Economic Consequences of the Japanese Occupation of Indonesia

by Riddhi Chakraborty

The Japanese occupation of Indonesia during the Second World War had a profound economic impact in shaping the country’s post-war economic policies and development. Post-war Indonesia experienced a gradual increase in political radicalism as it tried to break from colonial institutions that had shaped its infrastructure for over a century. During the postcolonial era, despite the political independence gained after World War II, Indonesia eventually became a nation overseen by autocratic rule. This blog post argues that the main reasons for Indonesia’s political transformations, despite their newly gained sovereignty post-war were: 1. a weakened administrative apparatus after the struggle against both the Dutch and Japanese occupation and 2. that Indonesia’s economic system thus remained foreign-dominated.

According to historian M.C. Ricklefs, the Japanese occupation of Indonesia aimed to completely reorientate the economy to center Imperial Japan as the overseer of the Pacific and Greater Asia. Such a plan thus required the removal of Western influences akin to a colony’s relation to the metropole.[1] Thus, as scholar Shigeru Sato argues, operating on limited time, the Japanese used the existing colonial administrative structure left over by the Dutch which emphasized nationalistic loyalty towards the occupying military.[2]

The parade of Japanese troops in the Pasar Besar area of Surabaya, 1942. The East Java Governor's Office and Viaduk Jalan Pahlawan are seen. Source: Nationaal Archief [3]

Major impacts of the economic policies under the Japanese occupation included regulating trade and doing away with traditional export markets. This included liquidating businesses in select economic sectors like agriculture while others, including those under foreign ownership, were confiscated. Industries crucial to the war effort like oil, communications, and mining were brought under military control.[4]

Agricultural production, exports and traditional Indonesian markets were hit especially hard due to the overall economic restructuring as part of its wartime objectives, which failed due to poor management,[5] alongside inflation in the Greater East Asia Co-Prosperity Sphere from 1943 onwards.[6] The Indonesian archipelago was split into three areas under the Japanese-occupying governing military that applied different economic policies to these regions.

A map of the Japanese advance from 1937 to 1942. Source: Wikimedia[7]

Java and Sumatra fell under the 16th and 25th Area Armies respectively under the Southern Expeditionary Army Group tasked with all military operations within the South East Asian and South West Pacific regions during the Second World War.[8] Under the Japanese 16th Army, Java saw a significant increase in nationalistic sentiments given its political importance despite its economic insignificance and its main resource was people (a.k.a laborers). Sumatra, on the other hand, under the naval 25th Army, witnessed the highest amount of oppression given its economic importance for its raw materials like oil and rubber and consequent supposed political irrelevance.[9]

World War II disrupted and spurred on political changes in colonial Indonesia. Such economic and social interferences propelled mass labor mobilization towards increasing agricultural produce with an emphasis on cotton production.[10] The focus on labor and war ammunition came at the cost of food production. The Japanese policy of self-sufficiency failed to increase food and clothing supply, with the tax system disrupting the local distribution of rice.[11] Furthermore, the global economic disruption caused by the war adversely impacted the export-import industries in Indonesia and its native subsistence economy, causing labor productivity to plummet. The resulting strain on the economy led to the significant loss of life amongst the Indonesian populace. Later, about 2.4 million people succumbed to illness and malnourishment between 1944 and 1945.[12]

Upon independence, Indonesia’s socialist government under President Sukarno saw its administration mainly composed of experts with prior governing experience under Dutch and/or Japanese rule. However, despite the commitment to democracy, Indonesia’s government faced frequent clashes between and within political parties–resulting in quick successions that disrupted the smooth implementation and planning of economic policies. Ultimately, by the 1950s, the government failed to curb the economic power of Dutch enterprises while also lacking the support for the Indonesian entrepreneurial class.[13]
Independent Indonesia chose democracy in 1945 with an unfortunate collapse in 1957, disappointing the expectations set during the Revolution of 1945-1949 when sovereignty transferred from the Dutch to the Republic of Indonesia.   Slow economic development in the face of rapid population increase caused urban areas to become the focus of politics, overshadowing the needs of rural areas and outer islands.[14] Furthermore, the issue of circulating Japanese banknotes also worsened the mounting inflation post-1945.[15]

NI-132-Imperial Japanese Government-100 Roepiah (1944). Source: National Numismatic Collection, National Museum of American History at the Smithsonian Institution[16]

Due to the Japanese occupation, agriculture in Indonesia failed to recover by the 1950s The weakened administrative system replete with foreign-dominated enterprises exacerbated the already growing political instability, thus pushing the economy (and society) towards gradual radicalization as seen under Japanese occupation. In the tumultuous years after independence, military destruction and the collapse of significant agricultural and industrial sectors exacerbated the already uneven socio-economic growth of Java and the outlying islands.[17]

Currency pegging encouraged smuggling. While foreign markets were considered necessary by the general public, the overt support for them led to political complications.[18] Issues of inflation, falling exports, and poor salaries exacerbated by corruption and maladministration contributed to the increasing radicalization throughout the 1950s that gradually steered the country toward an increasingly autocratic rule under the “New Order” led by President Sukarno.[19]

Source:
1. Ricklefs, Merle Calvin. A History of Modern Indonesia since c. 1200. London: MacMillan, 1993, p. 249-250
2. Post, Peter. The Encyclopedia of Indonesia in the Pacific War: In Cooperation with the Netherlands Institute for War Documentation. Vol. 19. Brill, 2009, p.61.
3. The parade of Japanese troops in the Pasar Besar area of Surabaya, 1942. The East Java Governor's Office and Viaduk Jalan Pahlawan are seen. Source: Nationaal Archief [3]​
4. Post, Peter. Encyclopedia of Indonesia, 2009, p.218-219
5. Ibid, p.226-227
6. Ricklefs, Modern Indonesia, 1993, p.249
7. A map of the Japanese advance from 1937 to 1942. Source: Wikimedia
8. Post, Peter. Encyclopedia of Indonesia, 2009, p.218-219
9. Ibid, p.247-250
10. Dick, Howard, et al. Emergence of a national economy: An economic history of Indonesia, 1800-2000. University of Hawaii Press, 2002, p.165-167
11. Thuy, Pham Van. Beyond Political Skin: Colonial to National Economies in Indonesia and Vietnam (1910s-1960s). Springer, 2019, p. 30-32
12. Van der Eng, Pierre. "Food supply in Java during war and decolonisation, 1940-1950." (2008).
13. Ibid, p. 119
14. Ricklefs, Modern Indonesia, 1993, p.289-291.
15. Booth, Anne. Economic change in modern Indonesia: Colonial and post-colonial comparisons. Cambridge University Press, 2016, p.38.
16. NI-132-Imperial Japanese Government-100 Roepiah (1944). Source: National Numismatic Collection, National Museum of American History at the Smithsonian Institution
17. “Netherlands Indies Japanese Occupation 1000 Roepiah ND (1945).” Heritage Auctions, currency.ha.com/itm/world-currency p. 38-40
18. Dick, Howard, et al.  National economy, 2002, p.215-217.
19. Widodo, Tri. "From Dutch Mercantilism to liberalism: Indonesian historical perspective." Journal of Indonesian Economy and Business (JIEB) 21.4 (2006), p.336