Does government promote or hinder capital accumulation? Evidence from Japan’s high-growth era

Governments occasionally intervene in private sector economic activities to promote specific industries and enhance economic growth. During Japan’s high-growth era, the government used various policy tools to intervene in private sector capital investments. We examine the effects of these policy tools on capital accumulation. We employ firm-level data sets, identify policy actions using historical records and find that they were applied intensively to specific sectors and firms and that government intervention partially affected those firms’ capital investment decisions. For some industries, such as steel, investment-promoting policy tools resulted relatively higher resource allocations of capital to labour. There were also cases in which policy actions aimed at curbing investments resulted in slower investments, but the effects were weak and small. Discouraging policy tools had contradictory effects on some industries, such as steel and textiles, and enhanced capital investments. The latter phenomenon was often observed when the government attempted to control private sector capital investments based on the current share of production or production capacities or based on the prediction of demands being inclined to have upward bias during the high-growth period.