Through pioneering a new growth model centered around the bureaucracy, one that would be copied by the Republic of Korea, Taiwan, and the PR China. After WW2, virtually every faction in Japanese politics had been purged except the bureaucracy. Conceptualizing Japanese politics as similar to their own, the American occupation authorities focused their purges on politicians and army officers, ignoring the third leg of Japanese politics which was more important in Japan than in any other country in the world: professional civil service. In the Minister of Commerce and Industry, only around 10% of employees lost their jobs, while in politics and the military, well near the entirety of senior leadership was eliminated. This handed control of the country over to a professional class of administrators who represented the top talent of their country.

Japan's bureaucracy has its roots in the 1886 founding of Tokyo University/Todai, a school specifically designed to train professional administrators. Throughout its history, most of the bureaucracy's top officials have come from this school, which is the best in Japan. Unlike in almost every other country, Japan's professional civil servants were the most promising graduates - the top talent, instead of going on to law firms, banks, and so on as in the rest of the world, coveted jobs in the civil service.

This has made the spirit of Japan's bureaucracy different than almost anywhere else, and is part of the reason why the country's government is misunderstood as "rigid". Elsewhere in the world, bureaucracy is stereotyped as rigid, while in Japan, bureaucrats are stereotyped as exceptionally shrewd and cunning. In most of the world, bureaucrats are subordinate to politicians. In Japan, especially before 1990, it was the other way around. It was not the Minister, but the Vice Minister who ran the ministry, and succession to the post of Vice Minister was internally decided by the Ministry's lifelong employees. While bureaucrats elsewhere in the world were dedicated to enforcing rules and regulations, Japanese bureaucrats conceived of themselves as an "economic general staff". Representing the top talent of the nation and being the ones who were really in charge, they gave the orders and rarely ever enforced Japan's theoretically strict regulations unless it benefited them.

All this would not have caused an economic miracle had the bureaucrats not already developed a solid economic strategy, but the 1930s gave them ample opportunity to do that. In 1931, the takeover of Manchuria by nationalist army officers gave left-leaning bureaucrats a "sandbox" in which to develop their own "industrial policy". Working with private sector firms like Nissan (which renamed itself Manchurian Industrial Development Corporation), influential bureaucrats Shiina Etsusburo and Kishi Nobusuke threw unpaid labor and free land at these cooperative zaibatsu to trigger an industrial boom. Back in Tokyo, the 1932 assassination of conservative Finance Minister Inoue Junnosuke allowed the isolationist Takahashi Korekiyo to take over the ministry. Korekiyo, without any understanding of Keynes, embarked on what historians have called a "proto-Keynesian" monetary policy, ending the Gold Standard and expanding the money supply. The first Finance Minister around the world to do this, he achieved immediate results. By 1935, industrial and mining output in the US and Germany was below 70% of 1929 levels. In Japan, it was actually 41% higher - when the rest of the world was in decline, Japan had achieved growth rates never before seen.

These two approaches were combined by the postwar bureaucracy, and given an added "push" by American-imposed reforms. The US broke up Japan's pre-war family owned corporations, the notorious zaibatsu. Seizing the opportunity, Japan's Central Bank provided a steady stream of cheap loans to the country's 12 regional savings banks, allowing them to aggressively merge and acquire the broken up pieces of the zaibatsu, effectively bringing the private sector under government control. The postwar bureaucracy introduced "priority production" in 1946, providing cheap loans to the coal and power industries to resolve shortages and invited American tax and economic consultants to revise Japan's tax code. By the early 1950s, the bureaucracy, through much trial and error, had perfected a routine to develop new industrial sectors. It consisted of the following steps:

1. A sector would be designated as "strategic", sending a signal to all the major corporations (keiretsu) to invest.

2. All domestic purchases of those products would be exempt from sales tax,

3. The rate of asset depreciation for tax purposes on investments into that sector would be much faster than usual.

4. Foreign currency reserves would be made available by the Ministry of International Trade and Industry for licensing foreign technologies.

5. Discount, and often free land and facilities would be provided to corporations by the bureaucracy,

6. New harbors were dredged, and strategic sectors would build their factories directly on the piers, greatly reducing transportation costs.

7. Imports of industrial inputs used in strategic sectors were tariff-exempt.

8. MITI "coordination committees" negotiated prices and oligopolies between major industries to ensure there was no "excessive competition" (duplication of industries in a competitive environment, where half the investment is wasted because one of two competing factories fails)

Expanding on point 4, MITI continued a pre-war legacy of tight foreign currency and trade controls. The primary problem of Japan before 1945 was an unfavorable trade balance that decreased the country's capital stock and caused constant currency crises. By controlling the supply of foreign currency, MITI was able to block most expensive technology imports and focus the country's trade deficit on enabling the country's most important emerging industries.

Strategic sectors were selected based on increasing complexity, starting with coal, steel ("the rice of industry"), and electric power, then synthetic textiles, radio, fertilizer, and petrochemical products, and finally planes, ships, automobiles, and consumer electronics. All these sectors had higher income elasticity (the degree to which prices increased in response to a rise in income) than Japan's traditionally dominant textile sector. Japan was in this way creating a multiplier effect for growth - as income rose, so too did the profits of its major corporations which could be reinvested in the next wave of strategic sectors.

All of this would have been wasted, however, if the corporations were not efficient to being with. MITI in the 1940s and 1950s made attendance at seminars hosted by American management experts such as W. Edwards Deming near-mandatory for keiretsu executives. Japanese corporations would be greatly influenced by this new wave of management philosophy influenced by the wartime practices of the US military, and would be the leading advocates of total quality and statistical process control.

Other changes to influence the behavior of corporations were introduced:

1. All exported goods were exempt from taxes.

2. Shareholder power was severely limited in corporate management, ensuring that executives focused more on long-term growth.

3. Foreign currency was concentrated in the hands of a handful import export companies called the sogo shosha, who offered loans to foreign buyers in exchange for importing Japanese goods and purchased imported materials on credit.

Illustrating the flexibility of the Japanese bureaucracy, MITI also built an industrial expo ship, which sailed around the world in the 1960s demonstrating Japan's newest industrial products. The Japanese bureaucracy was not primarily a regulatory entity like bureaucracies in the West. In practice, it functioned as a management consortium for Japan's corporations. Unlike the fully state-owned systems in the USSR and China, however, this "management consortium" was decentralized enough through formal private ownership that it never became bloated and inefficient.

Since 1980, there have been many attempts to "reduce" Japan's success down to a single strategy or slogan (say, "protectionism" or "export promotion", neither of which are true - most of Japan's industrial growth was driven by domestic consumption, with the radio sector being the only exception). However, this would be missing the point. Japan's bureaucrats saw themselves as an "economic general staff", and just as wars are won through superior doctrines - theories involving a wide array of tactics and operational methods - the tactics of economic battles are just as varied and complex.

Sources:

Sioguchi, Kiichi. Verbatim nots; Ikeda Hayato.

Shiina Etsusburo. My Personal History.

Saxonhouse, Gary R. Industrial Restructuring in Japan <A very old article, but a good and concise explanation of reforms around that time>.

Sugimoto Eiichi. MITI.

Chen, Edward K. Y. Hyper-growth in the Asian Economies: A Comparative Study of Hong Kong, Japan, Korea, Singapore, and Taiwan.

Driscoll, Mark. Absolute Erotic, Absolute Grotesque: The Living, Dead, and Undead in Japan's Imperialism, 1895–1945.

Okuno-Fujiwara, Masahiro. Industrial Policy in Japan: A Political Economy View.

Johnson, Chalmers. MITI and the Japanese Boom.