Japan Part 1 Pre-Modern to WW II Development of the Japanese Financial/Monetary Regime in the Broader Context of the Economic and Political Development of Japan 1: 2: 3: Pre-modern up to Meiji Meiji to WW II 1945 to present (3a: Economic and political institutions and 3b: Phases of development)
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Pre-Modern Japan (Pre-Togugawa and Togugawa (1603-1868)
Pre-Togugawa: 700AD to 1603 1. Until the end of the 16th century Japan was ruled by a combination of an Imperial Court in Kyoto, and aristocracy, or by numerous local warlords. 2. The system was subject to considerable political and economic instability because of decentralized power in the form of local warlords, indifferent Imperial Court, and willingness to debase the money supply to support the Imperial Court. 3. The first Japanese currency was coined by the Imperial Court, was introduced in 708 AD. The coin, modeled after the Chinese coin had a round shape with a square hole in the middle a shape that became the standard for subsequent copper coins in Japan until 1868. The Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, provides illustrations and a brief description of these coins. See Currency Museum in Tokyo. 4. Money coined by the Imperial Court tended to follow Gresham's Law, that is, newer coins contained less precious metal as the rulers frequently debased the money supply to finance their expenditures. As a result the value of the coin, measured by the purchasing power of rice,
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fell to 1/150th of its initial level over 150 years from the beginning of the 8th century to the mid 9th century. 5. Consequently, by the end of the 10th century, money circulation ceased and the economy regressed back to a barter economy. Nonetheless, the market was unwilling to function without some type of medium of exchange. 6. Japan entered an age of feudalism around the thirteenth century and for the next 300 hundred years local warlords fought one another almost on a continual basis. 7. Despite the lack of political and military stability, the expansion of the economy increased the demand for money. The lack of central authority prevented the establishment of a money supply responsive to the increased needs of trade. In the absence of a Japanese money supply, Chinese currency, acquired through increased trade with China, circulated within Japan. The imported Chinese money was insufficient to meet money demand. In order to fill the gap, coins were minted privately. However, these home-made coins were usually of low quality and traded at varying discounts, or were even sometimes rejected. 8. Bottom Line – pre-Tokugawa Japan lacked central authority of any type that would permit a stable financial and monetary system – money supply consisted of Chinese money and “private” money and many transactions were conducted in barter – rice was often the unit of account. Togugawa Period (1603 to 1868) 1. The first strong central political control over Japan was established in 1603 by the Tokugawa military government. The series of Tokugawa Shogun ruled the country through strong military and political control for the next 260 years. Imperial Court remained in Kyoto, but no power. The Tokugawa Shogunate was located in Edo (later to become Tokyo). 2. Imposed a structure on the economy: Isolation from foreign influence by limiting contact with foreigners. Permitted trade contact only on Dejima Island off of Nagasaki and with only a limited number of
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countries; (b) rigid cast system. Citizens divided into samurai, peasants (70 to 80 percent), artisans, tradesmen, and “untouchables” – landless peasants and butchers. (c) The nation was divided into regions and certain power was delegated to local lords. (d) Economic and political institutions design to limit risk and resist change. 3. The Tokugawa government standardized coins nationwide and introduced gold, silver, and copper coins. 4. Merchants on an isolated basis began to issue paper notes in lieu of change for silver coins. This was followed by the printing of local currencies by a number of Daimyos backed by silver or gold. 5. Japan is unusual from the evolution of monetary systems in other countries, that national coins and local paper money coexisted for a long time in Japan. 6. There developed a type of monetary policy during this period using international trade and changing the gold/silver content of national coins. Economic policy during the Tokugawa period: (a) in the late 17th century silver, gold, and then copper went abroad (international settlement) through foreign trade that was allowed only on the island off Nagasaki. (b) In 1715, the government reduced the number of Dutch and Chinese ships allowed to come to Nagasaki in order to curb the outflow of coins. (import quota triggered by a reduction in foreign reserves). (c) As a result of the outflow and government deficits, the Tokugawa government reduced the content of gold and silver in coins on two occasions: in 1695 and during the period from 1706 to 1711. Inflation resulted from these increases in the monetary stock. (d) In 1713, Hakuseki Arai a Confucian scholar advised the government that inflation was caused by too much money and recommended that the gold and silver content in coins be raised. (e) The government adopted Arai's recommendation to reduce the money supply by increasing the gold and silver content in 1714 and 1715. Severe deflation resulted from this action. The
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government later reversed its course and increased the money supply in 1736. (f) Finally, the price level was more or less stabilized for the next 80 years. (g) In the early 19th century the Tokugawa government tightened its budget in reaction to inflationary pressure caused by natural disasters, the Shogun family's extravagance, and military expenditures. Large amounts of seignorage were collected in 1818-1829 and in 1832-1837. The money stock increased by 60 percent and 20 percent, respectively, on these occasions. As a result, the price level, most reliably recorded in rice prices, more than doubled from 1820 to 1837. 7. During the Tokugawa period, the merchant class steadily increased its wealth through trading as the economy expanded. Several merchants established exchanges or simple banking institutions what would be regarded as a crude form of merchant bank. These institutions first functioned as carriers transferring money from Tokyo to Osaka and eventually expanding operations to lending to farmers and local daimyos. 8. Bottom line – national and local money, periods of monetary instability as government used its power to issue money to finance deficits, and beginning of banking system. 2: Meiji Restoration to the End of WW II 1. Foreign pressure against the sakoku policy intensified in the nineteenth century and the critical turning point was reached with the decision of the United States to send Commodore Matthew Perry in 1853 to force Japan to open ports for international trade (and establish spheres of U.S. influence). In 1854 the Tokugawa government signed a treaty to establish diplomatic and trading relationships with the United States. Similar treaties with other governments followed shortly afterward and effectively ended the sakoku policy. 2. This set off an internal political debate about Japan’s future. The opening of Japan became inevitable, partly because of the superiority of foreign fleets with modern weapons. In 1867 political power was
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transferred from the last Tokugawa Shogun to the 16 year old Emperor. The Meiji government was established January 1868 and thus commenced the Meiji Restoration, that is, ultimate political power was handed back to the imperial family with the objective of "modernizing" the country's political, economic, and social institutions. Objective – parity and then surpass the west economically and militarily. 3. Policies of the Meiji government to support this object: (a) strong centralized control and established a legislative system based on a national assembly – two houses based on United Kingdom; (b) end cast system and establish mobility of labor; (b) compulsory education; (c) end international isolation to gain western technology; (d) develop an industrial policy supported by large concentrations of industries that came to be known as zaibatsu – producer rather than consumption oriented economy; (e) develop a financial system as an instrument of this industrial policy; (f) infrastructure, including a postal system; (g) fiscal system combined with a national money supply and taxes paid in money; (h) strong military; and (i) foreign expansion. 4. Meiji inherited important elements from the Togugawa period: (a) high level of education; (b) high technology in agriculture; (c) infrastructure – road system; and (d) strong work ethic. 5. Not only use technology from the west but base new economic institutions on those in the west. Financial system needed to institutionalize the savings – investment process. 6. National Banking System 1872 based on U.S. national banking system-mistake! By 1879, 153 national banks had been established. In fact, the 1876 revisions rendered the issuing of bank notes so profitable that note issue expanded rapidly and the government eventually stopped the formation of new national banks. 7. Postal Savings System in 1875 based on U.K. postal savings system. 8. Bank of Japan in 1882 after the Belgian central bank in 1882. The Bank of Japan was established to stabilize the currency system and deal with inflation. The Bank became the sole bank to issue
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convertible notes two years later. National banks were converted to "ordinary" banks accepting and issuing deposits and specializing in short-term business lending but were no longer permitted to issue notes against reserves. 9. Banking problems caused MOF to accept postal deposits and make loans – basis on modern FILP system. In 1912, postal savings system commenced selling life insurance. 10.The Japanese financial system expanded significantly after the revisions in the national banking system and establishment of the Bank of Japan. In 1913, there were 1,457 ordinary banks, 52 specialized banks, and 684 small savings-type institutions. 11.The prewar banking system consisted of essentially two sets of banks. A large number of small poorly capitalized institutions who financed small businesses which were subject to credit and liquidity risks and a small number of very large and better capitalized banks which became part of the industrial structure referred to as the zaibatsu. 12.Japan's most severe banking collapse occurred in 1927 primarily as the aftermath of a major Tokyo earthquake that occurred September 1, 1923. The 1923 earthquake was devastating in terms of lives lost (133,000) and property damage. The Bank of Japan aggressively discounted commercial bills drawn on banks in the affected areas to assist the reconstruction with the understanding that losses would be covered by the government. By 1927 the so-called earthquake bills totaled ¥2.1 billion of which, the Bank of Japan had rediscounted almost one-forth of the outstanding amount. The rediscount period had been extended twice and with only a short time remaining, the legislature began debating a bill to extend measures for compensating earthquake bill losses in 1927. The government was forced to reveal details about the earthquake bills and as a result, inside arrangements between companies and banks became public. Earthquake bills were concentrated in only a few banks with about half of the outstanding bills held by the Taiwan Bank. Another problem was that the Taiwan Bank concentrated 70 percent of its lending to Suzuki Shoten (trading company). The core of the bad
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loan problem was thus concentrated in the Taiwan Bank and its relationship to the Suzuki Shoten.
13.In the aftermath, the Bank Law of 1928 significantly expanded government regulation and supervision over the banking system and encouraged consolidation of banking that continued for the next fifteen years. 14.In the 1930s the government increased control over the financial system as part of its general war mobilization. 15.MOF was always at the center of the Japanese financial system in terms of regulation and supervision and influence over the Bank of Japan. Note on the “wartime” Bank of Japan? The following Articles of the 1942 Law highlight the institutional dependence of the Bank of Japan on the Ministry of Finance and other parts of the government, and form the foundation for the “wartime revision view” of the Bank of Japan political economy: Article 1: The Bank of Japan has, for its object, the regulation of the currency, the control and facilitation of credit and finance, and the maintenance and fostering of the credit system, pursuant to the national policy, in order that the general economic activities of the nation might adequately be enhanced. Article 2: The Bank of Japan shall be managed solely for achievement of national aims. Article 25: The Bank of Japan may, with the permission of the competent Minister, undertake such businesses as are necessary for the maintenance and fostering of the credit system. Article 42: The Bank of Japan shall be under the supervision of the competent Minister. Article 43: The competent Minister may, whenever deemed necessary for the attainment of the object of the Bank of Japan, order the Bank to undertake any
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necessary business, or order alterations in the By-Laws as well as other necessary action. Although the language of the 1942 Law appears consistent with the “wartime revision view,” the importance of these articles is frequently exaggerated. Key aspects of the 1882 and 1912 Laws make clear that the position of the Bank of Japan in the financial system was largely unchanged despite the 1942 revision. Moreover, it is very likely that revision in the Bank of Japan Law would have occurred at the 30 year lapse since the previous revision in 1912 whether or not Japan was at war. The 1942 Law did not establish a new relationship between the Bank of Japan and the government, nor was there significant change in the role of the central bank in the economy or the financial system. The 1942 revision was a continuation of institutional characteristics established in the 1882 Bank of Japan Law. Comparison of the original 1882 Law and wartime 1942 revision, for example, reveals little difference in the expressed relationship between the Bank of Japan and the government. Selected articles from the 1882 Law and its By-laws illustrate this point. Article 13: The Bank of Japan is empowered to issue convertible bank notes; provided that, when permission to exercise this privilege is given, the Government shall enact special rules related to the same. Article 22: The Bank of Japan shall make a report to the Minister of State for Finance at least once a month, stating in detail the actual condition of the business conducted by the head office, branches and correspondents. Article 86: The Government shall oversee the management of all the business of the Bank of Japan, and shall be competent to interdict not only all transactions at variance with the provisions of the Bank of Japan Act and the By-laws, but also such as, in the government opinions, may seem disadvantageous. Article 87: The Government may, if it deem necessary, revise or amend these By-laws at any time.
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Thus, while the 1942 Law clarified the specific role of the Bank of Japan to use its control over credit "for national aims", the essential relationship between the Bank of Japan and the government remained unchanged between the 1882 and 1942 Law. The 1997 Bank of Japan Law is a significant institutional redesign – that occurred for three reasons: (a) distance Japan from the WW II experience; (b) in line with new thinking about independence; and (c) punish the MOF. Accomplishments of Meiji Restoration Impressive record of economic growth – see Ito’s table Why: (a) high savings rate; (b) financial system that channeled savings into industry; (c) building up infrastructure and military; and (c) protected domestic markets – mercantilism. Japan avoided the Great Depression because of (a) strong fiscal policy in 1931; (b) strong monetary policy in 1931: (c) devaluation of the currency; and (d) military build up for war. Impressive record of expansion 1894/5 – war with China leads to control over Taiwan 1904/4 – war with Russia leads to control over Korea – annexed Korea in 1910 1931 - control over Manchuria 1933 – Japan withdraws from the League of Nations 1937 – invades China 1940 – signs Tripartite Pack with Germany and Italy 1940/1 – takes control of Vietnam from France December 7, 1941 – war with the US (British, Australians, Netherlands, etc.)
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