Saturday, August 27, 2011

Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s

Japan’s experience during the 1930s is something that is not often discussed. For example, did Japan get out of the Great Depression before the war? In fact, it did, and used Keynesianism before Keynes’s General Theory.

A number of countries escaped the depression or the high involuntary unemployment and economic weakness after their contractionary phases of the Great Depression: Sweden, the US (to some extent), Germany, and Japan. In the 1930s, Sweden was an example of monetary and fiscal stimulus to escape the depression.* The US under Roosevelt was a moderate example of stimulus, but far too timid. It has been known for a long time that Germany and Japan escaped the depression by large-scale fiscal stimulus in the 1930s, but of course when you point this simple fact out (and stress that it is not in any way support for fascism), it provokes a cacophony of nonsense from Austrians and libertarians.

The Japanese recovery was masterminded by Takahashi Korekiyo, Japan’s Finance Minister, often referred to as the Japanese “Keynes” (Cha 2003).

Japan abandoned the gold standard on December 13, 1931, and escaped the death grip of deflationary shocks transmitted internationally by adherence to the gold standard. Japan then devalued its currency, and implemented effective foreign exchange controls. The yen was devalued by about 40% (Cullen 2003: 251), and most of this devaluation occurred in 1932 and 1933. After 1933 the value of the yen stabilized (Cha 2003: 130). By 1934, the yen started to appreciate against the US dollar (Drysdale and Gower 1998: 223). One of the reasons why devaluation was implemented was that the yen had been significantly overvalued in the 1920s (Teranishi 2005: 130-133), and this had seriously harmed Japanese exports and caused trade deficits in the 1920s.

Japan then engaged in large government deficit spending to stimulate the economy:
“The Takahashi fiscal expansion rested upon enlarged military spending and upon a package of public investments labeled ‘emergency relief expenditures’ (jikyoku kyokyuhi), largely comprising land reclamation, irrigation, drainage, dykes, roads, and river repairs.” (Flath 2000: 59).
While it is true that military spending was one component of fiscal policy, it is now known that its fiscal effect was not that great:
“It was once widely believed that the revival of prosperity in the early 1930s was due to increased military spending, but this is incorrect. According to Miwa Ryoichi, the rate of dependence of heavy and chemical industrial output on military demand was at its maximum in 1933 at 9.8 percent and then declined to 7 percent in 1936. For the machinery industry, this rate peaked in 1932 at 28 percent but fell to 18 percent in 1936. Even though the political clout of the military grew stronger, the influence of military spending on the economy was not all that great.” (Nakamura 1997: 135).
Moreover, military spending was not even a necessary component of fiscal policy at all: Japan could have concentrated on social spending and public works, the latter of which was in fact a large part of the spending program - larger than the military component (Nakamura 1997: 135). The public works projects funded by government deficit spending included public infrastructure investment, particularly public works for rural areas and villages (Nakamura 1997: 135).

As a matter of interest, it is also notable that Japan’s industrial policy was intensified in these years, which saw significant growth of domestic industry by infant industry protectionism and the emergence of some sectors with goods approaching world standards (such as electrical machinery and machine tools) and others becoming highly competitive internationally (Nakamura 1997: 135–136).

By 1933, Japan had emerged from the Great Depression. Japan did not levy new taxes to pay for deficit spending, but issued bonds. The Bank of Japan lowered its discount rate and lent more money to the banks.

Mark Metzler in Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan describes the Japanese government’s method of bond issuance:
“[the deficits were funded by government bonds] and in November 1932 the government began to sell entire issues of its deficit bonds to the Bank of Japan rather than to private institutions. That is, increased government spending was funded by the direct creation of money by the BOJ. Takahashi’s idea was first to boost the money supply and stimulate industry, and then, as conditions improved, to have the private sector buy government bonds from the Bank of Japan, soaking up money from circulation and controlling inflation” (Metzler 2006: 250).
This fiscal policy is also described by Nakamura:
“Central government expenditures declined from ¥1.74 billion in 1929 to ¥1.48 billion in 1931 and then increased to ¥1.95 billion in 1932 and ¥2.25 billion in 1933, after which they were fixed at a level of about ¥2.2 billion. Spending increases were financed with government bonds, but in order not to siphon private funds off the market with a huge government debt issue, a ‘Bank of Japan acceptance issues’ formula was adopted. The Bank of Japan underwrote the bonds when issued, and whenever there was a surplus of funds on the market as fiscal spending proceeded, the Bank of Japan would sell bonds to financial institutions.” (Nakamura 1997: 132).
In other words, Japan was using a policy we would now associate with Modern Monetary Theory (MMT). From November 1932, the government’s deficit was financed by issuing bonds directly to the Bank of Japan, and then later the Bank sold these bonds to private banks. Not only was there no hyperinflation, but no significant inflation.

If Japan had renounced its militarism and liberalised some trade later in the decade, it could have had access to raw materials to continue development.

Moreover, the yen depreciation in 1932 stimulated demand for Japanese exports overseas, especially for Japanese textiles in Asia. Thus the yen devaluation allowed a surge in Japanese exports, and this actually improved Japan’s current account. By 1934, Japan was moving to a trade balance, not to a trade deficit. Japan actually had a trade surplus in 1935, because of greater earnings from exports due to the yen depreciation (Fletcher 1989: 98). It could have paid for raw materials by concentrating on further development of its manufacturing sector, instead of turning to militarism. It was not until 1935 that inflation started to build up, and Takahashi Korekiyo, the Finance Minister, reduced government spending, especially military spending, to rein in inflation and to sterilize his previous budget deficits.

But Takahashi Korekiyo’s attempt to reduce military expenditures caused a conspiracy of army officers who assassinated him and the Prime Minister on February 26, 1936. They did so because they disagreed with his policy of reducing military spending. The policies of Takahashi Korekiyo’s successor gave the army a free hand in budget spending and by early 1937 there was a balance of payments and inflation crisis. That crisis, however, was precisely the result of not contracting demand under good Keynesian macroeconomic principles during the boom. Japan’s turn to militarism in 1936 was the result of the internal power of the army and the failure of civilian politicians and the murder of Takahashi Korekiyo, who had attempted to manage the economy on Keynesian principles.

Now I can just imagine the kind of inane comments that this post will provoke below – e.g., “You’re an apologist for fascism!,” “So Keynesianism only works in fascist countries!,” etc., etc. – and all such comments will be nonsense. Let me be clear: Japan’s imperialism and war crimes in these years were an immoral disgrace and utterly criminal. None of the comments above is a defence of Japan’s imperialism. There is no necessary connection between countercyclical fiscal policy and militarism/imperialism. The statement that fiscal stimulus allowed Japan to escape the depression is merely a statement of fact, not an endorsement of fascism.

* It is sometimes claimed that Sweden’s recovery was largely the result of Germany’s demand for imports during rearmament, but that is false, as German rearmament did not begin on a large scale until 1936, after Sweden had experienced recovery:
“Orthodox economists will maintain that the first German ‘miracle’ was simply the result of increased military spending. In fact, however, there was comparatively little increase in German military spending until after 1936. Public works such as the autobahns were financed by deficits, and women were encouraged to drop out of the labor force and reproduce.” (Turgeon 1996: 122–122, n. 1).


Cha, M. S. 2003. “Did Takahashi Korekiyo Rescue Japan from the Great Depression?,” The Journal of Economic History 63.1: 127–144.

Cullen, L. M. 2003. A History of Japan 1582–1941: Internal and External Worlds, Cambridge University Press, Cambridge and New York.

Drysdale, P. and L. Gower (eds), 1998, The Japanese Economy, Routledge, London and New York.

Flath, D. 2000. The Japanese Economy, Oxford University Press, Oxford and New York.

Fletcher, W. M. 1989, The Japanese Business Community and National Trade Policy, 1920–1942, University of North Carolina Press, Chapel Hill.

Metzler, M. 2006. Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan, University of California Press, Berkeley.

Nakamura, T. 1997. “Depression, Recovery, and War, 1920–1945,” in K. Yamamura (ed.), The Economic Emergence of Modern Japan, Cambridge University Press, Cambridge. 116–158.

Teranishi, J. 2005. Evolution of the Economic System in Japan, Edward Elgar Pub., Cheltenham, UK and Northhampton, MA.

Turgeon, L. 1996. Bastard Keynesianism: The Evolution of Economic Thinking and Policymaking since World War II, Greenwood Press, Westport, Conn. and London.


  1. Curiously, although Japan attempted a deficit financed increase in money supply back then, did Japan have a "hard money" policy during the postwar years?

    One hears of how America lost foreign exchange reserves to Japan, during those years, and the argument is that America's inflationary policies caused it to deplete its reserves to foreign sellers in a region with harder currency.

    PS: MMT possibly goes back to ancient Egypt and Mesopotamia.

  2. "One hears of how America lost foreign exchange reserves to Japan, during those years, and the argument is that America's inflationary policies caused it to deplete its reserves to foreign sellers in a region with harder currency."

    This seems to be a very strange explanation of Japan's post WWII economic history.

    What in fact happened is that Japan's highly activist and successful industrial policy turned it into an export-led growth colossus.

    It's accumlation of US dollars/gold was the result of its trade surpluses.

  3. Didn't Lord Keynes divide public finance into a current budget and a capital budget? I believe Tomas Sedlacek (sp?) points this out in his book, "The Economics of Good and Evil".


  4. David Lee claims that Canada's non-Keynesian policies have led to prosperity.

    Why is he wrong?

  5. "Canada's non-Keynesian policies" - that's nonsense.

    2 facts:

    (1) Canada had effective financial regulation and largely escaped the financial crisis:

    In light of that, it must also be noted that one reason for Canada's resilience was having years of strict banking regulations, which fostered a more stable financial system. As the Economist reported in 2010:

    Jim Flaherty, the finance minister, attributes Canada's strong performance to its "boring" financial system. Prodded by tight regulation, the banks were much more conservative in their lending than their American counterparts. Those that did dabble in subprime loans were able to withdraw quickly. This prudence kept a lid on house prices while those in America were soaring, but it paid off when the bust hit.

    (2) the recession was not as severe as in other countries, partly because of (1):

    (3) the Canadian government did implement countercyclical fiscal policy. The effects that stimulus had are gauged differently by different studies. The right-wing Fraser Institute (without any surprises there) downplays its effects. Other disagree:

    "Canada has arguably had one of the most successful stimulus programs in the industrialized world (China is in a league of its own). Harkening back to Chart 2, the direct impact of government spending and investment has added 1.6 percentage points to GDP growth in four quarters to Q1, compared with a typical annual addition of just under 0.6 percentage points over the past 30 years. Thus, the direct effect of additional public sector stimulus to overall economic growth has been a bit more than 1 percentage point in Canada over the past year ... etc"

    Douglas Porter, The Stimulus Myth(s), p. 8 ff.

  6. I think Mr. Lee already addressed your points:

    Of course no evaluation of a country's economic policies would be complete without making note of the missteps that invariably occur. Aside from questions of magnitude, where improvement can always be found by simply increasing the scope of the beneficial changes effected, the fact that Canada incurred a $55.6 billion deficit in 2009[26] in order to finance its misguided stimulus package stands out as a particularly large step backwards.

    Aside from the tax cuts, everything earmarked in the package including the bailout of the auto sector can safely be counted as pure waste. Monetary policy is another abortive scheme to manage the market being carried out in Canada that is destined to fail. Although the Bank of Canada has not indulged in the profligate excesses of the printing maestro at the Federal Reserve, its ostensibly conservative mandate of inflation targeting is nonetheless a poor substitute for the market processes that are necessary to prevent long-term disequilibrium in the economy.

    The artificially low interest rates induced by its policies have been producing housing bubbles across the country that may potentially cripple the economy when they burst. Their role in the underpricing of risk and the related rise in household debt entails consequences that are equally inauspicious. Even apart from these weaknesses, no country is entirely immune to the vagaries of global markets. Though Canada may have escaped the brunt of the fallout of the global recession, by no means can it expect to emerge unscathed when the global depression begins in earnest.

    This just goes back to the issue of whether Canada is in relatively good shape because of or in spite of "stimulus".

    10 years of surplus seems to kill MMT, doesn't it?

  7. since roughly 90% money is created out of thin air by the banking system system via fractional reserve and issued as debt if you pay down debt you have deflation and if you print/borrow more fake money (keynes) you have inflation to counter deflation. so the gold standard caused prices to decline because of less fake debt caused imaginary money to vanish from the system and people produced more to make up for it which is why they came out of the depression first as they were leaner and meaner. note:the gold std. with fractional reserve has been a big problem historically (like in france) but fiat fractional reserve is worse. i heard takahashi wanted to cut military spending and was assassinated - who knows what info to believe as all sides are covered. in any event, until there is sound money booms and busts will occur in ever rising exponential cycles until major events occur and there has not been sound money most of the time and for sure in the past few hundred years as imaginary money has been borrowed as debt to finance many wars. none of these economic mainstream theories have a chance when the money supply is not stable so arguing them is a waste of time probably set up by those who control the issuance of money and can change market direction profiting both ways.

  8. Canada ran budget surpluses because it was receiving stimulus via current account surpluses equivalent to 5% GDP during the period in question. This is perfectly in line with MMT and sectoral balances which state that for one sector to run a positive balance another sector must run a negative balance.

  9. It's difficult to conceive how the invasion of Manchuria (1931) did not have a significant effect on the economy of Japan. At almost 2/3rds the surface area of Japan, the addition of that much territory and resources is no small thing. A pity that this article doesn't address that.

  10. "It is sometimes claimed that Sweden’s recovery was largely the result of Germany’s demand for imports during rearmament, but that is false, as German rearmament did not begin on a large scale until 1936, after Sweden had experienced recovery" hilarious, i read this argument at ... Mises "Human Action" recently. Anyway, austrians criticism of Keynes precisely shows us that they don't even understand him, especially Rothbard criticism of multiplier.

  11. Oh well, the first part (stimulus) of the Keynesian policy is the easy one. The problem comes in when the government tries to reign in the spending/tax it back. Will the vested interest (i.e. first recipient of money) now say, all right, we have done well out of the stimulus, please tax us? Of course not, the tax/reduced spending will of course be directed and those who already lost out during the stimulus (and inflation) and the devaluation.

    There is no free lunch here and there is nothing magical about MMT. The state could just as easy to pass law as $1 is now equal to $2 but $1 debt should still be repaid as $1. Somebody wins (the grasshoppers?), somebody (the ant?) lost as it always is.