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

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  • Masato Shizume

    (Bank of Japan)

Abstract

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.

Suggested Citation

  • Masato Shizume, 2009. "The Japanese Economy during the Interwar Period: Instability in the Financial System and the Impact of the World Depression," Bank of Japan Review Series 09-E-2, Bank of Japan.
    • Handle: RePEc:boj:bojrev:09-e-2
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    Cited by:

    1. Christie Swanepoel & Philip T. Fliers, 2021. "The fuel of unparalleled recovery: Monetary policy in South Africa between 1925 and 1936," Economic History of Developing Regions, Taylor & Francis Journals, vol. 36(2), pages 213-244, May.
    2. Dwight H. Perkins & John P. Tang, 2015. "East Asian Industrial Pioneers: Japan, Korea and Taiwan," CEH Discussion Papers 041, Centre for Economic History, Research School of Economics, Australian National University.
    3. William B. English & Christopher J. Erceg & J. David López-Salido, 2017. "Money-Financed Fiscal Programs : A Cautionary Tale," Finance and Economics Discussion Series 2017-060, Board of Governors of the Federal Reserve System (U.S.).
    4. Masato Shizume, 2018. "Financial Crises and the Central Bank: Lessons from Japan During the 1920s," Studies in Economic History, in: Hugh Rockoff & Isao Suto (ed.), Coping with Financial Crises, chapter 0, pages 131-148, Springer.
    5. Pierre L. Siklos, 2022. "Did the great influenza of 1918–1920 trigger a reversal of the first era of globalization?," International Economics and Economic Policy, Springer, vol. 19(3), pages 459-490, July.
    6. Masato Shizume, 2017. "A History of the Bank of Japan, 1882-2016," Working Papers 1719, Waseda University, Faculty of Political Science and Economics.
    7. Matthew Baron & Emil Verner & Wei Xiong, 2021. "Banking Crises Without Panics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(1), pages 51-113.
    8. Shibamoto, Masahiko & Shizume, Masato, 2014. "Exchange rate adjustment, monetary policy and fiscal stimulus in Japan's escape from the Great Depression," Explorations in Economic History, Elsevier, vol. 53(C), pages 1-18.
    9. Jihad Dagher, 2018. "Regulatory Cycles: Revisiting the Political Economy of Financial Crises," IMF Working Papers 2018/008, International Monetary Fund.
    10. Hülsewig, Oliver & Steinbach, Armin, 2021. "Monetary financing and fiscal discipline," International Review of Law and Economics, Elsevier, vol. 68(C).

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