Controlling Funds Allocation for the War: The Experience of Japan in the Late 1930s

This paper explores how financial controls functioned to affect funds allocations in late 1930s Japan. For larger firms, subject to the financial controls, the difference in capital growth between firms in the nonpriority and priority industries expanded when the financial controls started, while differences in borrowing growth between them did not until the controls were later extended to cover both short- and long-term funds. For samples including small and medium-sized firms, I found that for a nonpriority industry, the capital growth of the firms subject to the controls (with capital over the upper limit of exemption for the controls) declined compared with the firms under the upper limit when the controls commenced. Conversely, for firms in a priority industry, this discontinuity across the upper capital limit is not observed. These results strongly suggest that the financial controls did indeed affect and alter the funds allocation.