Economic Development of Japan

No.5 Meiji 4

Opening of New Tokyo Stock Exchange, 1897

Macroeconomy of Late Meiji

(1890s-1900s)

Trade, Budget & Finance, Saving Mobilization

• Aggressive public spending continued for militarization and industrialization, causing budget deficit and gold reserve loss.

• Cotton industry succeeded in import substitution. Trade exhibited dual structure—exporting light industry goods to Asia and importing machinery from the West.

• Yen initially floated down, but was fixed at $1=2 yen after joining the gold standard in 1897.

• Banks and stock exchanges were set up, but main source of saving remained self-finance and joint stock companies within the private business sector.

• Japan relied relatively little on FDI. But foreign bonds were issued to execute the Japan-Russia War, local public investments and budget financing.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Government was relatively small

Meiji

Composition of Domestic Demand Gov invt Priv invt Gov cons Priv cons Source: Ryoshin Minami,

The Economic Development of Japan

, 1986.

100% 80% 60% 40% 20% 0%

Tax Revenue Structure

Meiji

Other Land tax Liquor tax Income tax Sugar tax In dir e c t t axe s Customs duties Other Corp. tax Dir e c t t axe s Source: Management and Coordination Agency,

Historical Statistics of Japan

, vol.3, Japan Statistical Association, 1988, pp.268-269.

100 80 60 40 20 0 100 80 60 40 20 0

Meiji

Exports by Commodity (%) Imports by Commodity (%) NA Other Manufactured Textile (incl. silk) Food Primary com.

PP.60-61

Shifts in Trade Structure

Other Manufactured Light industry Primary com.

Source: Ryoshin Minami,

The Economic Development of Japan

, 1986.

Trade Structure in Meiji (incl. colonies)

• Exports to West--silk to US (60-70%) dominated • Imports from West--machinery, steel, US raw cotton • Exports to other areas--cotton products, light industry goods (matches, umbrellas, clocks, glass products, lamp, knitted goods) • Imports from other areas--foodstuff, Indian raw cotton Trade content with developing areas & with colonies were similar 100% 80% 60% 40% 20% 0% 1892

Export

1902 1912 100% 80% 60% 40% 20% 0% 1892

Import

1902 1912

Taiwan, Korea, occupied China Developing areas Europe, US

Source: Y.Yamamoto & K.Oku, “Trade,” JEH vol.5, 1990.

Japan’s Trade Pattern

Early Meiji Late Meiji Europe, US Europe, US

Tea, silk

Japan

Machinery, textile products Tea, silk

Japan

Machinery, raw cotton (US) Raw cotton (India), food Textile & light manufacturing

Rest of Asia

25 % 20 15 10 5 0

Average Tariff Rate

Calculated as (tariff revenue)/(import value)

Meiji

1899 Restoration of tariff rights All commodities Average of non-zero tariff commodities

P.90

Exchange Rate Regime

Silver standard (float)

: until 1897 – Depreciation against Western currencies; East Asia (Shanghai forex market) used silver 1.2

1.0

0.8

0.6

0.4

Gold standard (fix)

: 1897-1917 and 1930-31 – Adopting global standard with reparation gold from China (at the initiative of Finance Minister Matsukata) Exchange Rate (Dollar/Yen)

Merits of gold standard

-Pride of joining the first class country club -No exchange risk -Ease in issuing foreign bonds 0.2

Meiji Demerit?

0.0

-No more depreciation

4 3 2 1 0 10 9 8 7 6 5 2500 2000 1500 1000 500 0

Meiji

G old R eserves (In m illions of yen)

WW1

Reserves in Import Months H eld abroad A t hom e

P.103

--Due to active public spending, Japan faced BOP pressure.

--Foreign bond issue can be regarded as a financing measure to avoid fiscal belt-tightening.

--Meanwhile, Japan’s gold reserves were on a declining trend in late Meiji.

--Japan eventually solved the BOP crisis not by tight budget but through WW1 export boom.

Japan-China War Reparation

• Japan fought and won a war against Qing Dynasty of China over the control of Korea (1894-95).

• After the war, Japan received from China: – Taiwan and Penghu Islands – Liaodong Peninsula (immediately forced to return to China under the pressure of Russia, Germany, France) – Reparation of 365 million yen (4 times the annual budget) • China borrowed from other countries and paid reparation in sterling-denominated checks in London • Japan held this amount in London as gold reserves • This balance was used to issue convertible paper money in Japan (establishment of gold exchange standard, 1897).

Special Account for Japan-China War Reparation (Balance at end 1902) Million yen Revenue Reparation from China 311.07

Compensation for return of LP Interest etc.

TOTAL Expenditure Japan-China War expenditure (past) Army buildup Navy buildup Yahata Steel Mill Budget finance for 1897 (infra.) Additional money for navy Budget finance for 1898 (Taiwan) Imperial family expense Education Natural disaster fund Remaining balance TOTAL 44.91

8.53

364.51

78.96

56.80

139.26

0.58

3.21

30.00

12.00

20.00

10.00

10.00

3.70

364.51

Percent 85.3% 12.3% 2.3% 100.0% 21.7% 15.6% 38.2% 0.2% 0.9% 8.2% 3.3% 5.5% 2.7% 2.7% 1.0% 100.0% For military

83.7%

Japan-Russia War (1904-1905)

 Cause: influence over Korea and Manchuria (Northeast China). Russia gained territorial & economic concessions and kept large troops in Manchuria. Japan signed Japan-UK Alliance to deter Russia.

  When the war started, few thought Japan would win.

To cover the war cost, Japan issued government bonds in London and New York. At first there were no takers, but finally the deal was done.

  Battles were fought on land and at sea. The fall of Russia’s

Lushun Fortress

and the defeat of Russia’s

Baltic Fleet

were decisive.

 Many were surprised that a non Western latecomer beat Whites.

Russia paid no war reparation. This was accepted because the Japanese government needed to end the war asap to avoid fiscal crisis.

40% 35% 30% 25% 20% 15% 10% 5% 0%

Meiji

Source: Ryoshin Minami,

The Economic Development of Japan

, 1986.

20% 15% 10% 5% 0% -5% -10% Gross saving (% of GNP) Net saving (% of GNP) Personal saving (% of disp inc) Dependence on Foreign saving =

Dependence on Foreign Saving

=(Imports-Exports)/Gross Investment

Foreign saving (bond issues)

Agriculture

Tax

Gov’t

Infrastructure Public spending

Industry PP.92-93

Intra-sectoral financing --Self finance --Joint stock companies --Mobilizing rich merchants & producers

Banks

Not very active Savings and Investment Balance by Sector (In millions of yen) Private farms Savings Investment Non-farm private sector Savings Investment Government Savings Investment External sector 1899-1902 1903-1907 1908-1912 1913-1917 1918-1922 1923-1927 1928-1932 1933-1937 1 121 120 62 180 118 -59 24 83 5 13 159 146 123 310 187 -233 -142 91 -97 4 175 171 -87 212 299 15 205 190 -68 43 240 197 175 752 577 120 317 197 338 207 657 450 81 1724 1643 -146 441 587 143 23 523 500 -290 858 1148 -112 801 913 -380 -12 402 414 631 1498 867 -626 251 877 -6 222 580 358 931 2637 1706 -1162 -298 864 -10 Memorandum item: Agricultural taxes (% of non-farm gross invt) 104 42.0% 115 38.4% 154 28.0% 166 24.2% 290 19.4% 291 13.8% 188 9.0% 145 11.3% Note: Prof. Juro Teranishi's estimates. Farms' S-I balance shows transfer of surpluses to the non-farm sector through the financial system while agricultural taxes are transfer of surpluses through government budget.

Gross Savings (% of estimated GDP)

30% 25% 20% 15% Government Non-farm private Private farms 10% 5% 0% -5% 1899-1902 1903-1907 1908-1912 1913-1917 1918-1922 1923-1927 1928-1932 1933-1937

Prof. Teranishi’s savings & investment estimates expressed in percent of GDP Gross Investment (% of estimated GDP)

30% 25% 20% 15% Government Non-farm private Private farms 10% 5% 0% 1899-1902 1903-1907 1908-1912 1913-1917 1918-1922 1923-1927 1928-1932 1933-1937 Note: GDP estimate by Prof. Yamada, from Management and Coordination Agency,

Historical Statistics of Japan

, vol.3, Japan Statistical Association, 1988, pp.344-345.

A Comparison with Vietnam Today

(Nguyen Ngoc Son’s preliminary study)

% of GDP

35.0

30.0

--Saving & investment rates are higher than Meiji Japan (data problem?) Tỷ lệ tiết kiệm trong GDP

Saving/GDP

25.0

20.0

15.0

10.0

5.0

Business Household Government

--Business is a large saver & investor: internal Tỷ lệ tiết kiệm nhà nước saving mobilization of business sector (same as Meiji Japan) Tỷ lệ tiết kiệm doanh nghiệp trong GDP --Mobilization of foreign saving is large Tỷ lệ tiết kiệm hộ gia đình (nearly 10% of GDP) 0.0

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 15.0

Investment/GDP Business Government Household

10.0

Household

5.0

Tỷ lệ đầu tư trong GDP

Business

0.0

-5.0

-10.0

Tỷ lệ đầu tư nhà nước trong GDP 1995 1996 1997 1998 Tỷ lệ đầu tư DN trong GDP 1999 Tỷ lệ đầu tư HGĐ trong GDP 2000 2001

(S-I)/GDP

-15.0

2002 2003 2004

Government

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Chênh lệch S-I Chênh lệch S -I của DN Chênh lệch S-I của NN Chênh lệch S -I của HGD 2005

Japanese Economy and Foreign Capital, 1858-1939

Simon Bytheway, 2005 (in Japanese, PhD dissertation at Tohoku Gakuin Univ.) • After 1858, foreign trading firms came, but their activities were confined to foreign settlement areas.

• Japan prohibited FDI until 1899 (revision of commercial law). Even after that, policy and popular opinion remained hostile to FDI.

• During Meiji period, foreign debt issue was much larger than FDI Share in foreign saving mobilization--gov’t bonds 82.5%, municipal bonds 7.8%, corporate bonds 9.0%, FDI 0.7% • However, FDI played important roles in some industries (see below), esp. technology transfer through patents.

Ex. light bulbs: bamboo filament  tungsten filament

1 2 3 4 5 6 7 8 9

Foreign Bond Issue of Meiji Government

Year 1870 1873 1897 1899 1902 1904 1904 1905 1905 10 1905 11 1907 12 1910 13 1910 Location London London London London London LN & NY LN & NY LN & NY LN, NY, Berlin LN, NY, Berlin, Paris LN, Paris Paris London Interest rate 9.0% 7.0% 5.0% 4.0% 5.0% 6.0% 6.0% 4.5% Maturity (years) 13 25 55 55 55 7 7 20 4.5% 4.0% 5.0% 4.0% 4.0% 20 25 40 60 60 Amount (mil yen) Purpose 4.88 Railroad construction 11.71 Redemption of samurai salaries 43.00 War 97.63 RR, steel mill, telecom, war 50.00 RR, steel mill, telecom, war 97.63 War 117.16 War 292.89 War 292.89 War, refinancing of domestic bonds 244.08 Redemption of fiscal bonds 224.55 Redemption of 6 & 7 174.15 Redemption of domestic bonds 107.39 Redemption of domestic bonds --Foreign bond issue was made easier by adoption of the gold standard. Other reasons were economic and legal maturity of Japan, and victories over China and Russia.

--Borrowing in later period was mainly for war and deficit refinancing.

Source: S.J.Bytheway (2005), pp.106-107

Central Government Bonds Outstanding

Billion yen 7 6 Foreign Domestic 5 4 3 2 1 0 Source: Management and Coordination Agency,

Historical Statistics of Japan

, vol.3, Japan Statistical Association, 1988, pp.278-279.

Central Government Bonds Outstanding

(Including Domestic & Foreign Bonds) （％

of Estimated GDP)

200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Note: GDP estimate by Prof. Yamada, from Management and Coordination Agency,

Historical Statistics of Japan

, vol.3, Japan Statistical Association, 1988, pp.344-345.

Year 1 2 3 4 5 6 7 8 1899 1902 1903 1906 1907 1909 1909 1909 9 1909 10 1909 11 1912 12 1912

Foreign Bond Issues of Municipalities

Six cities borrowed abroad for building local infrastructure Issuing city Kobe Yokohama Osaka Tokyo Yokohama Yokohama Osaka Nagoya Kyoto Yokohama Kyoto Tokyo Interest rate 6.0% 6.0% 6.0% 5.0% 6.0% 6.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Maturity (years) 36 23 78 30 28 8 29 33 29 44 20 40 Amount (mil yen) Purpose 0.25 Water works 0.90 Water works 3.09 Port facility 14.58 Port facility and roads 3.11 Port facility 0.65 Gas factory 30.22 Street trams, water works 7.82 Water works 17.55 Power supply, water works 7.00 Water works 1.95 Power supply, water works 89.56 Street trams In addition, many public/utility companies issued corporate bonds: RR companies, banks, textile companies, power companies, etc.

Source: S.J.Bytheway (2005), pp.138-139

Major FDI Firms in Meiji Period

Year Japanese name Foreign partner 4 5 6 1 2 3 1893 Standard Oil 1899 Nippon Electric (NEC) 1900 Murai Brothers 1900 Rising Sun 1901 Singer Mishin 1902 Osaka Gas Standard Oil (US) Western Electric (US) American Tobacco (US) S. Samuel & Co. (UK) Singer Sewing Machine (US) Mr A.N. Brady (US) 7 8 1903 Tokyo Electrical Train 1905 Tokyo Electric 9 1906 Osaka Glass Manufacturing 10 1907 Nippon Steel 11 1907 Imperial Spinning 12 1909 Dunlop Rubber J&P Coats (UK) Far East Dunlop (UK) 13 1910 Shibaura Manufacturing General Electric (US) 14 1910 Nippon Okijenu & Asechiresu L'air Liquide (FR) 15 1910 Lever Brothers Amagasaki 16 1910 Nippon Chikuonki Trading Mr Malcolm (UK) General Electric (US) Private syndicate (UK, Bel, Fr) Armstrong & Vickers (UK) Lever & Brothers (UK) Mr. F.W. Hohn (US) Foreign ownshp Remark 100% Later sold to Nippon Oil 54% 50% Later under Sumitomo State-owned in 1904 100% Oil business 100% 50% Brady capital exits 1925 - 38% 56% 50% Later Toshiba, 1939 60% 100% Later, 100% Japanese 24% 100% Weapon manufacturing Later Toshiba, 1939 100% - Phonograph FDI was relatively small (cf. China, India). However, it played leading roles in tobacco, oil refining, electrical and general machinery, weapons, automobiles, glass, (aluminum). Later, zaibatsu mostly took over FDI technology and production.

Source: S.J.Bytheway (2005), pp.166-167