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3. Economic Policy: Separating Okinawa from Japan and Endaka

While US political objectives had mostly been accomplished by mid-1947, little had been done to tackle Japan's economic problems. In his defence, MacArthur's orders stated that he was merely to ensure that the GOJ implemented programmes that would avoid acute economic distress, assure just and impartial distribution of available supplies, meet the reparation delivery requirements agreed by the Allies, and facilitate restoration of the economy so "the reasonable peaceful requirements of the population can be satisfied." These modest goals were founded on the principle that since the current economic situation was the direct outcome of Japan's own behaviour the Allies would not undertake the burden of repair.[1] As policy shifted through 1947, however, circumstances dictated that Japan be readied for independence and to become a bulwark against Communism in Asia. Since Japan was not economically stable enough to accept either responsibility occupation policy switched emphasis from punitive and political to non-punitive and economic.[2] Kennan was pivotal in pushing this new approach, as was Secretary of the Army, Kenneth J. Royall, Secretary of the Navy, James V. Forrestal, and Under Secretary of the Army, William H. Draper.[3] Draper was particularly busy on economic matters, overseeing the dispatch of a survey group of businessmen to Japan chaired by himself and Percy H. Johnson,[4] and making recommendations on policy toward Japan to US President Truman.[5]

Based on Draper's efforts, Truman issued a nine-point stabilisation directive for the Japanese economy in December 1948, and in February 1949, dispatched one of Draper's former colleagues and an architect of postwar West German currency reforms, Detroit banker Joseph M. Dodge, to Tokyo to oversee implementation in his role as economic advisor to MacArthur.[6] Whether Truman was being mischievous or not in the appointment is unclear, but like other members of the 'Japan lobby' in Washington, Dodge was in ideological opposition to MacArthur's policies from the outset. If Japan was to be reintegrated into the international trade economy and primary emphasis put on export promotion, Dodge believed, the economy would need to be freed from government controls. Although he did not dismiss positive GOJ endeavours that had led to increased production and signs of a slowing of inflation in 1948, Dodge still felt that the recovery thus far was artificial in that it was based on what he described as the "stilts" of US financial aid and domestic subsidy mechanisms.[7] Such artificiality was also dangerous. In essence, whilst the GOJ centred on policies emphasising recovery first, Dodge focused in on stability. His priorities were balancing the budget, reducing public expenditure, decreasing the scope of government intervention, and dealing with inflation. In order to standardise a chaotic exchange rate system and to boost export competitiveness, thereby allowing Japan to acquire and amass foreign capital,[8] Dodge established a fixed exchange rate of 360 yen to the dollar on 25th April 1949.[9]

Such a formula was unworkable in Okinawa where the absence of an industrial base to serve as foundation for a rejuvenated, expanded manufacturing sector combined with an historical inability to balance population growth and self-sufficiency, dictated import-oriented policies. The financial power to import would result from "long-term" US retention of military base facilities that would be developed accordingly,[10] with an attached responsibility to devise economic and social well-being programmes for the local people. Truman's approval of NSC 13/3 on 6th May 1949, led to a succession of survey groups[11] assessing conditions and recommending ways to remove Okinawa as a financial burden on Japan. Consensus was reached to link military base construction with the civilian economy. The programme would be tailored to meet the needs of the US military first and foremost, but would maximise the use of labour, materials, and services that were obtainable locally. It was also determined that certain infrastructure, like roads, bridges, harbours, and power plants, could be built for joint military-civilian use. The aim was to use base-building to prime the economic pump, so to speak, while simultaneously encouraging the creation of local enterprises that would contribute to the economy after the bases had been built. The US Congress authorised a budget of $73 million for base construction in Okinawa in October 1949,[12] and a further $25 million in Government Appropriation for Relief in Occupied Areas (GARIOA) funds for Okinawa in fiscal 1950.[13]

To address the supply-demand disparity and to stabilise commodity prices, on 12th December 1949, GHQ in Tokyo recommended that the internal exchange rate of the Okinawan B-yen should be altered to "within the range of 120 to 140 yen to the dollar," with a preference for a lower rate since export considerations did "not warrant the highest ratio."[14] This policy became official on 12th April 1950, and in October, by MGR Ordinance No 26, Japan was designated a "foreign country" in terms of foreign exchange and trade procedures.[15] Once economically separated by virtue of opposing endaka-enyasu exchange rates, US planners began reintegrating Japan and Okinawa in such a way as to maximise the use of each dollar of financial assistance and to support macroeconomic policies under implementation in both areas. It is commonly referred to as the "double use of the dollar," or doru no niju shiyo, policy. In December 1949, the Commander of RYCOM, Major General Josef Sheetz, secured a trade agreement with MacArthur in Tokyo by which purchase of Japanese goods to the tune of $9 million would be made by Okinawa, and $1 million in Okinawan exports by Japan.[16] In 1952, a broad agreement on trade, tariff, and other financial arrangements was approved by the United States Civil Administration of the Ryukyu Islands (USCAR), and by 1954 an interdependent economic system had developed, with Japan providing around 70% of Okinawa's imports, valued at almost $38 million, and accepting 80% of its exports, worth $10 million.[17] Japan benefited significantly from base construction on Okinawa. Of Japan's total dollar reserve of $13 billion in 1958, it is estimated that $4 billion was derived from Okinawa.[18] Base construction revenues were just part of an package aligning the promotion of Japan's exports with Okinawa's need to import.

Purely in terms of the early economic impact in the context of outlined goals, it is hard to criticise the US Government's (USG) base construction-currency realignment strategy. Whereas in 1947, unemployment in Okinawa stood at 7.2%, by late-1950, after the outbreak of the Korean War, it had dropped to just 0.4%.[19] Palliative policy or not, Okinawa was moving back into work.[20] Supporting the full employment drive was an economic promotion and fiscal stabilisation programme[21] developed by the US Joint Chiefs of Staff (JCS) for the incoming USCAR, or Beikoku minseifu.[22] Although wage and price controls were utilised to tame inflation, it was only after the Bank of the Ryukyus (Ryukyu Ginko) was established in May 1948[23] to consolidate Okinawa's financial institutions and regulate the flow of money, that it was brought under control. A taxation system that would gradually generate sufficient revenue to support all local government activities was finally introduced with the inauguration of the Ryukyu seifu, or Government of the Ryukyu Islands (GRI), in April 1952. In terms of development-oriented financial organs, a key role of the Ryukyu Ginko was in providing reasonable long-term loans to construction firms and other targeted enterprises. In April of 1950, USCAR set up the Ryukyu Reconstruction Finance Fund (RRFF) out of GARIOA funding and gave the Ryukyu Ginko administering authority. Upon the RRFF's recharting as the Ryukyu Development Loan Corporation (RDLC) in late-1959, it had provided 23,000 five- to ten-year loans with a value of over $40 million to a broad spectrum of enterprises and projects.

[1] 'US Initial Post-Surrender Policy for Japan: Part IV - Economic, 6th September 1945.’

[2] This US economic-strategic policy is fully discussed in Michael Schaller, The American Occupation of Japan: The Origins of the Cold War in Asia (New York: Oxford University Press, 1985).

[3] By this point MacArthur had fallen out of favour in government and business circles in Washington. His autocratic style won him few friends, nor did his perceived lack of economic understanding when policy toward Japan needed such a focus. A highly influential lobby group developed in Washington in response to this, composed mostly of those favouring the swift reintegration of Japan into the world economy. In September 1947, for example, a report prepared by the businessman and lawyer James Lee Kauffman was widely circulated around Washington. It was an open criticism of thus-far implemented economic policies toward Japan as well as a set of recommendations to facilitate the reintroduction of foreign capital and to bring about economic recovery. For Kauffman, Japan was an attractive prospect for US industry and capital, but not under existing conditions. He argued that the economy was in the hands of "sincere and hard-working men," untrained in economics. Kauffman accused MacArthur of implementing socialistic policies that would result in the installation of a bureaucracy of Americans and make Japan "a dependent for years to come." James Lee Kauffman 'Report on Conditions in Japan,' 6th September, 1947. A copy of this document was given to the current writer by Dr. Gordon Daniels, the Department of History, Sheffield University.

[4] The Draper-Johnson Committee report, published in April 1948, pushed for the elimination of restrictions on production and the cancellation of reparation requirements. To achieve a massive increase in Japan's exports a shift in food and other imports from the dollar area to the sterling and Asian areas was required, with payment being made in the form of Japanese industrial exports. Production was to be accelerated through anti-monopoly measures, curbing organised labour, controlling inflation, fixing the yen's foreign exchange value, and discouraging domestic consumption in favour of exports. Michael Schaller, The American Occupation of Japan: The Origins of the Cold War in Asia (New York: Oxford University Press, 1985), 129.

[5] William Draper felt that there were too many competing agencies involved in the reconstruction of Japan's economy, and that this was counter-productive. He felt a presidential directive would be the most effective way of gaining a measure of cross-departmental cooperation. Draper recommended ten measures to be included in any such directive: the establishment of a yen-dollar exchange rate, permitting Japanese trade representatives to travel abroad, the establishment in Tokyo of foreign trade missions of countries not represented, the re-negotiation of the Cotton Credit loan to extend the period of repayment, establishment of the Revolving Fund, the re-establishment of facilities for the permanent residence of foreign businessmen in Japan, simplification of the procedure for clearance of foreign trade transactions and the removal of duplication of GOJ functions by SCAP, encouragement of private loans to Japanese business, determination of policy on patents, trademarks and utility models, and restoration of business property to UN nationals in Japan. US DoS, FRUS: Volume 6 - The Far East and Australasia 1948, 714.

[6] Such an appointment had been argued for by Acting Political Advisor in Japan and Chairman of the ACJ, William J. Sebald, in March 1948. He stated that a stage had been reached where the occupation in its present form "retards rather than enhances the accomplishment of the principles" and that this transformation "appears to make desirable the setting up of a civilian deputy to…[SCAP] to take charge of the non-military activities of the occupation." 'Acting Political Adviser in Japan (Sebald) to the Secretary of State,' Tokyo, 1st March 1948. US DoS, FRUS: Volume 6 - The Far East and Australasia 1948, 670.

[7] Japanese economists refer to this as the chikuba keizairon, or 'theory of an economy on stilts.' See, for example, Ryukyu Ginko, Sengo Okinawa keizaishi (Naha: Ryukyu Ginko, 1984), 106. The broad thrust of Dodge's policies, especially the emphasis on stemming inflation, is commonly referred to as the 'Dodge Line.'

[8] In 1950, the total value of Japan's exports was $300 million, but by 1960 had risen to $4 billion. Makino Hirotaka, Saiko Okinawa keizai (Naha: Okinawa Taimusu Sha, 1996), 14.

[9] Economic historian Makino Hirotaka points out that the US got a "free ride" in terms of its military spending in Japan. Makino Hirotaka, 'Senryo shita no keizai: doru no seijigaku,' in Miyagi Etsujiro., editor, Shimpojiumu: Okinawa senryo - mirai e mukete (Naha: Hirugi Sha, 1993), 320-321.

[10] 'Report by the National Security Council on Recommendations with Respect to US Policy Toward Japan,' NSC 13/3, 6th May 1949. US DoS, FRUS: Volume 7 - The Far East and Australasia 1949, Part Two (Washington, DC: US GPO, 1976), 731. Far East Command's (FECOM) 'Economic Plan for the Ryukyu Islands' in May 1951, stressed that retention of US bases and full implementation of the proposed base construction programme were prerequisites for success in economic development in the coming years. FECOM, 'Economic Plan for the Ryukyu Islands,' May 1951 (photocopy, source unknown), 31. The FECOM report is discussed in some detail in Sengo Okinawa keizaishi, 238-239.

[11] Douglas L. Oliver of the Office of Far Eastern Affairs in May 1949, Under Secretary of the Army, Tracy S. Voorhees, in September, Assistant Chief of Engineers for Military Construction, Army Brigadier General George J. Nold, in October, and the US Army-dispatched Robert A. Martino-F. C. Norvell Mission in November.

[12] Following announcement of the Okinawa base budget a directive ordered procurement of materials and services was to be made, as far as possible, in Okinawa and Japan proper. In December 1949, GHQ announced that to obtain tools, materials, and workers for building works in Okinawa cooperation with Japanese companies was sought. The total outlay was estimated at $25 million. As Seizaburo points out, "Japanese capitalism…suffering…the effects of the 1949 rationalisation slump, looked to base construction on Okinawa as a great opportunity. Shinobu Seizaburo, 'The Korean War as an Epoch of Contemporary History,' The Developing Economies 1 (March, 1966), 26. Building contracts initially offered by Ryukyu Command (RYCOM) were split between Filipino, US, and Okinawan firms, with the latter gaining a good amount of business. From June 1950, RYCOM opened bidding to Japanese firms. By successfully underbidding the competition Japanese firms began to secure a larger number of contracts. In the mid-1950's, during the most intensive period of construction, Filipino firms had been priced out, and only Japanese, Okinawan, and US contractors remained. Of these, there were 7 US, 8 Okinawan, and 42 Japanese contractors involved in building projects. Makino Hirotaka, 'Senryo shita no keizai: doru no seijigaku,' in Miyagi Etsujiro., editor, Shimpojiumu: Okinawa senryo - mirai e mukete (Naha: Hirugi Sha, 1993), 327.

[13] GARIOA funding was appropriated to support MGR programmes which benefited the Okinawan economy. It is estimated that the total amount appropriated in GARIOA funds by the USG through to 1958 was around $165 million. GARIOA funding for Okinawa had been appropriated from Congress since 1947, but with the economic separation of the islands from Japan proper on 6th May 1949, and the subsequent "pay as you go" policy which freed occupied Japan from the burden of underwriting Okinawa's occupation costs, these GARIOA funds were increased. GARIOA funds would be used to purchase goods, the sale of which would generate revenue for use in reconstruction and rehabilitation projects. In fiscal year 1950, GARIOA funding in total amounted to $49,581,000, constituting a five-fold increase on the 1947. Ryukyu Ginko, Sengo Okinawa keizaishi (Naha: Ryukyu Ginko, 1984), 1372. Although it is common knowledge that there was creative use of GARIOA funds by the MGR so that ultimate benefit accrued to the US military rather the local people, little can be found in print. Daniel D. Karasik, 'Uncle Sam's Unwilling Stepchild - Okinawa' (unpublished, dated 4th April 1953).

[14] And because there would be less inflationary pressures. Sengo Okinawa keizaishi, 293.

[15] US Military Government Ordinance No 26, 'Foreign Exchange and Trade Procedures in the Ryukyu Islands.' Laws and Regulations During the US Administration of Okinawa, 114. Prior to the adoption of the dollar as the official currency in September 1958, outgoing money had to be converted from the Okinawan B-Yen into the dollar.

[16] 'Memorandum by the Assistant Secretary of State for Far Eastern Affairs to the Secretary of State,' 12th December 1949. US DoS, FRUS: Volume 7 - The Far East and Australasia 1949, Part Two (Washington, DC: US GPO, 1976), 731.

[17] Sengo Okinawa keizaishi, 1321. Interdependent, but not equitably. Okinawa was far more dependent on Japan and was effectively a satellite state in an economic sense. The USG established a system by which Japan extracted more from Okinawa than it contributed, enabling it to become stronger more swiftly. Potentially negative long-term ramifications of such a policy on Okinawa was not considered. Arguably, the USG had more modest objectives in Okinawa at this time, achievable through palliative economic policies. The draft USCAR directive in 1949 stating that the goal of a long-term economic plan was "achieving Ryukyuan self-support at a level of living appropriate to the achievement of US objectives." US DoS, FRUS: Volume 7 - The Far East and Australasia 1949, Part Two, 915.

[18] Makino Hirotaka, 'Senryo shita no keizai: doru no seijigaku,' in Miyagi Etsujiro., editor, Shimpojiumu: Okinawa senryo - mirai e mukete (Naha: Hirugi Sha, 1993), 327.

[19] Sengo Okinawa keizaishi, 1306-1307. Though the figure would rise and fall in subsequent years it should be noted that unemployment did not exceed 2% until after Okinawa returned to Japan in 1972.

[20] At the height of the initial base construction boom in 1952, some 603,000 locals were involved in some way, shape, or form, out of a total Okinawan population of just less than 943,800 (including the Amami Islands). Makino Hirotaka, Saiko Okinawa keizai (Naha: Okinawa Taimusu Sha, 1996), 27.

[21] The principal objectives of the plan were: 1) participation by the Ryukyuans in all suitable forms of agriculture, fishing, industry and commerce under a system of free, competitive enterprise; 2) sound policies for the utilisation and conservation of Ryukyuan natural resources, including land reclamation and improvement; 3) a program for developing on a long-range basis those Ryukyuan industries which can be sources of exports or reduce import requirements; 4) development of foreign trade, initially on a government basis but with the aim of restoring private trade as early as is feasible, and; 5) measures designed to stabilise the financial structure of the economy, e.g., an adequate and equitable system of taxation to support necessary Ryukyuan governmental activities without recourse to deficit financing; a sound banking and currency system, including a single rate of exchange appropriate for all foreign transactions with the ultimate objective of free convertibility. US DoS, FRUS: Volume 6 - East Asia and the Pacific 1950 (Washington, DC: US GPO, 1976), 1314-1317.

[22] US Army control of the MGR in Okinawa lasted from mid-1946 until 15th December 1950, when USCAR was formally inaugurated. This new organisation was still totally military in nature: with the Commander in Chief, Far East (CINCFE), as governor, and the Commanding General, RYCOM, as deputy, but with a Japanese peace treaty settlement on the horizon a determination was made to soften the terminology. Basic policy had been formulated by the JCS at least a year prior to USCAR's inauguration. 'Proposed Directive by the Joint Chiefs of Staff to the Commander in Chief, Far East (MacArthur) on Conduct of Civil Administration in the Ryukyus,' 30th November 1949. US DoS, FRUS: Volume 7 - The Far East and Australasia 1949, Part Two, 913-917.  

[23] The MGR capitalised Ryukyu Ginko with B-yen 10 million (about $300,000) in 1948, retaining a majority 51,000 shareholding. In only 4 years Ryukyu Ginko had doubled its initial capitalisation and by 1972 possessed assets totalling more than $385 million. On the establishment of Ryukyu Ginko see Sengo Okinawa keizaishi, 130-133, and Yoshino Toshihiko, Ryukyu ryokoki (Tokyo: Shiseido, 1960), 91-97. For the full text of MGR Ordinance No. 1, "Ryukyu Ginko no setsuritsu," promulgated on 4th May 1948, see Yoshino Toshihiko, Ryukyu ryokoki, 181-199, and Military Government Ordinance No. 1, 'Establishment of the Bank of the Ryukyus.' Laws and Regulations During the US Administration of Okinawa, 175-186.


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