2 Modernization and Empire: Industrialization from the Meiji Restoration to World War II

The dramatic transition from Tokugawa feudalism to an industrializing empire between 1868 and 1945 constitutes the formative crucible of Japan’s modern political economy. During these decades the Japanese state dismantled the bakuhan order, constructed new governing institutions, adopted Western technologies, and pursued an outward-looking industrial strategy that culminated in imperial expansion across East Asia. By 1945 Japan possessed both the productive capacity and the institutional repertoire that would underpin its post-war growth, even though wartime defeat necessitated profound reconstruction. The present chapter reviews the central phases of this transformation—the Meiji Restoration, the Taishō search for democratic equilibrium, and the early Shōwa shift toward a managed war economy—while tracing the parallel emergence of the zaibatsu conglomerates and the mobilisation of resources for military purposes. Emphasis is placed on quantitative indicators of economic and social change and on the enduring institutional legacies that continue to shape Japanese business and governance.

2.1 The Meiji Restoration and the Reconstruction of the State

With the resignation of the last Tokugawa shōgun in 1868, power was nominally returned to the emperor, yet real authority lay with a coalition of reformist samurai from Satsuma, Chōshū, Tosa, and Hizen domains. Their overriding objective was to secure national independence in a world dominated by Western imperialism. To that end they abolished the domains (1871), replacing them with centrally appointed prefectures, instituted a modern conscript army (1873), and promulgated a land-tax reform that converted feudal dues into a monetised tax liability, thereby stabilising state revenue (Jansen, 2000).

Fiscal centralisation enabled unprecedented public investment in modern infrastructure. Government outlays financed telegraph lines, railways, and model factories—among them the Yawata Steel Works (1901) and the Tomioka Silk Mill (1872)—which diffused technology and demonstrated industrial best practice. Although many state enterprises were later sold to private interests, they laid the groundwork for heavy industry and marked the beginning of an interventionist developmental strategy subsequently refined by the Ministry of Agriculture and Commerce (est. 1881) and, later, the Ministry of Commerce and Industry (est. 1925).

Politically, the Meiji leaders adopted the 1889 Constitution modelled on the Prusso-German form, establishing a bicameral Diet while retaining decisive prerogatives for the emperor and the genrō elder statesmen (Pyle, 1996). Bureaucratic recruitment was regularised through competitive civil-service examinations, entrenching a meritocratic elite whose technical competence—and corporate ethos of public service—echoes Tokugawa samurai values described in Chapter 1. Literacy, already high by international standards in 1870, rose from an estimated 45 percent to over 90 percent by 1910, creating a skilled labour force capable of absorbing imported technology (Ohkawa & Shinohara, 1979).

2.2 Industrial Take-Off and the Rise of the Zaibatsu

The transition from light industry led by silk and cotton to heavy and chemical industries after the Sino-Japanese War (1894–1895) reflects both deliberate state policy and private entrepreneurial initiative. Government demand for armaments and shipping stimulated steel, shipbuilding, and machinery, while protective tariffs (re-imposed after tariff autonomy was regained in 1911) nurtured domestic producers.

Entrepreneurial families—above all Mitsui, Mitsubishi, Sumitomo, and Yasuda—built vertically integrated, bank-centred conglomerates known as zaibatsu. Each was anchored by an internal bank that mobilised household savings, channelled funds to group firms, and exercised strategic coordination. By 1927 the four largest zaibatsu controlled almost one-third of paid-up capital in the Japanese corporate sector (Nakamura, 1994). Their close ties to the state reflected a division of labour: bureaucrats formulated industrial policy, while the zaibatsu executed large-scale projects requiring both capital and managerial expertise.

Table 2.1 summarises selected economic indicators. Output growth was especially rapid during the First World War, when Japan expanded exports to Asian markets vacated by the European powers. Real gross domestic product grew at an average annual rate of 4.3 percent between 1885 and 1920, and industrial output by roughly 6.5 percent (Ohkawa & Shinohara, 1979). By 1920 manufacturing accounted for just over 30 percent of gross domestic product compared with 12 percent in 1874—a structural shift mirrored by rising urbanisation..

Table 2.1 Selected Indicators of Japan’s Industrial Transformation	1870	1913	1938
Population (millions)	34	52	71
Real GDP (billion 1990 GK dollars)	25	71	169
Manufacturing share of GDP (percent)	12	24	34
Steel output (thousand metric tons)	—	186	6 803
Literacy rate (percent, est.)	45	90	96

Sources: Maddison (2007); Ohkawa & Shinohara (1979); Ministry of Commerce and Industry statistical returns, various years.

2.3 Taishō Democracy and Corporate Adjustment

The decade and a half from 1912 to 1926, known as the Taishō period, witnessed both political liberalisation and mounting economic volatility. An expanded electorate—male suffrage became universal in 1925—gave rise to party cabinets that sought to reconcile popular demands with fiscal orthodoxy. Early experiments with collective bargaining and enterprise unionism appeared in the textile mills, while new legislation such as the Factory Act (1923) modestly improved working conditions (Gordon, 1985).

Yet three disruptive shocks destabilised the system: the post-war recession of 1920–1921, the Great Kantō earthquake of 1923, and the Shōwa Financial Crisis of 1927. These events catalysed bank consolidation and reinforced the financial hegemony of zaibatsu groups. They also intensified strategic cooperation between the state and big business, prefiguring the more intrusive economic management of the 1930s. Corporate governance during the Taishō years thus oscillated between market competition and cartel-like coordination, anticipating post-1950 patterns of regulated competition under the aegis of the Ministry of International Trade and Industry (Johnson, 1982).

2.4 Militarisation and the Controlled Economy in Early Shōwa

Following the Manchurian Incident of 1931, Japan accelerated rearmament. Military expenditure rose from 35 percent of the general account in 1931 to over 70 percent in 1944 (Barnhart, 1987). The Army and Navy Ministries secured privileged access to fiscal resources and exercised veto power over cabinet formation, effectively subordinating civilian authority.

Industrial policy shifted from tariff protection to direct allocation of materials and credit. The 1938 National Mobilisation Law authorised state control over labour deployment, prices, and investment, embedding wartime planning mechanisms that anticipated post-war administrative guidance (Okazaki, 1993). Heavy industry’s share of industrial production surpassed 60 percent by 1942, compared with one-third in 1925, while light-industrial exports declined in relative importance (Nakamura, 1994).

Parallel to these domestic changes, the empire expanded: Manchukuo (1932), northern China (from 1937), and Southeast Asia (1941) supplied raw materials ranging from coal to rubber, reducing Japan’s dependence on Western sources but overextending its logistical capacity. The economic geography fostered by imperialism created vertically organised production zones that later informed the regionally integrated supply networks of post-war East Asia.

2.5 Japan in the Global Economy, 1868–1945

Japan’s trade ratio (exports + imports as a share of GDP) rose from approximately 9 percent in 1873 to 27 percent in 1913, underscoring the outward orientation of Meiji economic policy (Yamamura, 2003). The composition of trade shifted over time from silk and tea to machinery and chemicals. Capital imports—railroad equipment, machine tools, and eventually direct foreign investment in mining—provided technological spillovers, although their scale remained modest relative to domestic savings.

By the late 1930s trade became increasingly politicised: the United States supplied three-quarters of Japanese oil imports in 1937, and when Washington imposed an oil embargo in 1941, Japan’s strategic calculus tipped decisively toward southward expansion. The wartime experience therefore revealed both the achievements and the vulnerabilities of the modernising project: Japan could marshal substantial industrial capacity, yet it remained dependent upon overseas resource acquisition, a constraint that conditioned its post-1945 export-oriented development model.

2.6 Statistical Appendix

Table 2.2 Timeline of Major Institutional and Economic Reforms, 1868–1945
1868	Charter Oath outlines principles of modern governance.
1871	Abolition of domains; creation of prefectures.
1872–1873	Land-tax reform; compulsory education ordinance.
1889	Promulgation of Meiji Constitution.
1894–1895	Sino-Japanese War; Taiwan ceded to Japan.
1902	Anglo-Japanese Alliance signed.
1904–1905	Russo-Japanese War; Korea becomes protectorate.
1911	Restoration of tariff autonomy.
1923	Great Kantō earthquake; infrastructural reconstruction begins.
1925	General Male Suffrage Law; universal conscription amended.
1927	Shōwa Financial Crisis; Bank Law revision strengthens Bank of Japan supervision.
1931	Manchurian Incident; Kwantung Army establishes Manchukuo.
1937	Full-scale war with China; outbreak of Second Sino-Japanese War.
1938	National Mobilisation Law imposes comprehensive economic controls.
1941	Formation of Imperial Rule Assistance Association; oil embargo by United States.
1945	Defeat and surrender; Allied Occupation begins.

2.7 Legacies for Post-War Growth and Contemporary Institutions

Despite devastation in 1945, the institutional capacities forged since 1868 enabled rapid reconstruction. The mobilisation machinery of the early Shōwa era was repurposed under Allied supervision for industrial recovery; former munitions plants produced consumer goods, and the planning expertise honed in wartime ministries migrated to MITI, guiding the high-growth era (Johnson, 1982). The zaibatsu were formally dissolved, yet their managerial talent and networked capital were quickly reassembled into keiretsu groupings linked by main-bank finance—a post-war analogue of pre-1945 conglomerate coordination.

Moreover, developmental ideology—the conviction that national survival requires state-guided economic upgrading—endured. Industrial policy in the 1950s and 1960s echoed Meiji precedents in promoting strategic sectors such as steel, petrochemicals, and electronics. Even contemporary public-private initiatives in semiconductors and green technologies reflect a lineage traceable to nineteenth-century state entrepreneurship.

2.8 Conclusion

Between 1868 and 1945 Japan compressed centuries of institutional and industrial change into less than eight decades. A feudal polity was reshaped into a constitutional monarchy, an agrarian economy into an industrial power, and a secluded island state into an imperial actor on the world stage. These transformations involved formidable costs—including colonial domination abroad and authoritarian regression at home—yet they also produced the organisational capabilities, human capital, and technological foundations that underpinned Japan’s post-war economic miracle. Understanding this formative period is indispensable for interpreting the strategic preferences of Japanese corporations and policymakers in the present day, as many contemporary practices—bank-centred finance, government-business consultation, and export-led growth—originate in the institutional synthesis achieved during the Meiji, Taishō, and early Shōwa years.

References

Barnhart, M. A. (1987). Japan Prepares for Total War: The Search for Economic Security, 1919–1941. Ithaca, NY: Cornell University Press.

Gordon, A. (1985). The Evolution of Labor Relations in Japan: Heavy Industry, 1853-1955. Cambridge, MA: Harvard University Press.

Jansen, M. B. (2000). The Making of Modern Japan. Cambridge, MA: Harvard University Press.

Johnson, C. (1982). MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. Stanford, CA: Stanford University Press.

Maddison, A. (2007). Contours of the World Economy, 1–2030 AD: Essays in Macro-Economic History. Oxford: Oxford University Press.

Nakamura, T. (1994). Economic Growth in pre-war Japan. New Haven, CT: Yale University Press.

Ohkawa, K., & Shinohara, M. (1979). Patterns of Japanese Economic Development: A Quantitative Appraisal. New Haven, CT: Yale University Press.

Okazaki, T. (1993). The Japanese Economic System and its Historical Origins. Oxford: Oxford University Press.

Pyle, K. B. (1996). The Making of Modern Japan. Lexington, MA: D. C. Heath.

Yamamura, K. (2003). The Economic Emergence of Modern Japan: Selected Essays. Oxford: Oxford University Press.

# Modernization and Empire: Industrialization from the Meiji Restoration to World War II The dramatic transition from Tokugawa feudalism to an industrializing empire between 1868 and 1945 constitutes the formative crucible of Japan’s modern political economy. During these decades the Japanese state dismantled the bakuhan order, constructed new governing institutions, adopted Western technologies, and pursued an outward-looking industrial strategy that culminated in imperial expansion across East Asia. By 1945 Japan possessed both the productive capacity and the institutional repertoire that would underpin its post-war growth, even though wartime defeat necessitated profound reconstruction. The present chapter reviews the central phases of this transformation—the Meiji Restoration, the Taishō search for democratic equilibrium, and the early Shōwa shift toward a managed war economy—while tracing the parallel emergence of the zaibatsu conglomerates and the mobilisation of resources for military purposes. Emphasis is placed on quantitative indicators of economic and social change and on the enduring institutional legacies that continue to shape Japanese business and governance. ## The Meiji Restoration and the Reconstruction of the State With the resignation of the last Tokugawa shōgun in 1868, power was nominally returned to the emperor, yet real authority lay with a coalition of reformist samurai from Satsuma, Chōshū, Tosa, and Hizen domains. Their overriding objective was to secure national independence in a world dominated by Western imperialism. To that end they abolished the domains (1871), replacing them with centrally appointed prefectures, instituted a modern conscript army (1873), and promulgated a land-tax reform that converted feudal dues into a monetised tax liability, thereby stabilising state revenue (Jansen, 2000). Fiscal centralisation enabled unprecedented public investment in modern infrastructure. Government outlays financed telegraph lines, railways, and model factories—among them the Yawata Steel Works (1901) and the Tomioka Silk Mill (1872)—which diffused technology and demonstrated industrial best practice. Although many state enterprises were later sold to private interests, they laid the groundwork for heavy industry and marked the beginning of an interventionist developmental strategy subsequently refined by the Ministry of Agriculture and Commerce (est. 1881) and, later, the Ministry of Commerce and Industry (est. 1925). Politically, the Meiji leaders adopted the 1889 Constitution modelled on the Prusso-German form, establishing a bicameral Diet while retaining decisive prerogatives for the emperor and the genrō elder statesmen (Pyle, 1996). Bureaucratic recruitment was regularised through competitive civil-service examinations, entrenching a meritocratic elite whose technical competence—and corporate ethos of public service—echoes Tokugawa samurai values described in Chapter 1. Literacy, already high by international standards in 1870, rose from an estimated 45 percent to over 90 percent by 1910, creating a skilled labour force capable of absorbing imported technology (Ohkawa & Shinohara, 1979). ## Industrial Take-Off and the Rise of the Zaibatsu The transition from light industry led by silk and cotton to heavy and chemical industries after the Sino-Japanese War (1894–1895) reflects both deliberate state policy and private entrepreneurial initiative. Government demand for armaments and shipping stimulated steel, shipbuilding, and machinery, while protective tariffs (re-imposed after tariff autonomy was regained in 1911) nurtured domestic producers. Entrepreneurial families—above all Mitsui, Mitsubishi, Sumitomo, and Yasuda—built vertically integrated, bank-centred conglomerates known as **zaibatsu**. Each was anchored by an internal bank that mobilised household savings, channelled funds to group firms, and exercised strategic coordination. By 1927 the four largest zaibatsu controlled almost one-third of paid-up capital in the Japanese corporate sector (Nakamura, 1994). Their close ties to the state reflected a division of labour: bureaucrats formulated industrial policy, while the zaibatsu executed large-scale projects requiring both capital and managerial expertise. Table 2.1 summarises selected economic indicators. Output growth was especially rapid during the First World War, when Japan expanded exports to Asian markets vacated by the European powers. Real gross domestic product grew at an average annual rate of 4.3 percent between 1885 and 1920, and industrial output by roughly 6.5 percent (Ohkawa & Shinohara, 1979). By 1920 manufacturing accounted for just over 30 percent of gross domestic product compared with 12 percent in 1874—a structural shift mirrored by rising urbanisation.. | **Table 2.1 Selected Indicators of Japan’s Industrial Transformation** | 1870 | 1913 | 1938 | | ---------------------------------------------------------------------- | ---- | ---- | ----- | | Population (millions) | 34 | 52 | 71 | | Real GDP (billion 1990 GK dollars) | 25 | 71 | 169 | | Manufacturing share of GDP (percent) | 12 | 24 | 34 | | Steel output (thousand metric tons) | — | 186 | 6 803 | | Literacy rate (percent, est.) | 45 | 90 | 96 | *Sources: Maddison (2007); Ohkawa & Shinohara (1979); Ministry of Commerce and Industry statistical returns, various years.* ## Taishō Democracy and Corporate Adjustment The decade and a half from 1912 to 1926, known as the Taishō period, witnessed both political liberalisation and mounting economic volatility. An expanded electorate—male suffrage became universal in 1925—gave rise to party cabinets that sought to reconcile popular demands with fiscal orthodoxy. Early experiments with collective bargaining and enterprise unionism appeared in the textile mills, while new legislation such as the Factory Act (1923) modestly improved working conditions (Gordon, 1985). Yet three disruptive shocks destabilised the system: the post-war recession of 1920–1921, the Great Kantō earthquake of 1923, and the Shōwa Financial Crisis of 1927. These events catalysed bank consolidation and reinforced the financial hegemony of zaibatsu groups. They also intensified strategic cooperation between the state and big business, prefiguring the more intrusive economic management of the 1930s. Corporate governance during the Taishō years thus oscillated between market competition and cartel-like coordination, anticipating post-1950 patterns of regulated competition under the aegis of the Ministry of International Trade and Industry (Johnson, 1982). ## Militarisation and the Controlled Economy in Early Shōwa Following the Manchurian Incident of 1931, Japan accelerated rearmament. Military expenditure rose from 35 percent of the general account in 1931 to over 70 percent in 1944 (Barnhart, 1987). The Army and Navy Ministries secured privileged access to fiscal resources and exercised veto power over cabinet formation, effectively subordinating civilian authority. Industrial policy shifted from tariff protection to direct allocation of materials and credit. The 1938 National Mobilisation Law authorised state control over labour deployment, prices, and investment, embedding wartime planning mechanisms that anticipated post-war administrative guidance (Okazaki, 1993). Heavy industry’s share of industrial production surpassed 60 percent by 1942, compared with one-third in 1925, while light-industrial exports declined in relative importance (Nakamura, 1994). Parallel to these domestic changes, the empire expanded: Manchukuo (1932), northern China (from 1937), and Southeast Asia (1941) supplied raw materials ranging from coal to rubber, reducing Japan’s dependence on Western sources but overextending its logistical capacity. The economic geography fostered by imperialism created vertically organised production zones that later informed the regionally integrated supply networks of post-war East Asia. ## Japan in the Global Economy, 1868–1945 Japan’s trade ratio (exports + imports as a share of GDP) rose from approximately 9 percent in 1873 to 27 percent in 1913, underscoring the outward orientation of Meiji economic policy (Yamamura, 2003). The composition of trade shifted over time from silk and tea to machinery and chemicals. Capital imports—railroad equipment, machine tools, and eventually direct foreign investment in mining—provided technological spillovers, although their scale remained modest relative to domestic savings. By the late 1930s trade became increasingly politicised: the United States supplied three-quarters of Japanese oil imports in 1937, and when Washington imposed an oil embargo in 1941, Japan’s strategic calculus tipped decisively toward southward expansion. The wartime experience therefore revealed both the achievements and the vulnerabilities of the modernising project: Japan could marshal substantial industrial capacity, yet it remained dependent upon overseas resource acquisition, a constraint that conditioned its post-1945 export-oriented development model. ## Statistical Appendix | **Table 2.2 Timeline of Major Institutional and Economic Reforms, 1868–1945** | | | ----------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | | 1868 | Charter Oath outlines principles of modern governance. | | 1871 | Abolition of domains; creation of prefectures. | | 1872–1873 | Land-tax reform; compulsory education ordinance. | | 1889 | Promulgation of Meiji Constitution. | | 1894–1895 | Sino-Japanese War; Taiwan ceded to Japan. | | 1902 | Anglo-Japanese Alliance signed. | | 1904–1905 | Russo-Japanese War; Korea becomes protectorate. | | 1911 | Restoration of tariff autonomy. | | 1923 | Great Kantō earthquake; infrastructural reconstruction begins. | | 1925 | General Male Suffrage Law; universal conscription amended. | | 1927 | Shōwa Financial Crisis; Bank Law revision strengthens Bank of Japan supervision. | | 1931 | Manchurian Incident; Kwantung Army establishes Manchukuo. | | 1937 | Full-scale war with China; outbreak of Second Sino-Japanese War. | | 1938 | National Mobilisation Law imposes comprehensive economic controls. | | 1941 | Formation of Imperial Rule Assistance Association; oil embargo by United States. | | 1945 | Defeat and surrender; Allied Occupation begins. | ## Legacies for Post-War Growth and Contemporary Institutions Despite devastation in 1945, the institutional capacities forged since 1868 enabled rapid reconstruction. The mobilisation machinery of the early Shōwa era was repurposed under Allied supervision for industrial recovery; former munitions plants produced consumer goods, and the planning expertise honed in wartime ministries migrated to MITI, guiding the high-growth era (Johnson, 1982). The zaibatsu were formally dissolved, yet their managerial talent and networked capital were quickly reassembled into keiretsu groupings linked by main-bank finance—a post-war analogue of pre-1945 conglomerate coordination. Moreover, developmental ideology—the conviction that national survival requires state-guided economic upgrading—endured. Industrial policy in the 1950s and 1960s echoed Meiji precedents in promoting strategic sectors such as steel, petrochemicals, and electronics. Even contemporary public-private initiatives in semiconductors and green technologies reflect a lineage traceable to nineteenth-century state entrepreneurship. ## Conclusion Between 1868 and 1945 Japan compressed centuries of institutional and industrial change into less than eight decades. A feudal polity was reshaped into a constitutional monarchy, an agrarian economy into an industrial power, and a secluded island state into an imperial actor on the world stage. These transformations involved formidable costs—including colonial domination abroad and authoritarian regression at home—yet they also produced the organisational capabilities, human capital, and technological foundations that underpinned Japan’s post-war economic miracle. Understanding this formative period is indispensable for interpreting the strategic preferences of Japanese corporations and policymakers in the present day, as many contemporary practices—bank-centred finance, government-business consultation, and export-led growth—originate in the institutional synthesis achieved during the Meiji, Taishō, and early Shōwa years. ## References {.unnumbered} Barnhart, M. A. (1987). *Japan Prepares for Total War: The Search for Economic Security, 1919–1941.* Ithaca, NY: Cornell University Press. Gordon, A. (1985). *The Evolution of Labor Relations in Japan: Heavy Industry, 1853-1955.* Cambridge, MA: Harvard University Press. Jansen, M. B. (2000). *The Making of Modern Japan.* Cambridge, MA: Harvard University Press. Johnson, C. (1982). *MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975.* Stanford, CA: Stanford University Press. Maddison, A. (2007). *Contours of the World Economy, 1–2030 AD: Essays in Macro-Economic History.* Oxford: Oxford University Press. Nakamura, T. (1994). *Economic Growth in pre-war Japan.* New Haven, CT: Yale University Press. Ohkawa, K., & Shinohara, M. (1979). *Patterns of Japanese Economic Development: A Quantitative Appraisal.* New Haven, CT: Yale University Press. Okazaki, T. (1993). *The Japanese Economic System and its Historical Origins.* Oxford: Oxford University Press. Pyle, K. B. (1996). *The Making of Modern Japan.* Lexington, MA: D. C. Heath. Yamamura, K. (2003). *The Economic Emergence of Modern Japan: Selected Essays.* Oxford: Oxford University Press.