key terms

Wage gap between urban and rural

Foreign debt crisis due to Russo-Japanese War

in 1907 in was ¥1.4 billion

as a result Japan has balance of payment problems -- roughly ¥80 million per year

because of the gold standard -- this acts as a drain on the economy -- Japan cannot expand the volume of money in ciruclation -- this is a de facto tight money policy

IMPACT of WWI

1) WWI everyone goes off gold standard -- salutary inflation in Japan

2) Japan imports fall

• Western nations were producing largely for the war effort
• Japan begins producing advanced manufactured gooods for its own markets

3) Western nations lose ground in Asia markets, particuarly China

3) Japanese shipping services prosper -- take over commerical shipping from Western forces which are dedicated to war effort

4) Japan begins running a trade surplus -- ¥1 billion per year

5) between 1914 and 1918 the econ. grows at 9% annually

Details of this growth

• 1914-1919 real growth (inflation adjusted) in manufacturing is 72%
  • the labor force grew by about 42%
• much of this growth is in heavy industry -- areas of the economy which had previously been profitible only because of gov. subsidy
  • gross shipping tonnage grew by six-fold between 1915 and 1918
  • production of electric generators increased 10x
    • large generators are for domestic consumption (this area was dominated by Mitsubishi and Kawasaki)
    • Japanese manufactures of smaller generators make headway into Chinese market
  • machine tools (lathes, boring machines)
    • domestic production did not exist before the war
    • demand rose to 17,000 tons by 1918
  • modernization of plant in light industry like textiles
    • previously textiles remain based heavily on small, often rural factories
    • in 1914 only 8% of these use electric power
    • in 1919 -- 26%
    • overall in 1910 about 20% of Japanese factories used electric motors in 1920 about 60%
  • by 1920 only half of the Japanese labor force is the primary sectory (agriculture and foresty) one quarter each in manufacturing and service

POSTWAR crisis

• Western countries return to recapture their markets
  • Some sectors -- like machine tools -- collapse
    • survive only because of gov protection
    • Military considers machine tools a strategic sector
  • Other areas such as textiles remain competitve
    • But must fight for market share overall
  • Economic growth 1919-1931 is lower -- back on the order of 2%
• Economy is plagued by a series of financial scandals and recessions
  • a series of bank scandal and failures
  • the are accompanied by high rates of bankruptcy
  • in this environment the largest zaibatsu expand -- they take over, through stock transfers, insolvent or weaker companies
• UNEASY GROWTH

PROBLEM OF GOLD STANDARD

• US and UK had gone off during the war
  • returned in 1920 and prewar exchange rate (ignored inflation)
  • results in shock to the economy:
• 1920 stock market crash -- in Japan a few months stock prices fall by about half
• one result of this crisis is that the larger zaibatsu -- Mitsui, Mitsubishi, Sumitomo and Yasuda -- expand at the expense of smaller zaibatsu­ like Furukawa and Suzuki
• eleven small banks in western Japan failed -- triggering a panic
• 1923 Kantō earthquake
  • centered in Tokyo -- the quake killed over 100,000 people and left over 500,000 homeless and 250,000 without work
  • the quake is estimated to have destroyed as much as 10% of Japan's national wealth
• Japan has to borrow to finance rebuilding
  • it borrows abroad -- but must due so at high interest rates
  • it issues bonds
• 1927 -- earthquake bonds are tied to a bank crisis when a Kobe trading company -- which is a major holder of earthquake bonds, begins to lapse into insolvency
  • the bank is linked to the Bank of Taiwan -- the enitire fiscal structure appears tainted
  • this triggers a run on several major banks in April 1927
  • 11% of Japanese bank deposits are withdrawn -- 32 banks have to close temporarily
    • including the 15th Bank, which was founded back in the 1880s with daimyo bonds -- and was the bank of the Imperial family
  • Solvency is restored -- but long-term confidence in the banking system is weakened
• 1927 fiscal crisis leads a reform of bank law
  • bank managers cannot simultaneously engage in other businesses
  • banks are required to increase their capitalization

GREAT DEPRESSION

• Japanese economy is dealt an enormous blow by the Oct. 1929 stock market crash and great depression
• BUY depression is worsened by Japanese policy
• Japan attempts to return to the gold standard in January 1930 at prewar exchange rates
  • steady inflation since 1916 -- this meant a severe contraction of the money surplus
  • 1916 - ¥100 = $50
  • 1929 - ¥100 = $43
• Japan's makes it own goods more expensive -- weakens ability to export -- strengthens terms of imports