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The Japanese welfare model is identified by the unified typology method of welfare and production regime (Schroder 2013) as the corporate-centred conservative welfare regime (CCWR), a subgroup of t...

We conduct a discourse analysis of the Bank of Japan’s Monthly Report and examine its characteristics in relation to business cycles. We find that ambiguous expressions tend to appear more frequently with negative expressions, and this tendency is more pronounced in recessions. This suggests that the central bank communicates strategically by obfuscating the reports when their private information is unfavorable.

While Takahashi’s policy package brought the Japanese economy out of the Great Depression, crises in the international and domestic political scenes continued. Takahashi negotiated with the military ministers to alleviate the burden on public finances of the operation on mainland China and the buildup of arms. I revisit his struggle with pressures resulting from military expansionism from the perspective of fiscal and public debt policy governance in the long term.

In this chapter, I will explore the origins of Takahashi’s policies with reference to his career and personal networks in a global context both in time and space. I will begin with the development of his career, which informed his perception of society and the economy. Then, I will review his accomplishments as finance minister from his first appointment in 1913 through 1936, when he was assassinated. Finally, I will summarize his thoughts in relation to his earlier career and experience.

Crises bring policy innovations. Facing unprecedented situations, policymakers have worked hard to find solutions and still do so today. Takahashi has often been referred to as one of the world’s best policy innovators during the Great Depression of the 1930s. Which part of his policy was innovative? Was that really his work? To answer these questions, I revisit his policies focusing on policy innovation. First, I go through his exchange rate policy with reference to the departure from the gold standard. Second, I explore his fiscal policy focusing on debt-financed fiscal expansion. Third, I dig into the conduct of monetary policy focusing on open market operations. The appendix to this chapter explores the monetary policy operation based on the recently compiled government bond yield term structure data.

In this book, I revisit the achievements of Takahashi Korekiyo, a finance minister of Japan whose innovative macroeconomic policy brought Japan out of the global Great Depression in the 1930s. To this end, I review the Japanese economy in this period with data and chronology, explore the origins, intentions, and the consequences of Takahashi’s policy with econometric and archival analyses, and discuss lessons from this policy that can be applied today. In this introductory chapter, I go through the Japanese economy with reference to Takahashi’s policy and show the goals and the structure of this book.

In this chapter, I first overview modern Japanese economic history from a long-term perspective for the period between the mid-nineteenth and mid-twentieth centuries while putting the Japanese economy in its global context. I then review Japan’s macroeconomic performance and policies during the 1930s focusing on exchange rate, fiscal, and monetary policies.

A veteran finance minister, Takahashi Korekiyo, brought an early recovery for Japan from the Great Depression of the 1930s by prescribing a combination of expansionary fiscal, exchange rate, and monetary policies. To explore the comprehensive transmission mechanism of Takahashi's macroeconomic policy package, including the expectation channel, we construct a structural vector auto-regression (S-VAR) model with three state variables (output, price, and the inflation expectations) and three policy variables (fiscal balance, exchange rate, and money stock). Our analysis reveals that the exchange rate adjustment undertaken as an independent policy tool had the strongest effect, and that changes in people's expectations played a significant role for escaping from the Great Depression. During the second half of 1931, in particular, speculation on Japan's departure from the gold standard and the inflation that was likely to follow reversed the existing expectations: instead of expecting deflation, people began to expect inflation, months ahead of the actual departure from the gold standard. As a whole, the choice of the level of the exchange rate was crucial for changing people's expectations as well as promoting exports.

Japan defaulted on its public debt after the Second World War. This article addresses the question of how Japan lost its ability to sustain its public debt. We explore the sustainability of public debt in Japan before the War. We conduct statistical tests for the relationship between public debt and primary fiscal balance, and find that Japanese public debt was sustainable until 1931, and unsustainable in and after 1932. Narrative modes of analysis indicate that Japan lost its fiscal discipline because of the military's effective veto over budgetary processes and because of the absence of pressure for sound fiscal policy from international financial markets.

Why did policymakers adopt the gold standard? Although previous research has identified ex post effects of gold standard adoption on trade and bond yields, few studies have sought to understand whether these were the actual outcomes of interest to policymakers at the time of adoption. We examine the political economy of Japan's adoption of the gold standard in 1897 by exploring the ex ante motives of policymakers as well as how the legislative decision to adopt gold won approval. We then link the beliefs of contemporaneous policymakers to data so that we can test the economic effects of adoption. In contrast to previous studies examining bond yields, we find little evidence that joining the gold standard reduced Japan's country risk or investors anticipated a dramatic decline in borrowing rates for the government. Moreover, we find no evidence of a domestic investment boom or that investors anticipated one and bid it into stock prices. However, as some policymakers suggested, we find that membership in the gold standard increased Japan's exports by lowering transactions costs and because the price of gold fell relative to silver, making exports to silver standard countries more competitive. While Japan also received a boost in exports to its regional trading partners when it switched from paper to silver, going onto gold allowed Japan to tap into the growing share of global trade that was centered on the gold standard: by the late 1890s nearly 60 percent of Japanese exports and total trade were with members of the gold club.

We conduct a discourse analysis of the Bank of Japan’s Monthly Report and examine its characteristics in relation to business cycles. We find that the difference between the number of positive and negative expressions in the reports leads the leading index of the economy by approximately three months, which suggests that the central bank’s reports have some superior information about the state of the economy. Moreover, ambiguous expressions tend to appear more frequently with negative expressions. Using a simple persuasion game, we argue that the use of ambiguity in communication by the central bank can be seen as strategic information revelation when the central bank has an incentive to bias the reports (and hence beliefs in the market) upwards.

This monographic paper summarizes views held by the Bank of Japan (hereafter BOJ or the Bank) in the 1980s regarding economic conditions and monetary policy formulation, perceived from the BOJ archives and other materials from the period. From a historical viewpoint, the authors see the 1980s as a watershed time for the Bank's policy formulation, because the Bank acquired lessons for monetary policy formulation under a large fluctuation in economic and financial conditions and innovated new approaches for monetary policy formulation and money market management as stated below. First, during the 1980s the BOJ had to largely consider the external imbalance in formulating policy, and attention began to shift towards price stability in the medium or long term by the end of the decade. Second, the large fluctuations in asset prices, money supply, and commercial bank lending were closely monitored during this period, but the Bank's assessment about their impacts on macroeconomic consequences in the medium to long term was insufficient. A reflection of these lessons appears to evolve into a perspective on the Bank's monetary policy formulation that financial imbalances should be examined as a risk for achieving price stability in the medium to long term. Third, in light of ongoing financial deregulation during this period, the Bank started to change monetary policy measures from those based on a regulated interest rate framework to those based on market operation with good use of money markets and flexible interest rates.

The Japanese economy faced chronic crises during the interwar period. Among the crises, 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 incomplete restructuring in the business sector and postponements in the disposal of bad loans by financial institutions. 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 in January 1930.

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.

Japan defaulted on its public debts only once throughout its modern history, after World War II (WWII). How did Japan lose its ability to sustain its public debts? This paper explores the sustainability of public debts in Japan before and during WWII. First, this paper reviews the brief history of pre-WWII public finance in Japan with reference to some narrative evidence, data, and previous works. Second, this paper conducts three stages of econometric analyses. It tests Ricardian neutrality of public debt. It tests the dynamic efficiency of Japanese economy, and it conducts Bohn's tests for the relationship between public debt and primary fiscal balance. The tests indicate that Japanese public debts were sustainable until 1931, and unsustainable in and after 1932. Third, this paper interprets the results of quantitative analyses with narrative modes of analysis. During the 1930s, Japan lost its fiscal discipline because of the military's effective veto over budgetary processes and because of the absence of pressure for sound fiscal policy from international financial markets.Length: 35 pages

Departing from the gold standard was the necessary condition for early recovery from the Great Depression in 1930s (Eichengreen and Sachs[1985]). Then, was it the sufficient condition for an independent monetary policy? I explore Japan's monetary policy during the interwar period, focusing on the macroeconomic policy innovation in the early 1930s. I explore the view of the Japanese policymakers at that time, making use of newly available archives from the Bank of Japan. I derive a new series of representative long-term interest rate data from the market price of one particular government bond. Then, I explore the relationship between long-term interest rates of Japan and the two financial centers, Great Britain and the United States. The Japanese experience shows how strong the Golden Fetters were during the post-gold-standard era. The institution of the gold standard had an enduring influence on Japanese policymakers, even after its constraints were no longer formally binding.

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