The Japanese Economy during the Interwar Period: Instability in the Financial System and the Impact of the World Depression

May 2009
Institute for Monetary and Economic Studies
Masato Shizume

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The Japanese economy during the interwar period faced chronic crises. Among them, the Showa Financial Crisis of 1927 and the Showa Depression of 1930-31 marked turning points. The Showa Financial Crisis of 1927 was the consequence of persistent financial instability because of the incomplete restructuring in the business sector and postponements in the disposal of bad loans by financial institutions. The crisis brought reforms in the financial sector through large-scale injections of public funds and the amalgamation of banks. The Showa Depression of 1930-31 was caused by the Great Depression, a worldwide economic collapse, which had been intensified in Japan by the return to the Gold Standard at the old parity. Japan escaped from the Great Depression earlier than most other countries through a series of macroeconomic stimulus measures initiated by Korekiyo Takahashi, a veteran Finance Minister who resumed office in December 1931. Takahashi instituted comprehensive macroeconomic policy measures, including exchange rate, fiscal, and monetary adjustments. At the same time, the Gold Standard, which had been governing Japan's fiscal policy, collapsed in the wake of the British departure from it in September 1931. Then, Japan introduced a mechanism by which the government could receive easy credit from the central bank without establishing other institutional measures to govern its fiscal policy. This course of events resulted in an eventual loss of fiscal discipline.

Notice

Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2009-E-2, is a translation of the original Japanese issue, 2009-J-1, published in April 2009. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

If you have comments or questions, please contact Masato Shizume, Director and Senior Economist, Institute for Monetary and Economic Studies (E-mail: masato.shizume@boj.or.jp).