A Note on the Initial Conditions and Institutional Innovations in Japan’s Modern Economic Growth

Japan is the latest comer in the G7 countries, and the income level when it started modern economic growth was the lowest of the countries. As is well known, Japan experienced trend acceleration and a rapid catching-up. We do not observe the unconditional convergence of income level. Therefore we should identify the reasons for the trend acceleration of the Japanese economy. Favorable initial conditions and adequate institutional innovations in the process of modern economic growth explain the rapid catching-up. I analytically describe both favorable and unfavorable initial conditions. Favorable ones are a high literacy rate, infrastructure investment such as irrigation and transportation, development of distribution and financial systems, and the development of commodity markets like the Dojima rice market in the Tokugawa period. Unfavorable ones are the facts that Japanese people in the Tokugawa period were not punctual and they did not respect promises and contracts. The establishment of an engineering education system and industrial policy in the Meiji era contributed to the modern economic growth of Japan. Simon Kuznets often pointed out the importance of technology advancement. But without institutional and ideological adjustments, technology advancement does not stimulate the modern economic growth