Cha - 2003 - Did Takahashi Korekiyo

Economic History Association
Did Takahashi Korekiyo Rescue Japan from the Great Depression?

Author(s): Myung Soo Cha
Source: The Journal of Economic History, Vol. 63, No. 1 (Mar., 2003), pp. 127-144
Published by: Cambridge University Press on behalf of the Economic History Association
Stable URL: https://www.jstor.org/stable/3132497
Accessed: 10-03-2019 17:51 UTC
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms
Cambridge University Press, Economic History Association are collaborating with JSTOR
to digitize, preserve and extend access to The Journal of Economic History
This content downloaded from 92.176.150.133 on Sun, 10 Mar 2019 17:51:17 UTC
All use subject to https://about.jstor.org/terms
Did Takahashi Korekiyo Rescue Japan
from the Great Depression?
MYUNG SOO CHA
Takahashi Korekiyo is remembered as a wise finance minister saving Japan from the
Great Depression. The contribution of his policy measures however remains to be
rigorously measured, with proper control of other forces also driving the recovery.
Structural vector autoregression analysis of previously unexploited monthly data
confirms the pivotal role of Takahashi's debt-financed fiscal expansion. Monetizing
the public debts, the Bank of Japan maintained a neutral stance. The recovery was
aided by exchange-rate shocks generated during the transition from the gold standard
to the floating-exchange-rate regime and, to a smaller extent, by the world recovery.
A fter half a century of rapid growth and industrialization following the

Meiji Restoration, the boom ended and Japan entered a decade of stag-
nation following World War One. A series of supply and demand shocks
contributed to the recession of the 1920s, including, among others, a devas-
tating earthquake in 1923, the interwar agricultural depression, the financial
crisis of 1927, and deflationary expectations resulting from the anticipated
return to the gold standard.1 Finally came the Great Depression, in the wake
of which Japan returned to the gold standard in January 1930, a policy deci-
sion likened by a contemporary industrialist as "opening a window in the
middle of a typhoon." The depression was of shorter duration in Japan than
in other industrial countries, and the subsequent growth of the Japanese
economy was unusually rapid.
Given that Japan left the gold standard relatively early (December 1931),
its superior macroeconomic performance after 1929 can be seen as an addi-
tional piece of evidence corroborating the gold-standard theory of the Great
Depression as proposed by Barry Eichengreen and Peter Temin.2 I show,
however, that the early departure from the gold standard accounts for only
The Journal of Economic History, Vol. 63, No. 1 (March 2003). ? The Economic History
Association. All rights reserved. ISSN 0022-0507.
Myung Soo Cha is Associate Professor, Department of Economics, Yeungnam University,
Kyungsan, 712-749, South Korea. E-mail: mscha@yumail.ac.kr.
I am grateful to Osamu Saito for the hospitality at the Institute of Economic Research of Hitotsubashi
University, where I obtained most of the data used in this article. Jinsung Chung also kindly made parts
of the data available. I thank Hirosato Agawa, Jean Pascal Bassino, Hyung Gu Lynn, Neil Rollings,
Masato Shizume, Richard Smethurst, and Peter Temin for very helpful advice on a previous version
of this article. Comments of four anonymous referees greatly improved this article in terms of both
historical sensibility and econometrics. I also benefited from the comments of participants at the
seminar at the Institute for Monetary and Economic Studies of the Bank of Japan. My thanks are also
due to Joung Yoon Yoon for her careful proofreading. All remaining errors are mine.
1 See Nakamura, "Keiki hend6." Faini and Toniolo ("Reconsidering Japan's Deflation") stressed the
impact of deflation expectations. For a detailed account of the 1927 financial crisis, see Takahashi and
Morigaki, Showa kin 'yu kyoko shi.
2 See Eichengreen, Golden Fetters; Temin, Lessons; and Eichengreen and Temin, "Gold Standard."
127
128 Cha
part of the Japanese recovery. Most previous studies attribute the early and
rapid recovery to the expansionary policy measures following the decision
to take Japan off gold by Takahashi Korekiyo, the Finance Minister of Japan
from December 1931 to February 1936. Much of this literature consists of
narrative accounts, and quantitative studies have not been entirely convinc-
ing. Most importantly, in highlighting the policy shocks after December
1931, previous studies have failed properly to take into consideration other
influences that might also have driven the Japanese recovery. Also, different
studies emphasize different elements of Takahashi's policy shocks: fiscal,
monetary, or exchange-rate. Finally, there is a minority view that the recov-
ery forces really came from the private sector.
Therefore, the causes of Japan's recovery are an unsettled issue, and the
impact of the policy measures remains to be rigorously measured, properly
controlling for other shocks that also contributed to the recovery, including the
world recovery and the political regime shift. The demise of Japan's nascent
democracy (known as the Taisho democracy) and the rise of fascism in the
wake of the depression may have aided the Japanese recovery by exerting
downward pressure upon wages, as in Nazi Germany.3 The political change
was accompanied by the rise of government interventionism: in particular,
industrial policy in the form of a "heavy and chemical industrialization" drive
was launched in the 1930s, possibly generating investment demand stimuli. As
compared with the influence of the world recovery and the economic conse-
quences of the political regime shift, how important was the policy intervention
associated with the departure from the gold standard for Japan's recovery from
the Great Depression? Which of the policy measures mattered most?
THE GREAT DEPRESSION AND RECOVERY IN JAPAN
According to the gold-standard theory of the Great Depression, both

severity of the depression and the vigor of the subsequent recovery depe
upon how early a country abandoned the gold standard. As long as the g
convertibility of currency remained the predominant policy goal, the roo
bold reflationary measures was severely limited, as such policies would c
large balance-of-payments deficits and lead to rapid depletions of th
stock. Removal of the external constraint being a necessary preconditio
implementing expansionary policies, the earlier the departure from the
standard, the faster was the recovery likely to be, and vice versa.
Figure 1 bears out this story: the ranking in the level of each country
industrial-production index in 1937 matches the sequence of going off g
in the wake of the Depression: Britain, Germany, and Japan in 193
United States in 1933; and finally France in 1936. Figure 1 also shows
3 See Temin, "Socialism."
Did Takahashi Rescue Japan 129
1900- ----U.S.
--- - France
1700 - - ----Germany
------UK /
1500 -
1500 ~- Japan
1300 -
1100- / -
900- -L .- -- ,
700- \, -
500 -
300 . . . . ... . .i
1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937
FIGURE 1
INDUSTRIAL PRODUCTION INDICES
Source: League of Nations, International Statistical Yearbook.
Japan (which abandoned the gold standard several months after Ge

and Britain) revived earlier and grew faster than either of these count
Using a richer panel data set, Ben Beranke and Harold James show
the rate of the Japanese contraction in 1930/31 (8 percent) was smaller
the average rate of contraction for those countries leaving the gold st
in 1931 (16 percent). Whereas most of the countries leaving the gol
dard in 1931 had to wait until 1933 to see industrial production re
Japan's industrial-production index resumed growth in 1932. Final
pan's growth rate from 1932 to 1936 (62 percent) was substantially
not only the world average, but also the average for those countries le
gold in the same year as Japan (45 percent).4
Different studies attributed Japan's early and rapid recovery repeat
fiscal expansion, easy money, or the yen depreciation or to some co
tion of the three, following the decision by the Finance Minister Taka
to take Japan off gold. However, the relative importance of different m
economic shocks in bringing about the expansion has never been pr
evaluated. More importantly, it has been neither unanimously agree
nor rigorously established that the reflation measures were indeed cru
generating the vigorous upswing of the 1930s, controlling for the inf
of other shocks also driving the recovery.5
4 Beranke and James, "Gold Standard," p. 45, table 2.4.
5 Introducing Takahashi Korekiyo to English-speaking economists, Dick Nanto and Shin
used Granger-causality tests to show that both the yen/dollar exchange rate and real central go
spending had significant impacts upon the level of activity, whereas real private investment h
130 Cha
Although a majority
response to deflation
that contend that th
input-output table fo
of public consumpt
exports and invest
investment in the
was led by the priv
was attributed by v
related to the presen
labor market.7
Even if one accepts
shift in reversing th
alone propelled rapid
war in July 1937. Th
over, Takahashi bega
stabilization. Reduc
financing, while at t
it had supplied in th
tent with the fact t
and that the value o
that causes other th
tant in sustaining th
unidentified factors
early 1930s as well
Besides the policy-r
important shocks, w
count in the previou
which, along with
exports. Second, as
causal effect (Nanto and T

to the role of increased spe
on a larger coefficient esti
simplified form of nation
Okazaki, and Hiroshi Yosh
were equally important, a j
series data and ordinary lea
Okazaki, and Yoshikawa, "
theimpact of devaluation a
expansion. To reach this con
estimated using the ordin
6 See Tominaga, "1932-36
7 See Sato, "Senkanki nih
the dualistic structure of t
8Nakamura, "Keiki hendo,"
prompted the military to d
Depression was that the liberal policy regime of the 1920s became discred-
ited and state interventionism gained momentum in Japan. The shift in pol-
icy regime was pioneered by the "new bureaucrats (shinkanryo)." Disillu-
sioned with corrupt party politics and the instability of the market economy
as seen during the 1920s, these reform-minded technocrats implemented
different types of market intervention.9 One was the legislation of the Impor-
tant Industries Control Law (Jiyo sangyo toseiho) in 1931. Although the
law was not intended to impose direct state control over, but to encourage
"cooperation" among, firms in designated "important industries" by forming
depression cartels, the Ministry of Commerce and Industry remained in a
position to influence investment decisions and output- and price-fixing
agreements.10 Perhaps more importantly, various laws were introduced
during the 1930s to promote specific (mostly "heavy and chemical") indus-
tries, notably the Petroleum Industry Law of 1934 and the Automobile Man-
ufacturing Law of 1936. Under these laws, the government imposed limits
on market shares obtained by foreign companies (including Standard Oil,
Ford, and General Motors) and used tax incentives to promote import substi-
tution by heavy and chemical industries. 1 As a consequence, transportation,
chemical, and electricity emerged as the three sectors accounting for the
largest parts of the increase in manufacturing investment from 1929 to
1936.12 The "heavy and chemical industrialization" drive seems likely to
have contributed to the recovery by stimulating investment activity.13
The third and final factor concerns the labor market. Peter Temin ex-
plained the difference between the U.S. and German speeds of recovery in
the 1930s in terms of contrasting policies towards the labor market. In the
United States, labor unions were encouraged under the New Deal, and other
labor protection laws were introduced, raising real wages. Exogenous wage
rises shifted the aggregate supply curve to the left, reducing employment and
output. In Germany, the opposite occurred. The Nazis destroyed labor un-
ions quickly after taking power, and the government intervened in the pro-
cess of wage bargaining, exerting downward pressures on the level of
wages.14
Japan in the 1930s resembled Germany more than it did the United States.
The Great Depression killed not only the classical liberalism in the sphere
of economic policy, but also the Taisho democracy. As the unemployment
9 Chalmers Johnson termed this shift in policy regime the "rise of industrial policy." See his MITI,
chapter 3.
'0 See Hirasawa, Taikyokoki, chapters 1 and 2, for details on the Important Industries Control Law.
" Hashimoto, Gendai Nihon, pp. 54-55.
12 Hara, "Keiki junkan," p. 385, table 4.
3 Nakamura, Senzenki nihon, p. 208; and Suzuku, Showa kyokoshi, p. 186.
14 See Temin, "Socialism." Weinstein argued that the rise in nominal wages under the New Deal
impeded the recovery of the U.S. economy from the depression. See Weinstein, "Some Macroeconomic
Impacts."
132 Cha
rate rose, the campaign against Prime Minister Hamaguchi's deflationary

policy of keeping Japan on gold turned into a movement against party poli-
tics. A right-wing terrorist shot Hamaguchi in November 1930, causing his
eventual death in August 1931. In September, the Manchurian Incident made
it clear that civilian control of the military was weakening. With the collapse
of the rule of Hamaguchi's Minseito party in December, Takahashi
Korekiyo was appointed as the Finance Minister of the new Seiyukai party
cabinet. Two fatal attacks were carried out in 1932, killing Inoue Junnosuke
(the Finance Minister in Hamaguchi's cabinet) in February and Inukai
Tsuyoshi (the Prime Minister of the Seiyukai cabinet) in May. Thus ended
Japan's brief experiment with party politics. Thereafter, the military began
to exercise an increasingly strong influence.15 In this changed political envi-
ronment, both independent unions and proletarian parties suffered a setback.
The Home Ministry abandoned its liberal labor policy of the 1920s and
(together with the military) began to promote right-wing ("Japanist") forces,
which surfaced at the grass roots from the mid-1920s. Destroying main-
stream unions, the Japanist groups expanded to the point of organizing the
National Defense Fund Labor Association in early 1933. "At factories
throughout the nation in the winter of 1933, an estimated 80,000 union
workers and 20,000 non-union employees agreed to work on a Sunday or
holiday and donate that day's wages to the army's National Defense Fund
Drive."16 The unionization rate declined from a peak in 1931 until 1934, as
seen in Table 1, and the share of participants in labor disputes out of the
total number of gainfully employed in the manufacturing sector also fell.17
Those scholars who identified downward wage flexibility may in fact have
been observing the operation of the wage shocks.18
To summarize, at least six different types of structural shocks need to be
reckoned with to establish the causes of Japan's early and rapid recovery
from the Great Depression in a convincing way. One comes from the supply
side, and the other five are demand shocks. The supply shock refers to the
compression of wages during the 1930s, which possibly occurred in the
transition from democracy to fascism. In the course of this transition, state
interventionism emerged in Japan: in particular, "new bureaucrats" launched
an industrial policy in the form of a "heavy and chemical industrialization"
15 For details, see Berger, "Politics," pp. 105-17. The coup in 1936 (known as the February 26
Incident), during which Takahashi was murdered, finalized the transition to a de facto military rule.
16 See Gordon, Labor, chapters 9 and 10. The quote is from page 277.
17 For declining incidences of labor disputes, see Nakamura and Odaka, "Gaisetsu," p. 35, figure 1-8.
18 After suffering a significant setback in the few years following the Manchurian invasion, the labor
movement revived somewhat in the mid-1930s (see Table 1) as the labor market became tighter with
the progress of the upswing, and also as the political impact of the invasion faded, only to be crushed
again by the outbreak of the Sino-Japanese war in 1937. See Gordon, Labor, chapter 11. Japan's
military government banned labor unions altogether in 1940.
TABLE 1
UNIONIZATION RATE, 1929-1937
(percentage)
1929 1930 1931 1932 1933 1934 1935 1936 1937
6.8 7.5 7.9 7.8 7.5 6.7 6.9 6.9 6.2
Source: R6d6 Und6 Shiry6 linkai, N
drive, possibly generating d

remaining four demand sh
floating exchange-rate reg
supply, and exchange-rate s
affecting Japan's export de
OUTPUT DECOMPOSITION RESULTS
To measure the role of these factors in the Japanese recovery fr

Great Depression, I apply structural vector autoregression (VAR) a
to previously unexploited monthly macroeconomic time series dat
the analysis, one may first estimate the six structural shocks and the
of output response to each of the shocks and then decompose output f
tions into different components attributable to each of the shocks. The
sis uses six variables: world output; the real effective exchange r
Japan; real deficits of the Japanese government; high-powered money
plied by the Bank of Japan; the volume of railway freight (as an index
aggregate activity); and real wages in Japan. The Appendices disc
data sources and the estimation procedure.
Figure 2 shows the fluctuations of the six components from Octobe
to September 1936. To facilitate comparison, the six components are d
into two panels, and fiscal and domestic-demand components-the t
defining the upper and lower bounds of the figure, respectively-
played in both panels. Fiscal shocks turn out to be the most consist
potent source of recovery: the fiscal component rises to a plateau
and then falls, confirming the conventional story about the importan
played by Takahashi's fiscal expansion in reversing the downturn,
subsequent shift to fiscal rectitude.19 In contrast, the domestic p
demand component declines until 1934 and then recovers. The upt
peared to be driven by investment, as 1934 was the year when law
to be introduced to encourage investment in heavy and chemical indu
Despite the capital accumulation in the new industries, domestic
demand shocks remained deflationary on the whole, over the sample p
'9 Richard Smethurst locates the point of reversal in the balanced budget in 1935. Sm
Takahashi Korekiyo's Fiscal Policy, pp. 21-22.
a ~ & ~ & o o o o o
5 o ? ? S 8 8 ? S a G b
0
> Oct-30 O c
d ,
Jan-31 --
? Apr-31 I .-' -- r Jan-31

:a,31
C> ; Ar 1 Apr-31
Apr-31
p, ?lIrf Jul-31' 1 Y
Jul-3V~~ Jul-31
O ct3Oct-31-
g. 0 Oct-32-V ' < 0 - Oct-31
3 Jan-32
? . .: Z -
~.- O;- \ Jan-32
Jan-32
[r Apr-32'
Apr-342
- - .
'
0
Apr-32
{g 3Jul-32- -J 32
J O'-- J " <Jul-32
z Oct-32- < -
vl T- -Oct-3 2 Oct-32
t0 Jan-3 Jan-3
^ Apr-33 / -3
--^ J-- > 1 Apr-33
3_J
:n C 'an-3-
Jul-33 O
J13Oct-33'
C) JIu l-oc34-
Apr-3 ) -r<~1 rJul-33
Jan-3
o
Z ? Q I^
>Jan-34[ Oct-33
Oct-34
cn3 c/. ;:. . Jan-34
'
ff ~Apr-34
ffi^/" ^ 'b }
"0AA-
Apr-34
Jul-34 ' -3
Jul-34
c~ r~ Oct-34 '
00g~~~~~~
> Jan-35O
P---- ~---.?- ' Oct-34
<" >^-7 0' c O
Ic~ ~ ~ ~~~~~~~-. _Jan-, r5 Jan-35
D > Apr-35 - ' ' l
J'u-36-.... ",.. .c-t
Jul-35 -
'"
J
Apr-35
?*"*'-.. - - ' "/ O3 Jul-35
Oct-35 ' -
C)<] / ^---" ~~~0 Oct-35
Jan-36' .'-"
.0**-~--- > . . . > ~,3 - - OctJan-36
Apr-36 - 'n
Jul-36'
n'^-^7 ^""" 3 l-36 - ~~~~~~~~~~~Apr-36
.^^ ~ ;3-,k,,, Jul-36
In the early phase of the downswing, one finds the negative impact of the
assassinations and aggression upon private demand-most probably con-
sumer demand: notice the blips marked with asterisks in October 1931, and
February and June 1932. Also the upswing after 1934 was interrupted by a
sharp drop in February 1936, when the military coup occurred.
Figure 2A shows that the world output shock also accounted for a large part
of the Japanese output fluctuations in the 1930s. Deflationary shocks contin-
ued to be transmitted to Japan from the rest of the world until early 1932,
when the world as a whole entered upon a recovery path. The recovery was
not steady, but interrupted by stagnation in 1934. The key causes of the set-
back could be found in the United States: the introduction of the National
Industrial Recovery Act pushing wages upwards, the failure of the United
States monetary authorities to pursue aggressive expansion, and finally the
beggar-thy-neighbor effects of United States devaluation in 1933.20
The remaining three shocks were relatively mild. In the fluctuations of the
money shock component (Figure 2B), one finds a weak downward trend
after the departure from the gold standard in December 1931, which is re-
versed in early 1935. Once the changes in the money supply due to debt
monetization are taken into account, the monetary policy of the Bank of
Japan turns out to be neutral on the whole.
Exchange-rate shocks refer to those events-outside of world-output,
domestic-policy, and wage shocks-that shifted the Japanese real exchange
rate. Such exchange-rate shocks include both foreign exchange-market
intervention and exchange-rate regime shifts not only in Japan, but also in
the rest of the world. Fukai Eigo, a former governor of the Bank of Japan,
testified that the Bank of Japan could not afford to support the depreciating
yen by selling foreign currencies and hence was led to rely on capital con-
trol. Takatoshi Ito, Kunio Okina, and Juro Teranishi analyzed daily fluctua-
tions in the dollar/yen exchange rate from 1931 to 1933. Their findings
substantiated Fukai's statement and identified Japan's departure from the
gold standard, Japan's invasion of China, and the U.S. decision to abandon
gold as the key forces driving down the value of the yen.21 The pattern of the
fluctuations of the exchange-rate-shock component (Figure 2B) confirms
that the exchange-regime shift was indeed one of the important sources of
the exchange-rate shocks: the component rises sharply in the month follow-
ing Japan's departure from the gold standard, then falls in the following two
years, as the number of countries abandoning gold rose. The component
rises again from early 1935, when the transition to the floating-exchange-
rate regime was virtually complete (with the exception of the gold bloc) and
the dollar stabilization had begun.
20 Eichengreen, Golden Fetters, pp. 342-47.

21 Fukai, Kaiko, p. 276 ; and Ito, Okina, and Teranishi, "News," pp. 129-30
136 Cha
Finally, turning back to panel A, one finds that wage shocks had a posi-
tive impact on output in late 1932 and 1933, when the Japanese labor unions
were dealt a blow, as seen in Table 1. The effect, however, was small and
transitory. Although real wages fell in Japan throughout the 1930s, this
unique phenomenon (not observed in either Nazi Germany or fascist Italy)
was a consequence of the rapid recovery from the Depression, rather than
of exogenous wage shocks.22 The rapid recovery depressed real wages in
Japan by causing price inflation: the consumer-price index in Japan rose 12
percent from 1931 to 1936, as the index fell in other countries.23
The output decomposition results show that different factors supported the
Japanese recovery at different times. In 1931 Japan benefited from a world
in decline but still not in deep depression and gained from its devaluation in
December, a once-time effect, which gradually wore off in 1932 and 1933
as the number of countries abandoning gold increased. The world returned
as a positive force in 1933 as recovery began in the rest of the world, partic-
ularly in the United States, but faded quickly. Its place was taken by
Takahashi's fiscal expansion, starting from late 1932 and ending by late
1935. Other shocks mattered little in the Japanese recovery from the Great
Depression. Overall Takahashi's fiscal expansion stands out as the single
most important cause of the upswing.
CONCLUSIONS
The conventional account of the Japanese economy's recovery fr

Great Depression praises the Keynesian remedies-fiscal and mon
expansion and the consequent depreciation-applied by the Finance
ter Takahashi Korekiyo several years before John Maynard Keyne
eral Theory of Employment, Interest, and Money was published. This
applying structural vector autoregression analysis to previously unex
monthly data, confirms that Takahashi's deficit spending was indeed
in ending the depression quickly. Central government spending ro
1,423 million yen (10.7 percent of nominal gross national product)
to 2,254 million yen (14.7 percent of nominal gross national prod
1933, turning a small budget surplus amounting to 0.1 percent of
gross national product in 1931 into a deficit accounting for 6.1 pe
nominal gross national product.24 Financing a major portion of th
22 Eichengreen and Hatton, "Interwar Unemployment," p. 15, table 1.3; and Mattesini and
"Italy," p. 281.
23 These countries include the United States, France, Germany, and Italy. Only in Britain
index return in 1936 to the level of 1931. Maddison, Dynamic Forces, pp. 300-03, table
24 These numbers refer to the general account (ippan kaigi); the special account (tokubets
excluded, as it consisted mostly of accounts of public enterprises, colonial governments,
funds, most notably postal savings. Emi, "Keizai seich6," pp. 225-26.
deficit by printing money, the Bank of Japan at the same time absorbed
liquidity to prevent inflation from escalating beyond control.
The Japanese escape, led by fiscal expansion, is both interesting and
unique. The fiscal tool was never relied upon seriously for recovery from the
Great Depression in other countries. Although the rebound in both Nazi
Germany and Sweden relied to some extent on expansionary fiscal policy,25
in both the British and the U.S. recoveries, policymakers' contributions were
to be found in the sphere of monetary policy-nonsterilization of gold in-
flows, more specifically.26 Even during the heyday of Keynesian economics
after the Second World War, fiscal expansion was rarely implemented suc-
cessfully to pull an economy out of a slump.27
Why could fiscal expansion be readily and usefully mobilized in interwar
Japan? First, the Japanese government has never been seriously bound by
the ideology of classical liberalism. Since the Meiji Revolution, the govern-
ment has almost always believed that it had an important role to play in
promoting economic growth, as expressed by the slogan fukoku kyohei (a
rich country, a strong army).28 One sees the tradition of state interventionism
in Japan in the higher share of public spending in national income than in
other industrialized countries, as well as in the substantial contribution made
by the government in domestic capital formation.29
Secondly, the military's persistent demand for increased budget alloca-
tions provided a powerful impetus for fiscal expansion. The pressure for a
military buildup first emerged after the end of World War One and became
more vociferous after the Manchurian Incident in 1931. Although Takahashi
opposed imperialistic ambition toward China and tried to curb military
spending,30 he could not prevent the share of military spending in public
25 See Cohn, "Fiscal Policy"; Ritschl, "Deficit Spending"; James, "What is Keynesian"; Pikkarinen,
"Keynesianism"; and Eichengreen and Sachs, "Exchange Rates."
26 Brown, "Fiscal Policy," pp. 863-66; Eichengreen, Golden Fetters, pp. 342-47; Romer, "What
Ended the Great Depression," p. 781; and Della Paolera and Taylor, "Economic Recovery," p. 35.
27 The tax reduction by the Reagan administration in the early 1980s may be one of the rare cases,
where deficit spending generated substantial demand stimuli for an economy in recession. Also, Tamim
Bayoumi argued that public spending provided a significant boost during the 1990s to the Japanese
economy driven into a slump with the collapse of asset prices from 1989 (Bayoumi, "Morning," p. 33).
However, deficit spending swelled the public debts to such an extent as to make further application of
fiscal stimulus practically infeasible.
28 This activist policy stance was advocated and exploited primarily for the pork barrel politics
practiced by the Seiyukai, Takahashi's party. See Najita, Hara; and Ramseyer and Rosenbluth, Politics,
chapters 4, 9, and 10.
29 See Emi, Zaisei shishutsu, chapters 1 and 2. This is not to imply that Takahashi advocated state
interventionism. Believing in the government' sjob to steer the economy out of short run disequilibrium
by stimulating demand, he thought long run economic growth should be driven primarily by de-central-
ized decision making by private agents. See Smethurst, "Takahashi Korekiyo's Economic Policies."
30 Smethurst, Takahashi Korekiyo's Fiscal Policy, pp. 16-17. For a vivid account of the role of the
military in the budget politics in Japan from 1932 to 1934, see Ohmae, "Saito."
138 Cha
expenditure from ris

in 1936.31
Finally, Takahashi's reputation as a capable troubleshooter probably
helped the prompt provision of bold fiscal stimuli. As the vice governor of
the Bank of Japan, he first made himself famous through successful bond
sales in London and New York at the time of the Russo-Japanese war. Al-
ready having been Finance Minister three times, and Prime Minister once,
before taking office in December 1931, Takahashi had played a pivotal role
in tiding over two severe financial crises, one from 1920 to 1921 and the
other in 1927. His personal popularity, built upon this track record, probably
allowed him to stand above political bickering and facilitated the implemen-
tation of his Keynesian policy measures.
Appendix 1: Data Sources

The world-output series was taken from Mattesini and Quintieri, "Italy and the Great
Depression: An Analysis of the Italian Economy, 1929-1936," pp. 290-91. The real effec-
tive exchange rate is a weighted average of the real exchange rate of the yen vis-a-vis the
United States dollar, British pound sterling, French franc, German mark, Indian rupee,
colonial Korean won, and Taiwanese yen. For countries outside the Japanese empire,
nominal exchange rates are from Japan, Finance Ministry, Kin'yuijikosankosho; and price
indices are from League of Nations, International Statistical Yearbook. For the two colo-
nies, the nominal exchange rates equal one, and price indices are from Japan, Colonial
Government of Korea, Chosen kin'yu jiko sankosho; and Japan, Colonial Government of
Taiwan, Taiwan kin'yu nenpo. Trade weights were calculated from Nakamura, "Keiki
hendo to keizai seisaku," p. 310, table 6-13.
Real government deficits were calculated by deflating nominal deficits on the "general
account (ippan kaigi)" of the central government with the wholesale price index (available
from Japan, Bank of Japan, Oroshiuri bukka shisu). Nominal deficits are derived by de-
ducting monthly revenue from spending (available from Japan, Finance Ministry, Okurasho
nenpo) and then adding net monthly public debt accumulation (available from Japan,
Finance Ministry, Kokusai tokei nenpo). The high-powered money series is from Fujino
and Igarashi, Keiki shisu, pp. 400-01. As a measure of the level of activity, the Bank of
Japan seemed to rely on railway freight volume, which is available from Kin'yu jiko
sankosho.32 The real-wage series was calculated by dividing nominal wages (from the
Japan, Bank of Japan, Rodo tokei gaisetsu) by the Tokyo retail-price index (from the Bank
of Japan, Honpo juyo keizai tokei) for want of a better cost-of-living index. The nominal-
wage series represents "wage income (jitshu chin'gin)" per day, which was obtained by
dividing total wage payments by manufacturing and mining firms by days worked per
month. The daily-wage income data include overtime payments and, hence, take account
of any flexibility coming from shifts in the wage rate or hours worked.
31 Shima, "Iwayuru," p. 102.

32 Fukai, "Recent Monetary Policy," p. 394. Studies using monthly railway freight volume data as
a proxy for the aggregate output include Goodhart, Business; and Jeanne, "Monetary Policy."
Appendix 2: Output Decomposition Procedure

I started the process by estimating an ordinary vector autoregressive system, comprisi
world output, the Japanese real exchange rate, real government deficits, the money supp
railway traffic volume, and the real wage. The variables were seasonally adjusted and
transformed before estimation. As unit-root tests indicated only the real government d
cits series was stationary, the remaining five variables were first-differenced. The Aka
information criteria indicated that nine lags were optimal. The sample period runs f
January 1929 to September 1936, an end point dictated by the world-production ind
compiled by Fabrizio Mattesini and Beniamino Quintieri.
To arrive at a plausible specification relating the residuals from the vector autoregress
estimation (reduced-form shocks) to structural shocks, I first carried out Granger-causa
tests and calculated correlation coefficients among the reduced-form shocks. Given
results from the preliminary inspection and the standard Keynesian macroeconomic mo
with sticky nominal wages, I began by estimating the "general" specification as show
panel A of Appendix Table 1. The specification is "general" in the sense that it incor
rates every conceivable contemporaneous link consistent with either the statistical evide
or the Keynesian model. The vector e = (ep e, eg e, em, e,) represents the reduced-f
shocks, and E = (ep ee, g, Em, E, Ew) represents the structural shocks: foreign-outp
exchange-rate, fiscal, money-supply, domestic-private-demand, and wage shocks.
Equation 1 implies that the shock component in world output (ef) occurs solely due
world-output shock (Ef). Next comes the real-exchange-rate equation, where only
coefficient associated with wage innovation is significant. The world-output shock fails
lead contemporaneously to exchange-rate shock, probably because the "world" out
series (a weighted average of the industrial-production indices in the United States, G
many, France, and Britain) is an imperfect proxy for the level of activity in the world J
actually dealt with: Europe and the United States accounted for only 37 percent of Japa
exports in 1929-1931, a share which declined to 24 percent in 1934-1936.33 The insign
cant coefficient estimates for deficit and money innovations appear to reflect the redu
sensitivity of the exchange rate to policy shocks due to the gradual introduction of cap
control beginning with the Capital Fight Prevention Act of July 1932.34
Equation 3 indicates that while Japan's fiscal policy was aimed at countering exter
shocks, the finance ministry did not react to reduce output volatility within a month.
insignificant coefficient for domestic output innovation is also consistent with the abse
of automatic stabilizers (within a time horizon of one month) in interwar Japan: the une
ployment insurance scheme was not introduced until 1 December 1947,35 and taxes w
collected mostly on a quarterly or half-yearly basis in interwar Japan,36 with the gove
ment determining the level of monthly spending within the annual budget authorized by
Diet in the early months of each year.37
The insignificant coefficient estimates in equation 4 indicate that the Bank of Ja
neither tried to stabilize the fluctuating level of activity contemporaneously, nor shifted
money supply to accommodate money demand via discount-window lending.38 Whe
33 Calculated from Nakamura, "Keiki hend6," p. 310.

34 In May 1933 the Foreign Exchange Control Act replaced the Capital Flight Prevention Act, w
had been found to be porous. Still, the new act did not provide a watertight barrier against capital f
Itoh, Nihon, pp. 274-78; and Fukai, Kaiko, pp. 276-77.
351 am grateful to Professor Konosuke Odaka for this particular piece of information.
6 Japan, Finance Ministry, Shin zeihoyoran, pp. 228-30; and Sakairi, Showa zenki zaiseishi, p.
37 For a detailed description of the fiscal procedure in the early 1930s, see Ohmae, "Sait6."
38Fukai, Kaiko, pp. 268-89.
140 Cha
APPENDIX TABLE 1
ESTIMATED STRUCTURAL VAR MODEL
Equation No.
A. General Specificati
ef= ef 1
ee = -0.002ef + 0.01eg - 0.07em + 0.39 e + Ee 2

(0.03) (1.37) (0.90) (2.44)
eg =-2.1 ef1- 1.08ey + g 3

(2.01) (1.11)
em = -0.22ef- 0.01 e + , 4
(1.33) (0.04)
ey = 0.72ef + O.05eg - 0.09em + E 5

(5.26) (3.17) (0.33)
e = -0.09e- 0.1 ey + Ew 6
(1.56) (2.24)
Likelihood ratio test for over-identification: Chi-squared(2) = 3.04 with a significance level of 0.22.
B. Simplified Specification
ef = Ef 1'
ee= 0.36 ew + E 2'
(2.37)
eg =-2.76ef + 3'
(2.33)
em = e 4'
ey = 0.71ef+ 0.04eg + Ed 5
(6.08) (3.51)
ew =-0.14ey+ Ew 6'
(3.38)
Likelihood ratio test for over-identification: Chi-sq
Note: Parenthetically shown are t-statistics.
added deficit innovation (eg) in equation 4, and

coefficient for the added term was insignificant
found to be over-identified.
Equation 5 expresses an IS relationship, where
However, the coefficient associated with money
conventional wisdom that money shocks oper
represents the aggregate-supply relationship,
39 Adding exchange rate shock, also known to work w

cant and wrong (i.e., negative) coefficient for the added
tion to pass over-identification test.
shocks, as the world-output and wage shocks were found to be highly correlated. T
negative and highly significant coefficient for the domestic-output shock indicate
presence of nominal wage rigidity.
Dropping the terms associated with insignificant coefficients and re-estimating
simplified specification, I obtained broadly similar coefficients for the retained te
which are estimated more precisely as the larger t-statistics indicate (panel B). Alth
the output decomposition results were derived using the parsimonious specification,
general specification yields basically the identical outcome. Impulse-response funct
were all consistent with the predictions of the Keynesian model with nominal w
rigidity.40
One may recover structural shocks from reduced form shocks using the equation
panel B. The estimated structural shocks together with the impulse-response funct
allow decomposition of output fluctuations into six different components. For instance,
can calculate the part in monthly change in output due solely to the money-supply s
by setting the present and past values of structural shocks other than the money-su
shock equal to zero in the impulse-response function for output. Accumulation of
money-supply component yields the path along which the output level would have fluc
ated had money-supply shocks alone been generated.
40 Impulse-response functions, Granger-causality test results, and correlation coefficients amo

reduced form shocks are available upon request.
REFERENCES
Bayoumi, Tamim. 'The Morning After: Explaining the Slowdown in Japanese Gr

the 1990s." NBER Working Paper No. 7350, Cambridge, MA, September 199
Berger, Gordon M. "Politics and Mobilization in Japan, 1931-45." In Cambridge
of Japan, volume 6, edited by Peter Duus, 97-153. Cambridge: Cambridge Uni
Press, 1988.
Beranke, Ben, and Harold James. "The Gold Standard, Deflation, and Financial C
the Great Depression: An International Comparison." In Financial Markets
nancial Crises, edited by Glenn Hubbard, 33-68. Chicago: University of Ch
Press, 1991.
Brown, E. Carrey, "Fiscal Policy in the 1930s: A Reappraisal." American Econo
view 46, no. 5 (1956): 857-79.
Cohn, Raymond L. "Fiscal Policy in Germany during the Great Depression." Expl
in Economic History 29, no. 3 (1992): 318-42.
Della Paolera, Gerardo, and Alan M. Taylor. "Economic Recovery from the Arg
Great Depression: Institutions, Expectations and the Change of Macroeconom
gime." NBER Working Paper No. 6767, Cambridge, MA, April 2000.
Eichengreen, Barry. Golden Fetters. Oxford: Oxford University Press, 1992.
Eichengreen, Barry, and T. J. Hatton. "Interwar Unemployment in International
tive: An Overview." In Interwar Unemployment in International Perspective,
by Barry Eichengreen and T. J. Hatton, 1-59. Dordrecht: Kluwer, 1988.
Eichengreen, Barry, and Jeffrey Sachs, "Exchange Rates and Economic Recover
1930s." This JOURNAL 45, no. 4 (1985): 925-46.
Eichengreen, Barry, and Peter Temin. "The Gold Standard and the Great Depr
NBER Working Paper No. 6060, Cambridge, MA, June 1997.
Emi, Koichi. "Keizai seicho to saichutsu kozo (Economic Growth and the Struc
Public Spending)." Keizai Kenkyu 14, no. 3 (1963): 223-29
.Zaisei shishutsu (Public Spending). Tokyo: Toyo Keizai Shimposha, 1971.
142 Cha
Faini, Riccardo, and Gi

1920s." Explorations in
Fujino, Shozaburo, and F
Economic Research of H
Fukai, Eigo. "The Recent
ence, edited by A. D. G
. Kaiko nanajunen (Rem
Goodhart, Charles A. E.
Nicolson, 1972.
Gordon, Andrew. Labor
of California Press, 199
Hara, Akira. "Keiki jun
daikyokoki (A History
edited by Oishi Kaichir
Hashimoto, Juro. Genda
Iwanami, 2000.
Hirasawa, Teruo. Daiky5o
Great Depression). Tok
Ito, Takatoshi, Kunio Ok
Rate, 1931-1933: The En
sion." Journal of the J
Itoh, Masanao. Nihon no
Financial Policy in Jap
Iwami, Toru, Tetsuji Oka
Why Was It So Short?"
tives from Historical E
1998.
James, Harold. "What i
Economic Ideas, edited
Press, 1989.
Japan, Bank of Japan. H
Economy). Tokyo: Bank
. Oroshiuri bukka shis
Rodo tokei gaisetsu (In
various years.
Japan. Finance Ministry, Kin'yu jiko sankosho (Handbook of Financial Matters). Tokyo:
Finance Ministry, various years.
. Kokusai tokei nenpo (Statistical Yearbook of Public Debt). Tokyo: Finance Minis-
try, various years.
. Okurasho nenpo (Statistical Yearbook of the Finance Ministry). Tokyo: Finance
Ministry, various years.
.Shin zeiho yoran (A New Summary of Tax Laws). Tokyo: Sanseido, 1937.
Japan. Colonial Government of Korea. Chosen kin 'yiijik sankosho (Handbook of Finan-
cial Matters in Korea). Seoul: Korea, various years.
Japan. Colonial Government of Taiwan. Taiwan kin 'yajiko sankosho (Handbook of Finan-
cial Matters in Taiwan). Taipei: Taiwan, various years.
Jeanne, Olivier. "Monetary Policy in England 1893-1914: A Structural VAR Analysis."
Explorations in Economic History 32, no. 3 (1995): 302-26.
Johnson, Chalmers. MITI and the Japanese Miracle. Stanford, CA: Stanford University
Press, 1982.
League of Nations. International Statistical Yearbook. Geneve: League of Natio

1925-37.
Maddison, Angus. Dynamic Forces in Capitalist Development. Oxford: Oxford University
Press, 1991
Mattesini, Fabrizio, and Beniamino Quintieri. "Italy and the Great Depression: An Analy-
sis of the Italian Economy, 1929-1936." Explorations in Economic History 34, no. 3
(1997): 265-94.
Najita, Tetsuo. Hara Kei in the Politics of Compromise, 1905-1915. Cambridge, MA:
Harvard University Press, 1967
Nakamura, Takafusa. Senzenki nihon keizai seicho no bunseki (An Analysis of the Eco-
nomic Growth in Prewar Japan). Tokyo: Iwanami, 1971
. "Keiki hendo to keizai seisaku (The business cycles and economy policy." In Niju
kozo (Dual Structure), edited by Takafusa Nakamura and Konosuke Odaka, 275-322.
Tokyo: Iwanami, 1989.
Nakamura, Takafusa, and Konosuke Odaka. "Gaisetu, 1914-37 nen (Introduction to
1914-37)." In Nija kozo (Dual Structure), edited by Takafusa Nakamura and
Konosuke Odaka, 275-322. Tokyo: Iwanami, 1989.
Nanto, Dick K., and Shinji Takagi. "Korekiyo Takahashi and Japanese Recovery from the
Great Depression." American Economic Review 75, no. 2 (1985): 369-74.
Odaka, Konosuke. "Niji kozo (Dual Structure)." In Niji kozo (Dual Structure), edited by
Takafusa Nakamura and Konosuke Odaka, 275-322. Tokyo: Iwanami, 1989.
Ohmae, Shinya. "Saito naikakuki no yosan hensei to okurasho, 1 (Budget Compilation
under Saito Cabinet and the Finance Ministry, Part 1)." Hogaku Ronso 145, no. 3
(1999): 28-50.
. "Saito naikakuki no yosan hensei to okurasho, 2 (Budget Compilation under Saito
Cabinet and the Finance Ministry, Part 2)." Hogaku Ronso 147, no 3 (2000): 29-51.
Okazaki, Tetsuji. "Senzenki nihon no keiki junkan to kakaku siry6 chosei (The Business
Cycle and Price-Quantity Adjustment in Prewar Japan." In Keizai riron e no
rekishiteki pasupekutibu (Historical Perspective for Economic Theory), edited by
Hiroshi Yoshikawa and Tetsuji Okazaki, 181-205. Tokyo: Tokyo University Press,
1990.
Okura, Masanori, and Juro Teranishi. "Exchange Rate and Economic Recovery of Japan
in the 1930s." Hitotsubashi Journal of Economics 35, no. 1 (1994): 1-22.
Pikkarinen, Jukka. "Keynesianism and the Scandinavian Model of Economic Policy." In
Political Power of Economic Ideas, edited by Peter Hall, 311-46. Cambridge: Cam-
bridge University Press, 1989.
Ramseyer, J. Mark, and Frances M. Rosenbluth. The Politics of Oligarchy: Institutional
Choice in Imperial Japan. Cambridge: Cambridge University Press, 1995.
Ritschl, Albrecht. "Deficit Spending in the Nazi Recovery, 1933-1938: A Critical Reassess-
ment." Working Paper No. 68, Institute for Empirical Research in Economics, Univer-
sity of Zurich, Zurich, 2000.
Rodo Undo Shiryo Iinkai. Nihon rodo undi shiryo (Materials for the History of Labor
Movement). Volume 10. Tokyo: Rodo Undo Shiryo Iinkai, 1959.
Romer, Christina D. "What Ended the Great Depression?" This JOURNAL 52, no. 4 (1992):
757-84.
Sakairi, Chotaro. Showa zenki zaiseishi (A Fiscal History of Early Showa Period). Volume
4. Tokyo: Sakai Shoten, 1988.
Sato, Kazuo. "Senkanki nihon no makuro keizai to mikuro keizai (Macro- and Micro-
economy of Interwar Japan)." In Senkani no nihon keizai bunseki (An Analysis of the
Interwar Japanese Economy), edited by Takafusa Nakamura, 4-30. Tokyo: Yamakawa,
144 Cha
1981.
Shima, Kinzo. "Iwayuru 'Takahashi zaisei' ni tsuite (On so-called Takahashi Finance)."
Kin'yu kenkyui 2, no. 2 (1983): 83-124.
Smethurst, Richard J. "Takahashi Korekiyo's Economic Policies in the Great Depression
and their Meiji Roots." Discussion Paper No. JS/00/381, The Suntory Centre, London
School of Economics, London, 2000.
Smethurst, Richard J. Takahashi Korekiyo's Fiscal Policy and the Rise of Militarism in
Japan during the Great Depression. Unpublished Manuscript.
Suzuki, Masatoshi. Showa kyok6 kara manabu (Lessons from the Showa Crisis). Tokyo:
Kodansha, 1999.
Takahashi, Kamekichi, and Sunao Morigaki. Showa kin 'yu kyokoshi (A History of Showa
Financial Crisis). Tokyo: Kodansha, 1993.
Temin, Peter. Lessons from the Great Depression. Cambridge, MA: MIT Press, 1989.
. "Socialism and Wages in the Recovery from the Great Depression in the United
States and Germany." This JOURNAL 50, no. 2 (1990): 297-306.
Tominaga, Norio. "1932-36 nenkan no nihon keizai (The Japanese Economy from
1932-36)." In Kindai nihon no keizai to seiji (Economics and Politics and Modem
Japan), edited by Akira Hara, 326-48. Tokyo: Yamakawa, 1986.
Weinstein, Michael. "Some Macroeconomic Impacts of the National Industrial Recovery
Act, 1933-1935." In The Great Depression Revisited, edited by Karl Brunner, 262-81.
Boston: Kluwer Nijhoff, 1981.
Yasuba, Yasukichi. "The Japanese Economy and Economic Policy in the 1930s." In Recov-
ery from the Depression, edited by Robert G. Gregory and Noel G. Butlin, 135-47.
Cambridge: Cambridge University Press. 1988.

Cha - 2003 - Did Takahashi Korekiyo

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cha - 2003 - Did Takahashi Korekiyo

Uploaded by

Copyright:

Available Formats

Economic History Association

Did Takahashi Korekiyo Rescue Japan from the Great Depression?

A fter half a century of rapid growth and industrialization following the

THE GREAT DEPRESSION AND RECOVERY IN JAPAN

According to the gold-standard theory of the Great Depression, both

3 See Temin, "Socialism."

Source: League of Nations, International Statistical Yearbook.

Japan (which abandoned the gold standard several months after Ge

causal effect (Nanto and T

rate rose, the campaign against Prime Minister Hamaguchi's deflationary

1929 1930 1931 1932 1933 1934 1935 1936 1937

6.8 7.5 7.9 7.8 7.5 6.7 6.9 6.9 6.2

Source: R6d6 Und6 Shiry6 linkai, N

drive, possibly generating d

OUTPUT DECOMPOSITION RESULTS

To measure the role of these factors in the Japanese recovery fr

? Apr-31 I .-' -- r Jan-31

20 Eichengreen, Golden Fetters, pp. 342-47.

The conventional account of the Japanese economy's recovery fr

expenditure from ris

Appendix 1: Data Sources

31 Shima, "Iwayuru," p. 102.

Appendix 2: Output Decomposition Procedure

33 Calculated from Nakamura, "Keiki hend6," p. 310.

ee = -0.002ef + 0.01eg - 0.07em + 0.39 e + Ee 2

eg =-2.1 ef1- 1.08ey + g 3

ey = 0.72ef + O.05eg - 0.09em + E 5

Likelihood ratio test for over-identification: Chi-sq

Note: Parenthetically shown are t-statistics.

added deficit innovation (eg) in equation 4, and

39 Adding exchange rate shock, also known to work w

40 Impulse-response functions, Granger-causality test results, and correlation coefficients amo

Bayoumi, Tamim. 'The Morning After: Explaining the Slowdown in Japanese Gr

Faini, Riccardo, and Gi

League of Nations. International Statistical Yearbook. Geneve: League of Natio

You might also like