The Japanese Economy During the Great Depression: The Emergence of Macroeconomic Policy in A Small and Open Economy, 1931–1936 (Studies in Economic History)

This book provides a systematic explanation of a remarkable policy innovation in an emerging economy in the modern world. In doing so, it highlights the nature of the Japanese economy during the interwar period. It offers a canonical case study for an international macroeconomic policy of a small and open economy. Readers can draw lessons from the Japanese experience in the 1930s, recalling what kinds of challenges policymakers faced in a crisis situation, what they can do, and what they should not do. As a whole, it is a novel reference both for scholars in economic history and international economics and for policymakers all over the world. A comprehensive and clear-cut picture of the Japanese economy during the Great Depression in the 1930s is presented, including the policy innovations brought about by an iconoclastic finance minister, Korekiyo Takahashi, at that time. To this end, the book integrates the narrative analysis based on newly available archival documents and the quantitative analysis based on newly constructed macroeconomic data and contemporary econometric methodologies. This work shows how Japan escaped from the depression in its early stage. It illustrates a transmission mechanism of the macroeconomic stimulus package of currency depreciation, easy money, and fiscal expansion. As well, it argues that the key for economic recovery was currency depreciation and that expectations played a pivotal role in ending deflation and kick-starting economic recovery. Also contained here is an exploration of politico-economic interaction in the shaping of economic policy and the long-term consequences of policy actions such as departure from the gold standard and initiation of the government debt finance by the central bank. It is shown that the collapse of the international gold standard and the lack of governance of military spending resulted in a loss of fiscal discipline in the long run. Preface References Contents About the Author Abbreviations List of Figures List of Tables 1 Takahashi Korekiyo, the Man Who Brought Japan Out of the Great Depression 1.1 Japan’s Great Depression Hero 1.2 The Scope of This Book References 2 Japan’s Plunge into and Emergence from the Great Depression 2.1 Overview of the Japanese Economy from the Late Nineteenth to the Early Twentieth Century 2.2 Contraction and Recovery of the Japanese Economy 2.2.1 Lifting Gold Embargo Plunges Economy into Great Depression, 1930–1931 2.2.2 Takahashi’s Initiatives for Economic Recovery, 1931–1932 2.3 A Quantitative Account of the Macroeconomic Effects of Takahashi’s Policies 2.3.1 Takahashi’s Stimulus Package and Economic Recovery in the 1930s 2.3.2 A Structural Vector Auto-Regression Model 2.3.3 The Sources of Economic Recovery 2.3.4 The Dynamics of Takahashi’s Policy Package 2.3.5 Economic Growth and Job Creation by Sector 2.3.6 Distributional Aspect of Takahashi’s Policy Package References 3 Policy Innovation in the Great Depression 3.1 Massive Currency Devaluation 3.2 Debt-Financed Fiscal Spending as Part of an Emergency Relief Program 3.3 Open Market Operations as a Monetary Policy Instrument 3.3.1 Debates on Open Market Operations Before Takahashi’s Return 3.3.2 Monetary Policy Operation During Takahashi’s Term 3.4 Impact of the 1931 JGB Price Collapse on Bank Profits and Debt Financing of the Government 3.5 Concerns About the Sustainability of the Policy Scheme 3.6 Appendix: Team Takahashi’s Monetary Policy as Viewed from the Term Structure of Interest Rates 3.6.1 Abstract of the Appendix 3.6.2 Existing Interest Rate Data and the Motivation for Constructing a New Dataset of JGB Yields 3.6.3 Principal Component Analysis of JGB Yields 3.6.4 Views of Market Participants References 4 Sustainability of Public Debt Under Stress 4.1 Sustainability of Public Debt in the Long Run 4.2 Governance of Public Finance in Japan Under the Meiji Constitution 4.3 Sustainability of Public Debt and the Gold Standard 4.4 Loss of Public Debt Sustainability in the Early 1930s References 5 Origins of the Economic Ideas of Takahashi Korekiyo 5.1 Development of Takahashi’s Career 5.2 Takahashi as Finance Minister 5.3 Principles of Takahashi’s Economic Policies 5.4 Takahashi’s Policies for Achieving Full Employment 5.5 Takahashi’s Policies for Facilitating Economic Growth by Promoting Investment 5.6 Takahashi’s Policies for Maintaining the Credibility of State Finance 5.7 How Takahashi Dealt with the Macroeconomic Policy Trilemma 5.8 Column: Maeda Masana, Matsukata Masayoshi, and the French Connection References 6 Lessons for Today from Takahashi Korekiyo’s Policies 6.1 Challenges Takahashi Faced 6.2 The 1930s from a Longer Perspective 6.3 Lessons for Today 6.3.1 Macroeconomic Policy Innovations and the Unconventional Policy 6.3.2 Civilian Control of Military Forces 6.3.3 Geopolitics and the National Goal 6.4 Conclusion 6.5 Column: Takahashi Korekiyo and Ishibashi Tanzan References