and effectively. After the opening of ports, Japan first imported British cotton clothes (finished products). Later, it imported cotton yarns and wove clothes for the domestic market. By around 1900, Japan began to export cotton yarns while importing raw cotton. In the early 20th century, Japan became a major exporter of cotton clothes. As today's prejudice in development economics is to discredit import substitution as a failed policy, Japan's brilliant success in this early period is all the more striking.

However, introduction of modern Western technology did not necessarily mean that traditional technology from the Edo period was wiped out. In the cotton as well as other industries, traditional production methods existed side-by-side with modern factories. Sometimes the two sectors produced differentiated products for different markets. Other times they were vertically related (one produces inputs to the other). Moreover, new technology influenced traditional methods, but local needs also modified imported technology.

By the end of Meiji (1912), which was shortly before the outbreak of WW1, it can be said that Japan was successfully industrialized in the field of light industries, especially textiles. But heavy and machinery industries were still embryonic. Their vigorous development started later, during and after WW1.

Macroeconomy and the industrial revolution in light industries

Masayoshi Matsukata (1835-1924), from Satsuma, tightened monetary and fiscal policies greatly in the early 1880s to stop inflation and restore monetary order.

The Japanese economy underwent several stages since the opening of ports in the late Edo period.

(1) Initial impact of foreign trade (1850s-): foreign technology and products flowed in and shifts in relative prices and industrial structure occurred. Inflation was high.

(2) Monetary confusion and inflation (late 1870s): inflation accelerated due to printing of paper money to finance a civil war (Saigo's uprising in Kyushu, 1877). As rice and agricultural prices rose, rural farmers and landlords got rich while former samurais were generally impoverished.

(3) Matsukata deflation (early 1880s): Finance Minister Masayoshi Matsukata (photo above) adopted a deflationary policy to (i) end inflation; and (ii) introduce a modern monetary system including the establishment of the Bank of Japan as the central bank in 1882. Rural income declined and landless farmers increased.

(4) First "company boom" (late 1880s): After inflation subsided and modern banking was installed, there was a rush to establish joint stock companies in the private sector. Exchange rate depreciation, easy money and low interest rates also encouraged their emergence.

(5) Continued waves of "company booms" (1890s-1910s): A great number of additional joint stock companies were established in the late 1890s, late 1900s and during WW1, interspersed with occasional recessions. At first, company booms were concentrated in textiles and railroads, but later, investment was activated across all sectors.

(6) Two wars (Japan-China 1894-95; Japan-Russia 1904-05): After each war, fiscal activism was adopted. Military spending was maintained even during the peace time while public investment on railroads, telephone network and so on was undertaken. Economic management of Taiwan (newly acquired colony, 1895) began. Local governments issued foreign-currency denominated bonds and invested in infrastructure (water, roads, education, etc). As a result, the size of general government expanded and the balance-of-payments deficit widened. Gold reserves (i.e. foreign reserves) were lost, and the debt-to-GDP ratio (estimated) rose to about 40% with roughly half of the debt being denominated in foreign-currency.

The above describes the situation up to the end of the Meiji period and immediately before WW1. Fiscal spending was promoted by Seiyukai (its full name was Rikken Seiyukai), a political party established in 1900 with Hirofumi Ito (the constitution drafter and the first prime minister) as the party leader. Seiyukai's support base was rich farmers and landlords who demanded active public investment in rural areas. But fiscal overspending led to the mounting balance-of-payments pressure, and belt-tightening was felt necessary.

But in reality, instead of implementing fiscal austerity, the macroeconomic crisis was suddenly solved thanks to World War I. As Europe and America fought, they stopped exporting to the rest of the world. Diverted world demand allowed the Japanese economy to enjoy an enormous export-led boom (but this was in the following Taisho period to be discussed more fully in lecture 7).

No reliable GDP statistics exist, but we have some estimates. According to real GDP estimates for the Meiji period, output was very bumpy and the average growth rate was 2-3 percent. By today's LDC standards, this is not a particularly high growth (data quality may be the problem). As to the employment structure, the share of agricultural employment was dominant (about 70% at first) but gradually declined.

Salient developments in international trade

Regarding the trade structure, silk (yarns, not finished products) dominated exports followed by tea, cereals, seafood, minerals, coal, and so forth. In other words, Japan was a primary commodity exporter. Raw silk remained the top Japanese product not just during the Meiji period but for the entire pre-WW2 period. The largest importer of Japanese silk and tea was the United States. Stockings made by Japanese silk were very popular among American ladies.

It should be noted that the US protected its silk cloth industry with tariff rates of 45-50%, but needed silk yarn as inputs. The American attempt to increase domestic silk yarn production (i.e. upstream integration) failed, so the US was compelled to continue to import Japanese yarns. More generally, as a young developing country the US maintained high import protection throughout the 19th century.

On the import side, dramatic shifts occurred reflecting the successful import substitution of the cotton industry as discussed above. Initially, finished products (clothes) were imported. Later, imports shifted to intermediate inputs (cotton yarns) and then to raw materials (raw cotton). In the graph in handout no.4, we can see a clean pattern of product cycle for this industry (import -> domestic production -> export). Domestically, production shifted from spinning to weaving, and from low to high quality At first, the United Kingdom was the main exporter of finished textile products and machinery to Japan. But over time, Japan effectively competed with British textile products and drove them out of the Asian market.

In early Meiji, Japan's trade pattern was "vertical," which is typical of a developing country. It exported silk and other primary commodities to Europe and America, while importing finished textile goods and machinery from them.

In late Meiji, Japan had developed a more complex trade pattern. Against Europe and US, it still conducted vertical trade. But with the rest of Asia (China, Korea, India, and others) Japan began to export light industry goods (cotton yarn, cotton clothes, matches, umbrella, clock, lamp, glass products, knitwear, and so on) and import materials for them, especially Indian raw cotton which was short-fiber cotton. Japan also imported US cotton which had longer fiber.

Due to Japan's emergence as a cotton textile producer, India was at first an exporter of cotton products, but later, it became an exporter of raw cotton.

As cotton yarn exports and raw cotton imports both rose, the government abolished the cotton yarn export tax in 1894 and similarly abolished cotton import tariff in 1896. This benefited the modern cotton factories (which used Indian cotton as inputs) but hurt traditional producers who spun domestically produced cotton. In order to establish monopsony in Indian cotton imports, Japanese textile companies formed a cartel to use only Nippon Yusen (a Mitsubishi-group shipping company) to transport Indian cotton to Japan.

Figure 4-1

Trade Structure

How Western technology was transferred

Western technology was imported and internalized in three distinct ways.

(1) Hiring of foreign advisors: In early Meiji, new factories and infrastructure were constructed and operated with heavy assistance of hired foreign engineers and managers. Salaries of foreign advisors were very high (sometimes higher than that of the prime minister) and became a great burden on the central government budget. There were different types of technological transfer schemes including turn-key contract, management contract, and technical advice. But there was virtually no FDI in the Meiji period, whether 100% foreign-invested or joint venture. Contracts were project-specific and with term limits, so foreigners returned home when the contract expired. The government took utmost care that no important national projects such as mines, railroads and shipyards would be under foreign ownership. Japan was even afraid of borrowing from foreigners, especially in early Meiji.

Table 4-1

Top earners: Salary Comparison with Prime Minister

Person Position Monthly salary
Mr. Cargill (British) Advisor to Railroad Department, Ministry of Industry 2,000 yen
Mr. Kindle (British) Advisor to National Mint, Ministry of Finance 1,045 yen
Mr. Morrell (British) Advisor to Railroad Department, Ministry of Industry 850 yen
Mr. Kiplon (American) Advisor on development of Hokkaido 833 yen
Tomomi Iwakura Udaijin (equivalent to prime minister); chief of Iwakura Mission to US & Europe 600 yen

In the late 19th century, there were many idle railroad engineers in the UK since the British railroad system had been more or less completed. Thus they often traveled abroad to keep themselves employed.

Kobu Daigakko was located in Kasumigaseki, near today's MOF. Later it became the Faculty of Engineering, Tokyo University.

(2) Training Japanese engineers: But foreign advisors were too expensive. The government vigorously promoted "import substitution" by Japanese engineers. Elite students were appointed by the government to go abroad to study latest ideas and technology at top universities in Europe and America with financial support from the Japanese government. In Tokyo, Kobu Daigakko (Technical University) was established in 1877 where foreign professors taught in English and German. Moreover, many technical high schools were created all over the country, producing a large number of middle-level engineers. This no doubt greatly increased the technical absorptive capacity of the country.

However, according to Prof. Odaka (see below), traditional craftsmen were more influential on the factory floor than newly trained engineers during much of Meiji.

(3) Copying, licensing, technical cooperation: Graduates from Technical University played an instrumental role in selecting and importing new technology. In economic ministries and private firms, they took the initiative in collecting information, purchasing machines, and adjusting them to Japanese requirements. Many US and European products were copy-produced by reverse engineering (we cannot do this today under WTO and TRIPS). Trading companies, such as Mitsui Trading and Takada Shokai, provided customers with product information and technical assistance. Later, in the early 20th century, a number of automobile and electrical machinery companies concluded licensing agreements and technical cooperation contracts with Western firms. But the Japanese side quickly absorbed new technology and often dissolved the relation with the Western partner later.

Japan is said to be a country of monodukuri (manufacturing things). In many European countries including the UK, engineers who work in dirty factories were not considered high-class compared with managers, lawyers and accountants who work in clean offices. But in Japan, university graduates loved to build, adjust and repair machines and manage factories. They had no problem with working side by side with machine operators. This was also true in Meiji. Many good students chose technical engineering, rather than law or economics, as their fields of specialization (maybe this tradition is disappearing in today's Japan).

Hybrid technology

Professor Konosuke Odaka (Hosei University, who also headed JICA's Myanmar research project) argues that Meiji industrialization was achieved by combining existing traditional technology and imported Western technology in an appropriate manner. He calls this "hybrid technology." Although Western technology was far superior to Edo technology, the former did not completely replace the latter. This can be considered as one example of "translative adaptation" (lecture 1).

According to Professor Odaka, there were different types of industrial evolution (M stands for "modern", I stands for "indigenous" and "*" means modified).

M -> M : for a completely new technology, the Western model must be imported as a whole; there was no corresponding traditional technology (railroad, telephone, electrification)

I -> I* -> M : indigenous technology was first adjusted and expanded. Later, there was a switch to a new Western method (shipbuilding, sake making)

I -> M* -> M : indigenous technology was first replaced by Western technology but in small scale that fitted Japanese reality. Later, the size was expanded (printing, machinery)

In addition, indigenous technology and modern technology often co-existed, because they played complementary roles in vertical industrial linkage (input-output), or their products and markets were differentiated (for example, modern factories produced for export, traditional ones produced for the domestic market, etc).

Takafusa Nakamura (professor emeritus, Tokyo University) proposes the concept of "new" indigenous industry, which is an indigenous industry modified by Western technology. This corresponds to I -> I* above in Professor Odaka's terminology.

Figure 4-2

Figure 4-3

Source: Takanori Matsumoto & Miyako Okuda, "Nationwide Development of Indigenous Industries in Prewar Japan," in Nakamura (1997).


Meiroku Zasshi

Mei is the first syllable of Meiji. Roku means six. Zasshi means journal or magazine. Meiroku Zasshi (Journal of the Sixth Year of Meiji) was a series of publication by Meirokusha (Society of the Sixth Year of Meiji) in 1874 and 1875. Meirokusha, in turn, was a free discussion forum founded by Arinori Mori (later to became the first education minister) in 1873. Meiroku Zasshi was a collection of relatively short essays covering a wide variety of issues such as lessons from Western history, proposal for reforming the Japanese language, religious questions, social policy, and economics. At the outset of each issue, the following message was printed in archaic Japanese:

"Recently, our friends gathered to discuss social issues and foreign situations in order to deepen knowledge and enjoy high spirits. As meeting records accumulated, we have decided to publish them and share them with our colleagues. While it is only a small booklet, we would be happy if it helps to improve the knowledge of the Japanese people."

Arinori Mori (1847-89)

Meiroku Zasshi

Mamichi Tsuda (1829-1903)

As an example, here is the summary translation of "The Argument Against Tariff Protection" by Mamichi Tsuda (1829-1903), a scholar of Western studies. This article was published in the fifth volume of Meiroku Zasshi on April 15, 1874.

Our trade deficits were 8 and 7 million yen in 1872 and 1873, respectively. In addition, we pay 2 million yen annually for foreign advisors and teachers. This means that our gold and sliver flow out of Japan at the rate of roughly 100 million yen every ten years. Our international reserves may be exhausted in one or two decades.

Pessimists say, "If we lose precious metals like this, how can Japan survive? We must stop this outflow. Europe used tariff protection before. The US is still practicing it. We must also adopt this policy."

I disagree with this idea. European economists state clearly that protection is the worst policy which harms the nation's welfare. The US is still using tariff protection because American industries are less developed than European with higher cost. Therefore, they levy high tariffs on imported goods to promote domestic industries.

But the level of Japanese industries is far below that of American. Needless to say, comparison with Europeans is out of question. It is like a small baby trying to compete with a giant. That is why we have to pay 2 million yen for foreign teachers. Evidently, copying American policy is not suitable for Japan. There are several reasons why tariff protection is undesirable.

First, commercial treaties with the West prohibit raising our tariffs.

Second, there is a huge gap in technology between Japan and Europe. For example, the price of domestic steel is higher than imported steel even with transportation cost. Protection is not enough to narrow this gap.

Third, Japanese people now widely use imported products (food, clothes, household goods, etc) but domestic supply is nonexistent. No Japanese factories can produce them.

Fourth, under the policy of rapid Westernization, a large amount of imports is inevitable.

Fifth, Japan is like a student learning Western knowledge and technology. To study more and faster, we need to pay high tuition.

Some say, "If we do nothing, we will lose all international reserves soon." But don't worry. The trade balance may be in surplus or in deficit in the short run, but there will be no great imbalance on average. The movement is natural and cyclical. When we first opened our ports, we had trade surpluses for a few years. Then, imports exceeded exports for the next three to four years. It is certain that we will have surpluses again in the near future. The natural balance is always maintained, and this is the condition under which technology and civilization should progress.

Meiroku Zasshi was Japan's first modern scholarly journal which greatly stimulated policy debate among intellectuals. However, the journal was terminated by the government order under tightened thought control in November 1875. Its publication lasted only two years.

Additional Questions & Answers


Iwanami Shoten, Kaiko to Ishin, Nihon Keizaishi 3 (Opening of Ports and Meiji Restoration, Japanese Economic History vol. 3), M. Umemura and Y. Yamamoto, eds, 1989.

Iwanami Shoten, Sangyoka no Jidai 1, Nihon Keizaishi 4 (The Age of Industrialization 1, Japanese Economic History vol. 4), S. Nishikawa and T. Abe, eds, 1990.

Nakamura, Takafusa, Nihon no Keizai Hatten to Zairai Sangyo (Japanese Economic Development and Indigenous Industries), Yamakawa Shuppansha, 1997.

Odaka, Konosuke, Shinban Shokunin no Sekai, Kojo no Sekai (The World of Craftsmen and the World of Factories, new edition), NTT Publishing, 2000.

Sugihara, Kaoru, Ajiakan Boeki no Keisei to Kozo (Formation and Structure of Intra-Asia Trade), Minerva Books, 1996.