The Shōwa Crisis in the MediaThe Armaments Expansion Budgets and the Japanese Economy after the Russo-Japanese WarThe Economic Development of Japan: The Path Traveled by Japan as a Developing CountryTo Stand with the Nations of the World: Japan’s Meiji Restoration in World History1914–1918 Online. See Following the Meiji restoration, an upsurge of pacifism and liberalism in the early 1920s coincided with the foundation of genuine party politics—a period dubbed the Taishō Democracy.Political debate between the two parties centered on the extent and pace of monetary and fiscal tightening required for a return to prewar gold parity against the backdrop of mild deflation, sluggish growth, and financial system fragility. Extending colonization was also a way to ensure captive demand and a supply of cheap commodities.The modernization push extended to experimentation with new monetary and financial institutions that could foster growth and economic stability.

In Western dating, the Meiji and Taishō eras were 1868–1912 and 1912–26, respectively.Deliberate resort to seigniorage would entail observable flows in the central bank accounts. The result was a significant debt overhang and one of the longest quasi-sovereign default episodes in history (1947–52).Theory suggests that whether fiscal or monetary policies are dominant or the extent to which they act in concert can have important consequences for macroeconomic performance.The next sections shed light on the policies and transformation of the interwar period on the eve of WWI and describe the monetary dominance regime in the immediate aftermath of the war; the short-lived monetary subordination To understand the history of Japanese public debt during the interwar period, it is necessary to go further back. For instance, foreign observers praised the government for the new sinking fund that was created in 1925A large number of domestic debt instruments were issued in the interwar period.

Despite the New York stock market crash, the American and British consortium of banks consented to grant foreign credit (In the wake of the issuance, J.P. Morgan & Co. praised the Japanese government’s actions as “still another evidence of the determination of the Japanese government and people” to conduct their currency and finances “upon the highest bases of soundness and credit” (Until the gold embargo was lifted in early 1930, the government kept public debt under tight control in the 1920s, despite a destructive earthquake and a series of financial crises and natural disasters (Returning to the gold standard also paid off in international markets: Japan issued foreign bonds in May 1930 in London and New York with a coupon of 5.5 percent, a reduction in servicing costs compared to the 1924 issuances when the country was off the gold standard.Note: There are several ways to envisage the maturity of a security No further major external issuance was required, implying lower reliance on international capital markets. This move antagonized military leaders, who had been subjected to budgetary cutbacks in the past but were now firmly entrenched in positions of power.Following its 1933 withdrawal from the League of Nations on account of the Manchurian Incident, Japan weaned itself off foreign resources and was cut off from international financial markets.Note: gov’t = government; WWI = World War I; WWII = World War II.With the military machine ramping up, the BoJ adopted an unconditional purchase policy for sovereign bonds.With the formal outbreak of the Sino-Japanese War in July 1937, Japan formally shifted to a wartime governance mode and widespread financial repression.

Issuance fees charged by Japan’s underwriters were also smaller in 1930, 4 percent instead of 5 and 4.5 percent in 1924 (Takahashi had long retired, after multiple stays at the Ministry of Finance and the central bank, when he was called back in 1927 with the support of the military to reassure international and domestic markets.When Japan went of the gold standard, capital flow management measures were motivated by a desire to limit carry-trade opportunities and focus domestic liquidities on domestic bond issuances. Japan had a highly developed industry, but the land was scarce of natural resources. A nationwide financial panic was sparked shortly thereafter when financial difficulties between banks and trading companies came to light (see Author note: The yen’s non-convertability to gold and the resulting exchange rate fluctuation.The Bank of England had opened accounts for and provided payment facilities to the BoJ and the Japanese sovereign. The oligarch Toshimichi wrote in 1873: “If our country becomes involved in an unexpected misfortune … our inability to repay our debts to England will become England’s pretext for interfering in our internal affairs which would lead to baneful consequences beyond description”.Japan also shared many of the characteristics of today’s emerging markets: a small open economy with an expanding trade sector, insufficient domestic revenue mobilization, and need for international capital to finance economic development and wars. In 1918, Japan was the second largest creditor country in the world, after the US. Thus, outright bailout or budget support was not provided. As such, adherence to the monetary rule was “a good housekeeping seal of approval”, which signaled to international capital markets that the country was committed to prudent fiscal and monetary policies.Fiscal activism increased when the gold standard was abandoned in the wake of the worldwide financial turmoil and crippling domestic deflation and depression. In 1902, the British Foreign Office sent a letter to Rothschilds London stating, “His Majesty’s Government regard it as a matter of political necessity that Japan should be able to raise in this country, rather than elsewhere, the money which she requires, and they hope that she will obtain a loan in London on reasonable terms” (September 22, 1902). The interwar period was marked by a radical change in the international order, away from the balance of power that had dominated pre-World War I Europe. Yet, the schemes also implied a steadily growing BoJ exposure to the government.More importantly, the impact on the financial sector was less benign than it seemed, as the BoJ lost the ability to discriminate among borrowers.
Even though the government had access to domestic debt financing in the mid-1930s, central bank independence was eroded as seigniorage revenues were increasingly channeled to meet burgeoning fiscal deficits.


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