A stylized image representing Japan's transition from traditional to modern economy

Japan's Economic Puzzle: Unraveling the Great Divergence and What It Means Today

Soraya Malik in Business & Economy August 2025 • 4 min read.

"New research sheds light on Japan's unique economic history, challenging conventional wisdom about growth, divergence, and Asia's place in the global economy. But what lessons can we learn from Japan's past struggles and successes?"

Before the age of easily accessible data, much of what we knew about pre-19th-century economic growth relied on educated guesses rather than hard evidence. While these estimates were valuable, they often lacked the granular detail needed for a truly accurate picture. Economist Angus Maddison was among the first to note this gap, acknowledging that many regions across Europe and Asia possessed rich historical records that could offer deeper insights into their economic past.

Maddison's work spurred a wave of historical national accounting, particularly in Europe, where researchers meticulously pieced together economic data reaching back to the 13th century. However, Asia's economic history remained less explored due to data scarcity and the challenge of integrating it into existing economic frameworks. While studies emerged for China and India, one major economic power was noticeably absent: Japan.

Now, new research is changing that, offering fresh estimates of Japan's economic performance from 730 to 1874. This data promises to enrich our understanding of the 'Great Divergence' debate – the period when Europe surged ahead economically – and to reveal Japan's unique path within Asia.

How Did Japan Navigate Economic Growth Before Modern Times?

A stylized image representing Japan's transition from traditional to modern economy

Despite not achieving European levels of wealth per capita, Japan demonstrated positive economic growth before 1868. This was in contrast to China and India, which experienced economic stagnation. This divergence within Asia highlights Japan's unique development trajectory.

Although Japan experienced positive trends, its growth lagged behind Northwest Europe. The economic gap widened until the institutional reforms of the Meiji Era propelled Japan forward. This nuanced view acknowledges Japan's relative success within Asia while recognizing its initial struggles to keep pace with Western advancements.

Early Growth (730-1280): Characterized by Malthusian cycles, where population increases led to decreased per capita income and vice versa.
Medieval Expansion (1280-1600): Saw significant population and income growth, driven by agricultural advancements and the rise of commerce.
Tokugawa Stability (1600-1868): Featured slower but steady growth, proto-industrial development, and urbanization.
Meiji Restoration (1868 onwards): Marked a turning point with rapid modernization and economic catch-up.

The research underscores the importance of continuous institutional adaptation and strategic policy choices in fostering long-term economic success. The Meiji Restoration, while transformative, built upon foundations laid in earlier periods, highlighting the cumulative nature of economic progress.

Lessons from the Land of the Rising Sun

Japan's economic saga offers valuable lessons for nations navigating their own paths to prosperity. By understanding Japan's past, we can gain insights into the complex interplay of factors that drive economic success and the importance of strategic adaptation in a rapidly changing world. The study encourages a deeper analysis of historical data to inform future economic policies and strategies. It emphasizes that while broad global trends matter, each region's unique historical context shapes its economic destiny.

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Everything You Need To Know

How did Japan's economic growth compare to other Asian countries like China and India before the Meiji Restoration?

Before the Meiji Restoration, Japan experienced positive economic growth, which set it apart from China and India, both of which faced economic stagnation during the same period. While Japan didn't achieve the wealth levels of Northwest Europe, this divergence within Asia showcases Japan's distinct developmental path. The factors contributing to these differences, such as varying agricultural practices, governance structures, and trade policies, are crucial for understanding Asia's diverse economic landscape before modern times. Further research into these specific factors can provide a more detailed comparison.

What were the key phases of Japan's economic development between 730 and 1874, and what characterized each phase?

Japan's economic development from 730 to 1874 can be divided into four key phases. First, the Early Growth period (730-1280) was characterized by Malthusian cycles, where population growth alternately increased and decreased per capita income. Second, the Medieval Expansion (1280-1600) saw population and income growth driven by agricultural advancements and commerce. Third, the Tokugawa Stability (1600-1868) featured slower but steady growth, proto-industrial development, and urbanization. Finally, the Meiji Restoration (1868 onwards) marked a turning point with rapid modernization and economic catch-up. Each phase built upon the previous one, demonstrating the cumulative nature of economic progress, although the Meiji Restoration represents a significant institutional shift that accelerated development.

What is the 'Great Divergence,' and how does Japan's economic history contribute to this debate?

The 'Great Divergence' refers to the period when Europe experienced significant economic growth and surged ahead of other regions in the world. Japan's economic history contributes to this debate by offering a unique case study outside of Europe. While Japan did not reach the same levels of wealth per capita as Northwest Europe before the Meiji Restoration, it still demonstrated positive economic growth, unlike some other Asian economies that stagnated. This makes Japan an important point of comparison in understanding the factors that enabled some regions to grow while others lagged behind. Further comparative research could reveal specific institutional or policy choices that either facilitated or hindered economic development.

What role did institutional reforms, such as the Meiji Restoration, play in Japan's economic modernization?

The Meiji Restoration was a turning point in Japan's economic modernization, marked by rapid changes that allowed Japan to catch up with Western economies. However, it is crucial to recognize that this transformation built upon foundations laid in earlier periods, such as the proto-industrial developments of the Tokugawa era. The Meiji Restoration's success highlights the importance of continuous institutional adaptation and strategic policy choices in fostering long-term economic success. The extent to which earlier foundations enabled or constrained the reforms, and the specific policies enacted during the Meiji era, are critical areas for further investigation.

Beyond the specific historical context, what broader lessons can other nations learn from Japan's economic journey?

Japan's economic saga offers valuable lessons for nations navigating their own paths to prosperity. It emphasizes the importance of understanding a region's unique historical context when formulating economic policies and strategies. Japan's experience highlights the interplay of factors that drive economic success and the need for strategic adaptation in a rapidly changing world. Continuous institutional adaptation, exemplified by the Meiji Restoration, and the importance of building upon earlier foundations are crucial lessons for other nations aiming to achieve sustainable economic development.