Japan
Content
A brief introduction to the history of the Economy and Monetary Policy ³Kinyuseisaku´ of Japan since the Meiji era.
Juan Sebastian Rodriguez
During he Meiji revolution (1868±1912) Samurais fighting the Tokugawa regime committed to catching up with the west and pushed the industrialization of Japan. It was then, when the zaibatsu-large financial conglomerates including groups such asMitsui, Mitsubishi, and Sumimoto- emerged to workhand-by-hand with the Japanese government andimpulse the first wave of financial prosperity in the country. Japan had started a story of financial success (and potential demise), and the relation between the biggest companies and the government was arguably going to mark the pace at which Japan was to conduct its Monetary Policies until the postwar period. The founding of the Postal Service in 1871, The Bank of Japan (BOJ) in 1882, great investments in infrastructure, the creation of the new currency, and the expansion of the zaibatsu to multiple economical sectors were among these policies. Before 1920¶s Japan had confronted economical challengesassociated with social disparity, high taxes, and the extreme inflation of the 1914 (174 % increase in prices from 1914 to 1920). The Meiji era had ended and there had to be political changes to distance the economical powers from having to much inference in the national government, as well as to mitigate the outburst of proteststhroughout the country. Hara Kei (1856-1921) becomes the first commoner Prime Minister in 1918. He introduces ³educational reforms, and pushes the expansion of transportation and communication, the fortification of National Defense, and industrial growth´1. In addition Kei lowered tax qualifications from 10 to 3 yen, but this was not enough: the decade of the 1910 ends with the evident necessity for stronger fiscal policy. The 1920¶s plunge of the stock market, soaring silk prices- japans industry main fuel-, and the appearance of overpriced Japanese goods further aggravated the situation. In the decade of the 20¶s Japan¶s strategywas one of diplomacy. Under the leadership of Shidehara Kijuro country starts becoming an important actor in the international arena. Kijuro, who was also married to the fourth daughter of Mitsubishi¶s founder Iwasaki Yataro, fomented a culture of consumption that was characteristic of Japan¶s 1920¶s. Shopping districts and big department stores as well as the rise of the iconic sarariman date back to this era. However, the 1920¶s did not finish how they started. A crisis in 1927 affected small banks ³and strengthen the big zaibatsu banks.´2 Moreover, the 1929 crisis in the US also hit Japan, and disparities aroused again leading to the formation of a rural military force that took over power. Japanese military rule forced the zaibatsu to invest heavily in the war, and the extreme nationalistic sentiment took a toll on the apparent peace and prosperity of the early 20¶s. WW II ends in 1945, and a defeated Japan is also devastated. The U.S. will exercise its leverage in the country and will foster the most important political and economic reforms in the country recent history. The zaibatsu, for example, had to be dismantled in favor of corporate groups and the consequential selling of the former zaibatsu stocks in the stock market; groups like Mitsui and Mitsubishi were ³divided into some 240 different firms´3.Other reforms included those of the land that turned many from leasing land into owning it. During the pre-war era many aspects of they way Japan conducted their financial policy were going to change. Other aspectswill rather be an echo from the past, both in the good and the bad side of the financial spectrum. Firstly, the years of prosperity were to come. Japan had turned into the most important ally of its past enemy, the U.S. Moreover, it had adopted what is known as the ³Mc Arthur Constitution´- for the influence of this American general in writing it. PM Yoshida Shigeru then lead the country from U.S occupation to independence, fostered industrial growth, promoted
democracy, and changed some of the policies imposed by the U.S during the occupation. Zaibatsu turned into financial groups with many subdivisions, however Yoshida allowed for some removed executives to recover their positions. In 1949 theBOJ is re-structured, and the history of monetary policy in Japan will revolve around the relation between the Bank, the Minister of Finance (MOF) and the Minister of International Trade and Industry (MITI). The ³income-doubling plan´ set by the Ikeda administration in 19614 exceeded all the expectations. In 1968, Japan surpasses Germany as the second greatest GDP of the world and its growth continues at a very high rate until at least 1973. The yen gain valued with respect to the dollar ³and to help prevent US $ devaluation´ moving from 360 yen per dollar to 254 yen per dollar in 1974. This helped also helped increase the Japanese surplus. However, from 1973 to 1981 Japan economy suffered product of the high dependency on foreign oil. In addition, as economy major Takatoshi Ito describes, ³the BOJ underestimated the strength of the economy and potential of prices to rise quickly.´5 The BOJ interventions in lending rates, which increased ³from 4.25 in Oct. 1972 to 9% in December 1973´, slowed down economic activities. Japan was plowing the field for its first economic bubble. The BOJ exercised its mandate poorly, and was very criticized for doing ³too little, too late.´ It also had little independence, as its policy was often obstructed or altered by both the MOT and the MITI.6One could argue for a form of economic and political cooperation similar to the zaibatsu of 30 years earlier: ³Getting approval of the interest rate changes was tricky. It often depended on the relationship between Governor [of the BOJ] and the Minister of Finance, or between Governor and Prime Minister.´7Until 1985 there had been an appreciation of the dollar, however the G5, a group of the most powerful economies of the time, meet in an effort to contract the appreciation of the dollar. In 1986 the yen dollar exchange rate was of 150 per 1$. The NIKKEI Stock Average rose ³from 18,701 yen in 1985 to its peak of 38,957´8 in 1986. The strong yen became a misleading indicator for the BOJ, which delayed necessary interest rate increases. There was abundant surplus and abundantinvestments lead to the economic bubble that burst in 1989. The major banks had accumulated too much bad debt. There was distrust of the BOJ and other financial institutions. The NIKKEI fell to 15,000 yen in 1990. The 90's are the lost decadethere was zero to negative growth. Only during1995-1997 there is a partial economic recovery. People started buying more before taxes increased, but the economy stopped again once the taxes increased. In 1997, the Bank of Japan Law was revised ³for the first time in 55 years and went into effect in April 1998´ giving more independence to the Bank. The BOJalthough not completely independent yet- has applied policies such as the ZIRP (Zero Interest Rate Policy) or Quantitative easing in 2001, but has seen little success. A history of more than a hundred years of continuous demise and rebirth of the Japanese economy makes some keen to thing that perhaps once again Japan will stand up to its name. The results of this decade could, nevertheless, make one think this is a rather difficult task. Japan has experienced small growth, but it has also been a victim of the Global Crisis, specially the one of 2007. The demographic crisis of the oldest population in the world, and the one that ages at faster pace also add to a pessimistic forecast. In the projection of the monetary policy for the next one hundred years will depend whether or not the story of Japan will continue to be one of greatness and resistance, or on the contrary of failure and decay.
12 3 Michael
Adolphson: Course Tradition and transformation, Harvard Summer in Kyoto 2010. 4, 5, 6 Laura Alfaro, Akiko Kanno:Kinyuseisaku: Monetary Policy in Japan (A). April 2009 7 Takatoshi Ito: Great Inflation and Central Bank Independence in Japan. 2010
Juan Sebastian Rodriguez
During he Meiji revolution (1868±1912) Samurais fighting the Tokugawa regime committed to catching up with the west and pushed the industrialization of Japan. It was then, when the zaibatsu-large financial conglomerates including groups such asMitsui, Mitsubishi, and Sumimoto- emerged to workhand-by-hand with the Japanese government andimpulse the first wave of financial prosperity in the country. Japan had started a story of financial success (and potential demise), and the relation between the biggest companies and the government was arguably going to mark the pace at which Japan was to conduct its Monetary Policies until the postwar period. The founding of the Postal Service in 1871, The Bank of Japan (BOJ) in 1882, great investments in infrastructure, the creation of the new currency, and the expansion of the zaibatsu to multiple economical sectors were among these policies. Before 1920¶s Japan had confronted economical challengesassociated with social disparity, high taxes, and the extreme inflation of the 1914 (174 % increase in prices from 1914 to 1920). The Meiji era had ended and there had to be political changes to distance the economical powers from having to much inference in the national government, as well as to mitigate the outburst of proteststhroughout the country. Hara Kei (1856-1921) becomes the first commoner Prime Minister in 1918. He introduces ³educational reforms, and pushes the expansion of transportation and communication, the fortification of National Defense, and industrial growth´1. In addition Kei lowered tax qualifications from 10 to 3 yen, but this was not enough: the decade of the 1910 ends with the evident necessity for stronger fiscal policy. The 1920¶s plunge of the stock market, soaring silk prices- japans industry main fuel-, and the appearance of overpriced Japanese goods further aggravated the situation. In the decade of the 20¶s Japan¶s strategywas one of diplomacy. Under the leadership of Shidehara Kijuro country starts becoming an important actor in the international arena. Kijuro, who was also married to the fourth daughter of Mitsubishi¶s founder Iwasaki Yataro, fomented a culture of consumption that was characteristic of Japan¶s 1920¶s. Shopping districts and big department stores as well as the rise of the iconic sarariman date back to this era. However, the 1920¶s did not finish how they started. A crisis in 1927 affected small banks ³and strengthen the big zaibatsu banks.´2 Moreover, the 1929 crisis in the US also hit Japan, and disparities aroused again leading to the formation of a rural military force that took over power. Japanese military rule forced the zaibatsu to invest heavily in the war, and the extreme nationalistic sentiment took a toll on the apparent peace and prosperity of the early 20¶s. WW II ends in 1945, and a defeated Japan is also devastated. The U.S. will exercise its leverage in the country and will foster the most important political and economic reforms in the country recent history. The zaibatsu, for example, had to be dismantled in favor of corporate groups and the consequential selling of the former zaibatsu stocks in the stock market; groups like Mitsui and Mitsubishi were ³divided into some 240 different firms´3.Other reforms included those of the land that turned many from leasing land into owning it. During the pre-war era many aspects of they way Japan conducted their financial policy were going to change. Other aspectswill rather be an echo from the past, both in the good and the bad side of the financial spectrum. Firstly, the years of prosperity were to come. Japan had turned into the most important ally of its past enemy, the U.S. Moreover, it had adopted what is known as the ³Mc Arthur Constitution´- for the influence of this American general in writing it. PM Yoshida Shigeru then lead the country from U.S occupation to independence, fostered industrial growth, promoted
democracy, and changed some of the policies imposed by the U.S during the occupation. Zaibatsu turned into financial groups with many subdivisions, however Yoshida allowed for some removed executives to recover their positions. In 1949 theBOJ is re-structured, and the history of monetary policy in Japan will revolve around the relation between the Bank, the Minister of Finance (MOF) and the Minister of International Trade and Industry (MITI). The ³income-doubling plan´ set by the Ikeda administration in 19614 exceeded all the expectations. In 1968, Japan surpasses Germany as the second greatest GDP of the world and its growth continues at a very high rate until at least 1973. The yen gain valued with respect to the dollar ³and to help prevent US $ devaluation´ moving from 360 yen per dollar to 254 yen per dollar in 1974. This helped also helped increase the Japanese surplus. However, from 1973 to 1981 Japan economy suffered product of the high dependency on foreign oil. In addition, as economy major Takatoshi Ito describes, ³the BOJ underestimated the strength of the economy and potential of prices to rise quickly.´5 The BOJ interventions in lending rates, which increased ³from 4.25 in Oct. 1972 to 9% in December 1973´, slowed down economic activities. Japan was plowing the field for its first economic bubble. The BOJ exercised its mandate poorly, and was very criticized for doing ³too little, too late.´ It also had little independence, as its policy was often obstructed or altered by both the MOT and the MITI.6One could argue for a form of economic and political cooperation similar to the zaibatsu of 30 years earlier: ³Getting approval of the interest rate changes was tricky. It often depended on the relationship between Governor [of the BOJ] and the Minister of Finance, or between Governor and Prime Minister.´7Until 1985 there had been an appreciation of the dollar, however the G5, a group of the most powerful economies of the time, meet in an effort to contract the appreciation of the dollar. In 1986 the yen dollar exchange rate was of 150 per 1$. The NIKKEI Stock Average rose ³from 18,701 yen in 1985 to its peak of 38,957´8 in 1986. The strong yen became a misleading indicator for the BOJ, which delayed necessary interest rate increases. There was abundant surplus and abundantinvestments lead to the economic bubble that burst in 1989. The major banks had accumulated too much bad debt. There was distrust of the BOJ and other financial institutions. The NIKKEI fell to 15,000 yen in 1990. The 90's are the lost decadethere was zero to negative growth. Only during1995-1997 there is a partial economic recovery. People started buying more before taxes increased, but the economy stopped again once the taxes increased. In 1997, the Bank of Japan Law was revised ³for the first time in 55 years and went into effect in April 1998´ giving more independence to the Bank. The BOJalthough not completely independent yet- has applied policies such as the ZIRP (Zero Interest Rate Policy) or Quantitative easing in 2001, but has seen little success. A history of more than a hundred years of continuous demise and rebirth of the Japanese economy makes some keen to thing that perhaps once again Japan will stand up to its name. The results of this decade could, nevertheless, make one think this is a rather difficult task. Japan has experienced small growth, but it has also been a victim of the Global Crisis, specially the one of 2007. The demographic crisis of the oldest population in the world, and the one that ages at faster pace also add to a pessimistic forecast. In the projection of the monetary policy for the next one hundred years will depend whether or not the story of Japan will continue to be one of greatness and resistance, or on the contrary of failure and decay.
12 3 Michael
Adolphson: Course Tradition and transformation, Harvard Summer in Kyoto 2010. 4, 5, 6 Laura Alfaro, Akiko Kanno:Kinyuseisaku: Monetary Policy in Japan (A). April 2009 7 Takatoshi Ito: Great Inflation and Central Bank Independence in Japan. 2010
