The Tokugawa shogunate which ruled Japan from 1603 to 1868 is popularly thought of as a period of extreme national introversion, during which Japan closed itself off from the outside world in a feudal state for 250 years and stagnated economically. This is inaccurate. The period of shogun rule was one of sustained economic advance for the Japanese people, albeit at a modest pre-industrial pace. By the time the U.S. Navy’s Commodore Matthew Perry arrived in 1853, Japan was fully comparable to mid-18th century Britain in both technology and living standards, albeit with different capabilities. The greatest credit for that success should go to the innovative reforming shogun Tokugawa Yoshimune (1684-1751) who during his rule from 1716 to 1745 reoriented the Japanese economy in a way that has lessons for us today.
Tokugawa Ieyasu, the founder of the shogunate, was featured in the excellent recent FX series “Shogun” (where he is known as “Toranaga”). Ieyasu saw that if he could unite the country under his rule, since Japan was physically isolated from the Asian mainland a lengthy period of internal peace and prosperity could follow. He therefore left the Imperial house in place in Kyoto with little power and proclaimed himself “shogun” – roughly, a military governor. His descendants continued to rule as shoguns until 1868, with two parallel bureaucracies, an effective one for the shoguns and a mostly ceremonial one for the Emperors. International contacts were cut off in 1639, except for one annual Dutch ship trading through Nagasaki (the shoguns correctly regarded early 17th century Catholicism with its powerful alien Pope as subversive).
Ieyasu was proved correct; peace followed his assumption of power and so did prosperity. Japan’s population increased by about 30% in 1600-1700, while the cities grew, with Edo (the modern Tokyo) attaining a population of 1 million. The society was not truly feudal; the private armies of samurai were moved to the cities and encouraged to live off fixed stipends, while censuses in 1722 and 1846 gave the government more knowledge of their people than was common in mediaeval or even 18th century Europe.
Commerce also flourished, with the Mitsui and Sumitomo merchant houses both established in 1615 and Mitsui’s “Echigoya” kimono and fabrics store (the modern Mitsukoshi) established in 1673, soon with branches in Edo, Osaka and Kyoto. The “Genroku” period (1688-1703) saw a surge in merchant prosperity and ostentatious display, with the top merchants outshining all but the richest “daimyo” feudal lords, even though as strivers after money they were considered of the lowest social class.
The Genroku period almost bankrupted the shogunate, as the shoguns’ expenditure increased with the prevailing extravagance and outran their income. Income for the shoguns, the Emperor and the other feudal lords came from extracting 50-60% of the rice harvest from the peasantry through taxation payable in rice itself. As population increased and rice-growing plots grew smaller, this did not leave the peasants enough to live on, so rural areas became depopulated as cities grew and flourished. Women were also mistreated; a 1648 order from the central government to the villages decreed:
“However good-looking a wife may be, if she neglects her household duties by drinking tea or sightseeing or rambling on the hillsides, she must be divorced.”
This combined with excessive luxury among the merchant classes to create widespread discontent – a similar phenomenon to that brought about by artificially low interest rates since 2000 in the United States and most of Europe. I don’t know what the Japanese for hillbilly is – “hirubiru” probably — but J.D. Vance’s “Hillbilly Elegy” could easily have been written in the Japan of around 1710.
Fortunately, reform was at hand in the form of Yoshimune, who assumed the shogunate in 1716, and passed a program of “Kyoho Reforms.” Sumptuary laws were imposed on the merchant class and other deflationary measures were taken, suppressing the over-consumption of the Genroku years. From this period the big city merchants became much more conservative in their business practices, forming guilds and working to preserve their positions rather than amassing excess riches.
Yoshimune also established and regulated a centralized rice market in Osaka, which collected taxes, developed into a securities exchange, improved the market for farmers, made rice cheaper for city dwellers and moved Japan fully onto a money economy. Western books (other than those relating to Christianity) were once again permitted; they were readable only by a few but allowed the new Western scientific and technological ideas to permeate. Commercial libraries were encouraged and proliferated throughout the country, as were temple schools in rural areas; from this period rural literacy began to rise substantially, to around 50% of the male population by 1850. Population stopped growing, which itself helped living standards (the best land in mountainous Japan was already under cultivation).
Most important, peasants were allowed to engage in “by-employment” beyond simply growing rice on their plots, which was not subject to the heavy rice harvest taxes. From this point peasant incomes began to increase and rural industries such as textiles, porcelain, silkworm cultivation, sake brewing and specialty metalwork were encouraged with a network of rural merchants growing up to market peasant non-rice output. By 1850, 55% of peasant income in one province consisted of “by-employment” beyond the growing of rice.
Since Japan consisted of numerous separate “daimyo” domains (even though there were no internal tariffs) competition between those domains produced technological progress and specialization. For example, whereas Western growers still grew silkworms on individual farms with little trade between growers, at Fukushima a network of silkworm merchants grew up, selling to specialized growers for cross-breeding. Thus, over 200 species of silkworms were available when Japan opened up. This was a huge competitive advantage for Japanese silk products, the country’s major initial post-1868 export, since apart from the more varied and finer silks that could be produced, many of those silkworm species were immune to the diseases decimating Western silkworms around that time.
Yoshimune’s reorientation of Japan’s economy from the big cities to rural areas, and of incomes from the wealthiest merchants to the general populace, produced a country that by 1850 was roughly twice as rich per capita as its neighbors China and Russia, with a populace well suited to take on a technological revolution. The economic rebalancing Yoshimune produced is an important lesson to policymakers of today.
As in Japan’s Genroku era, a quarter-century of interest rates held artificially low by feckless central banks has produced in the West a redistribution of wealth to the rich, in no way caused by their economic contribution, but simply by their ownership of fixed assets and their ability to borrow huge sums of money at favorable rates. Meanwhile, as in 1710 Japan, ordinary people (the vast majority of whom in 1710 Japan were rice farmers; here the range of occupations is greater but the fate the same) have been impoverished by the excessive costs required to support the bloated city populations and their inability to share in the benefits of city dwelling. Through Yoshimune’s reforms, merchant excess was curtailed, wasteful government expenditure was cut back and economic activity was redirected to the rural areas in which the vast majority of the population lived.
The benefits of Yoshimune’s reforms extended for over a century, greatly facilitating the rapid modernization and economic takeoff that took place after the 1868 Meiji Restoration, to the extent that even by the 1890s Japan was surprising the world with its political and economic strength. Similar reforms today in the United States and Europe would cut back government, raise interest rates to burst the asset bubble, and reorient economic activity away from the big cities and towards rural areas. That would produce an efflorescence of beneficial innovative economic activity that would restore Western economic predominance, making the United States and Europe Great Again, not only for the benefit of their elites but for their ordinary people, who would finally reap the full reward of the last two centuries’ magnificent technological achievements.
There are lessons to be learned from all human societies, even the most remote and distant. All we need is minds open enough to learn them.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)