Prices, Standards of Living and Material Incentives in Japan, 1937-1941

"It is widely recognised that by 1945 the extent of material deprivation and malnutrition in Japan was considerable, and that economic collapse was a key factor in Japan’s defeat. This process has been studied by a number of scholars. The position of the economy during the China War years prior to Pearl Harbour, 1937-41, has received much less attention. The focus of this paper is on these years during which the state struggled to establish an efficient planning mechanism that met the needs of the war effort. In maximising the contribution of labour to the wartime economy, the Japanese government sought to make use of both material and non-material incentives, and the ‘spiritual mobilisation’ campaign has been studied at some length by historians. This paper will focus on the issue of material incentives, showing that the decision to expand the conflict in December 1941 was taken in a context in which Japan’s economic vulnerability was already apparent to observers both inside and outside the country. During these years market operation remained the norm even as state regulation increased. The regulation changed and distorted incentive structures, repeatedly generating new problems that demanded further regulation. One critical factor in sustaining labour productivity – and overall productivity - was the extent to which incentive structures allowed workers to equate increasing efforts with increasing rewards, and the core question addressed in this paper is how far did patterns of remuneration and consumption suggest that such incentive structures continued to exist. The state recognised this imperative even as it sought to hold down prices and constrain consumption, but it can be argued that its efforts in this respect were largely ineffective. The result was that well before December 1941 many workers were experiencing declining real incomes and shortages of goods. This failure of material incentive structures in turn affected work effort, attendance and working hours, and contributed to declining labour productivity and efficiency of production. The first part of the paper outlines the development of the regulatory system during these years, showing that it was essentially ad hoc and lacking in attention to material incentives. In particular, the authorities were slow to realise that price controls could only be effective in the context of some kind of control over distribution. The outcome was that one shortage often led to another, and policymakers had to address shortages of some goods as early as 1938. The second part outlines basic quantitative indicators of workers’ living standards, specifically prices, real wages and real income. Japanese economic historians have produced such indices and time series data since the 1970s, but for contemporary observers the most reliable source of such information was the estimates produced by the leading economic journal, the Tōyō Keizai Shinpō. As price and wage controls spread, making accurate assessments of real wages and income more difficult, and as confidence in the government’s own figures began to wane, it was these data that were used by both Japanese and Western economists to assess what was going on in the Japanese economy. The third part of the paper looks at what workers were able to consume with the income that they earned. It will be shown that from early on in the conflict there were growing shortages not just of luxury goods, but of many basic consumer goods. While shortages became a far greater problem after 1941, and especially during 1943-5, even before Pearl Harbour they were threatening to undermine labour’s commitment to the war effort. Shortages were sometimes absolute, but were in some cases relative, the consequence of distributional failures. Ration quotas were increasingly not met. In both cases the result was the emergence of so-called ‘outlaw transactions’. Even where workers’ incomes may have been sustained, therefore, there was no guarantee that they could purchase what they needed with those incomes. Moreover, trends in other indicators of living standards, such as working hours, leisure time and health, also began to decline during the early years of the China war. Both Japanese and Western commentators were well aware of these problems, and of their potential impact on productivity and the ability of the economy to sustain a lengthy conflict. Japanese economists, for obvious reasons, sought to put a more positive gloss on their reports, but it is clear that the problems of material incentives that reached crisis point in 1943-5 had much earlier origins, and were exacerbated by inadequate state policies. "