• Economic Policies for an Incoming Labour Government – Part 4

    Economic Policies for an Incoming Labour Government

    By Bryan Gould and George Tait Edwards


    Part 4 of 9 – Shimomuran Economics


    The body of developed policy that underpins Asian industrial and economic

    success is not understood in the West, yet it was clearly foreshadowed in

    the work of the greatest western economist of the twentieth century, John

    Maynard Keynes. It is a sad reflection on western economists that the

    Keynesian insights were most fully developed by the great Japanese

    economist, Dr Osama Shimomura 1910-89, whose work has only recently

    come to the attention of western economists by virtue of the sustained

    efforts over four decades by the second author of this paper.

    An indication of the extent to which Shimomura has been overlooked in the

    West is the fact that his works have never been translated Into English

    except by the Indian Statistical Institute1, (and even in that work the

    Development Bank of Japan has edited out Shimomura’s key formulae).

    Shimomura enjoys, however, a towering reputation in his own country. The

    Development Bank of Japan offers a “Shimomura Fellowship” to

    commemorate his life on the basis that “during his long career as an

    economic scholar and critic, Dr Shimomura rose to become Japan’s most

    influential post-war economist, founding a school of thought based on the

    “Shimomura Theory,” which attracted numerous followers.”2

    He was acknowledged, within Japan and during his lifetime, as the “brains

    behind the Japanese economic miracle” – the most successful national

    economic growth plan of the 20th century. Five of his published works

    became available in the British Library last year but there seems to be little

    interest in how Japan, in the course of a few decades, progressed from the

    war-damaged, impoverished country of 1945 to become one of the most

    highly developed and powerful industrial economies in the world.

    Shimomura’s major contribution to macro-economics is his economic growth

    model, the basis of which was that the total level of Japanese investment is

    equal to the natural investment level (that is, investment financed by

    savings) plus the additional investment financed by credit creation

    originating at the Bank of Japan. The model illustrated the range of that

    additional credit-created investment as no less than 10% to 15% of national

    income a year.

    It is generally agreed by most economists, following Keynes, that

    investment is the major key to economic development and growth.

    Shimomura’s economic model applied an extension of the Keynesian

    analysis and showed that an economy could selectively increase its

    investment level through an increase in investment credit at the central

    bank, if that credit was earmarked for commercial and industrial

    investment. The rapidity of Japanese industrial development in the 1960s

    and 1970s, in apparent response to the stimulus provided by investment

    credit-creation by the Bank of Japan under instructions from the

    government, is widely seen in Asian economies as a vindication of

    Shimomuran policies.

    Professor Kenneth K Kurihara (1910-1972) – the Distinguished Professor of

    Economic Theory at the State University of New York in Binghampton,

    teacher of macro-economics at Princeton and Rutgers, the State University

    of New Jersey, guest lecturer at the universities of Oxford and Cambridge,

    and author of “The Growth Potential of the Japanese Economy” – was one

    of the most influential interpreters of Shimomuran economics; he also had

    the great advantage of being able to write in English. He concluded that

    “if, therefore, greater investment can be financed partly by credits, there

    is no need for that ‘abstinence’ which the classical economists considered

    necessary for economic progress, any more than there is for that ‘austerity’

    which some present day underdeveloped countries impose on already

    under-consuming populations at the constant peril of social unrest. Nor is it

    difficult, in such credit-creating circumstances, to agree with Keynes’

    observation that investment and consumption should be regarded as

    complementary rather than competitive.”3

    After more than two decades of persistent stagnation, during which

    Shimomuran policies were lost sight of, and supplanted by policies urged on

    the Japanese by the IMF and western economists, Shimomura is now back in

    favour in Japan. The Prime Minister of Japan, Shinzo Abe, announced on 19

    April 2013 in a speech to the Japan National Press Club that Japan is once

    again implementing Shimomuran economics – he explicitly made two

    references to Dr Shimomura – in order to end the Japanese depression and

    restore high growth to create once again what he described as “a Japan of

    abundant capital.”4

    Western economists, however, seem to be unaware of this revival of

    Shimomuran economics. On the rare occasions that they have been invited

    to consider the issue, they have maintained that correlation is not

    causation, and that there is no evidence that the new credit created by the

    Bank of Japan “caused” the observed growth in the 1960s and 1970s, or

    that the cessation of that growth was the consequence of abandoning credit

    creation. And there the argument might have rested except for two recent


    First, the British economist Sir Clive Granger produced, in a 1969 paper in

    Econometrica, a new statistical technique called Granger Predictive

    Causation Analysis – an achievement that led in 2003 to his award, along

    with his colleague Robert Engle, of a Nobel Prize for contributions to

    economics. The Granger Causality Analysis tests the validity of predictive

    causative links between two economic factors; using Granger predictive

    analysis, it can be shown whether there is a predictive link between two

    items of economic time series.

    Second, and more recently, detailed and expert work on the course of the

    Japanese economy – both its period of sustained and almost unprecedented

    growth, and its subsequent period of stubborn stagnation – was undertaken

    by Professor Richard Werner, professor of economics at the University of

    Southampton. Professor Werner originated the term “quantitative easing”

    and in 1991 predicted the imminent ‘collapse’ of the Japanese banking

    system and the threat of the “greatest recession since the Great

    Depression”. He is a specialist in the Japanese economy and became the

    first Shimomura Fellow at the Research Institute for Capital Formation at

    the Development Bank of Japan where he spent ten years in the 1990s.

    Professor Werner has applied Granger Predictive Causation Analysis to the

    Japanese data over a long period and has shown in his book “New Paradigm

    in Macroeconomics” – that there is a clear Granger causation predictive link

    between investment credit creation at the Bank of Japan and subsequent

    rates of Japanese economic growth, both positive and negative. He also

    found that the causative link that is so clear in the case of investment

    credit creation does not hold good in respect of any other of the

    candidates, such as interest rates, structural changes, and so on, that are

    often advanced as potential explanations for the vagaries of the Japanese

    economy over five decades. Significantly, Werner also found that excessive

    credit creation where that credit is not earmarked for use in new

    investment in productive capacity will finds its outlet in speculation and the

    creation of asset bubbles, as occurred in Japan from 1986-91.

    Werner’s use of the Granger technique and the conclusions he is able to

    draw allow us to say with certainty that the use of investment credit

    creation has been the essential element in determining the rate of growth

    for the Japanese economy. Empirical observation and the analysis of the

    observed data allow for no other explanation. It is on that basis that we can

    extrapolate from the Japanese experience, as identified by Werner, to

    western economies, and say that – since advanced economies function very

    similarly, whether in Japan or elsewhere – the solution to the poor

    performance and lagging development of western economies is the adoption

    of investment credit economics, which is fully capable of reversing the ill effects,

    including the damage to personal incomes and the social fabric, of



    1 A reference to that inadequate translation of what is perhaps Shimomura’s most significant

    books, Seicho Seisaku No Kihon Mondai (Basic Problems in Growth Policy, 1961) can be found



    2 See http://www.dbj.jp/ricf/en/fellowship/

    3 See “The Growth Potential of the Japanese Economy” (John Hopkins Press Maryland 1971), pp.


    4 http://www.kantei.go.jp/foreign/96_abe/statement/201304/19speech_e.html


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