Industrialisation requires increasing capital formation to provide assets to keep pace with the growth in labour, to raise productivity by substituting capital for labour and to allow ‘embodied’ technical progress. In growth-accounting terms the ‘contribution’ of the growth rate of gross capital stock to the rate of growth of output was invariably much higher than that of labour. While Japan used traditional labour-intensive techniques where appropriate and adapted western technology to suit her factor endowments and prices, modern industrialisation necessitated modern technology and that presupposes a fast rate of capital accumulation.

From the 1880s to the 1930s, the ratio of gross domestic capital formation to GNP rose from 12 to 25 per cent and the ratio of net domestic capital formation to NNP from 8 to 20 per cent, most of the increases having taken place in the interwar period. A structural decomposition of gross domestic fixed capital formation demonstrates that the rise in producers' durables from under 18 per cent in the 1880s to 60 per cent in 1938 was the key to trend acceleration in industrial growth. Since the Second World War the high productivity of capital stock is evinced by a relatively low and falling capital:output ratio due to rapid technical progress and a consequent relatively young age of capital. The prewar incremental capital:output ratio was higher and a slight secular trend rise is evident. Capital-deepening or a rise in the capital: labour ratio was also a feature.