Unlocking the miracle: Understanding Japan’s remarkable postwar economic recovery

This paper explores optimal recovery paths for economies devastated by disasters or war, using Japan's post-World War II recovery as a case study. Japan experienced severe destruction, including infrastructure loss, starvation, and high inflation. Yet, within 10 years, it achieved significant economic recovery, suggesting an optimal recovery path exists. Key features of such recovery are: 1) fixed production technology and 2) a greater capital intensity in the capital goods sector compared to the consumer goods sector. We analyze this using a two-sector growth model with Leontief technologies, adapting it into a continuous-time optimal growth model. Focusing on nonlinearity and interior-point solutions, we identify two critical points: an unstable focus and a saddle. Transversality conditions indicate that the saddle-point stable point is the optimal solution and recovery path. Numerical analysis based on historical data reveals that postwar Japan's economic reconstruction started with an initial capital stock per capita near an unstable fixed point, and that government intervention was essential to guide the economy on the only solution trajectory that would lead to an optimal steady state, meaning a return to the prewar economic level. Thus, Japan's rapid recovery can be seen as a remarkable achievement. JEL Classification O22, O41, O53