´´ The Showa Depression - Japan's Other Lost Decade

Wednesday, December 17, 2014

The Showa Depression - Japan's Other Lost Decade

Japan's Heisei recession, better known under the label "lost decade", might be, along with the Great Depression, the best researched and widely covered economic crisis in history. It is often described as an unprecedented crisis in Japan's modern economic history. The truth is that it is not!

The Showa recession and financial crisis between 1920 and 1927 was, just like the Heisei recession, characterized by slow growth, mild deflation and chronic financial crises. Furthermore, the grand final of the Showa recession and Heisei recession was a full blown depression and fierce deflation (although in the latter case extremely short in duration!). The economic slump in th 1930's was labeled Showa depression. The one of 2008/2009 “Lehman Shoku.”

Just like the Showa depression, the” Lehman Shoku” was mainly attributable to external factors in combination with policy misjudgments and mistakes within Japan. Although the similarities of Japan's economic performance during the 1920s/ 1930s and the 1990s/2000s are striking little has been researched and covered about Japan's "other lost decade".This series of posts intends to present and scrutinize the Showa recession, financial crisis and depression, as well as political actions and responses accompanying this turbulent period.

In the  First Part I showcased the Showa recession and financial crisis.

This second part will be exclusively dedicated to the Showa depression, which was a fundamentally different economic crisis than Japan's recessionary years of the 1920's and a devastating and traumatizing event for the Japanese economy and society as a whole.

The Long Way to Restoring the Gold Standard in Japan


After the First World War leaders around the world sought to swiftly restore the suspended international gold standard at pre- war parity and reconstruct the European economy. The United States took the lead and returned to the pre-war gold standard in June 1919. (Shizume)

In the UK it took a little longer. Here the intended return to the gold standard was accompanied by a heated debate between certain economists that were not in favor of returning to the gold standard (at least not at pre-war parity) on the one side, and politicians, business leaders and other pro gold standard advocates on the other. In Britain John Maynard Keynes was the most vocal opponent to the reactivation of the gold standard in its pre- war embodiment. He asserted in 1925 that the UK should not return to gold at the prewar exchange rate, because the equilibrium exchange rate had shifted significantly due to international price divergence. He predicted a recession if an overvalued exchange rate was chosen. Keynes calculated that at the prewar parity the sterling pound would be overvalued by roughly 10 percent. (Ohno) Nevertheless did the United Kingdom entered the gold standard in April 1925 (Shizume) and with the U.K. basically the majority of industrialized nations returned to the gold standard by the middle of the 1920's at its pre- war parities.

Although throughout the 1920s, restoring the gold standard was considered as an important economic goal in Japan (Ohno), it chose not to join the other major countries. At least not during the 1920s

. Japan had good reasons for being hesitant. Apart from the prolonged instability in the domestic financial system, policymakers feared that Japan might be unable to sustain the gold parity after returning to the gold standard. The main concern was Japan's persistent trade deficit during the 1920s, which was a consequence of waning competitiveness due to the high prices of domestic goods compared to foreign goods. By running a significant trade deficit for an extended period of time, the nation's specie and foreign reserves, which Japan had accumulated via huge trade surpluses during the War period, were ever more declining  (Shizume)

But the supporters of the gold standard in Japan, mainly to be found in the Japanese business elite, did not give up easily. Not only did they lobby politicians in Japan, but also supported pro gold standard campaigns in the media. (Hamada et al.) Finally, the gold standard supporters won out at the end of 1929. Dissenting voices like those of Tanzan Ishibashi, economic journalist at Toyo Keizai Shimposha, arguing for a return to the gold standard at a new, more depreciated parity, were in the minority camp and not heard. (Ohno)

It was the Minsei Party government (July 1929-April 1931), with Prime Minister Osachi Hamaguchi, Finance Minister Junnosuke Inoue, and Foreign Minister Kijuro Shidehara that deliberately adopted a deflationary policy. Their aim was to prepare the nation for the return to the prewar gold parity through real appreciation.

Eliminating inefficient banks and firms was a welcomed side effect of the deflationary policy. Thus, Inoue implemented a macroeconomic austerity program and deflated the economy. Inoue argued that: „ (...) our economy remains very unstable because of the export ban on gold [the yen’s non-convertibility to gold and the resulting exchange rate fluctuation]. We must liberalize gold exports as soon as possible. But we cannot liberalize gold exports without preparation. What is required in preparation? The government must tighten the budget. The people must accept this fiscal austerity and they themselves must reduce consumption. If that happens, prices will start to fall and imports will begin to contract. That will create an upward pressure on the Yen in the foreign exchange (...) we face a recession without an end in sight. If nothing is done, we will sink deeper into the recession.

In the past, Japan often overcame recessions with the help of external stimuli. But the current situation does not permit such a hope because the European economies are severely weakened by the last war [WW1]. Under such circumstances, we should not hope for foreign demand to bail us out. Recovery must be generated by our hands. There is no way out except through our own austerity (...)" (Essays of Junnosuke Inoue, Vol.1, 1935).  (Ohno)

Unfortunately, the preparation and adoption of the gold standard took place exactly at the worst moment of time imaginable. The black Thursday crash of October 1929 had just severely shaken up Wall Street. The stock market crash only marked the prelude of the Great Depression. Just at a time when Japan was groping through the maze of its own growth slump (Kuronama), and the economic crisis, which was started in the US, swiftly engulfed all capitalist countries, Japan was deliberately and forcefully deflating its economy.

Finally, Japan returned to the gold standard at the prewar parity in 1930, i.e. restoring a fixed exchange rate of 2 yen per dollar, with the overwhelming support of the public. (Hamada et al.) But the result was an utter disaster.


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