Stabilize the Peasant Economy
Governance of Foreclosure by the Shogunate*
F–187
September 2017
This version: November 2017
Yu Mandai†
Masaki Nakabayashi‡
Institute of Social Science
The University of Tokyo

Abstract
Regulation of foreclosure in a financial crisis has been centuries long, often politicizedconundrum to authorities. Japan in the fifteenth and sixteenth centuries had free financial,land and coercive labor markets. They were complementary institutions of the Japan’s
first age of the laissez-faire financial capitalism. It raised the growth but resulted in recurrent financial crises. Therefore, the Edo (Tokugawa) shogunate, 1600–1868, banded
coercive labor, protected peasants’ property right and regulated the farmland-collateralloans. The key was an optimal degree of regulation. The shogunate first banned foreclosure and invited a credit shrink. In the first half of the eighteenth century, the shogunate
introduced legislation to legalize foreclosure of pledged farmland as clarifying the rights
of borrowers. The regulation asymmetrically lowered interest rates for timely repayment.
Keywords: farmland-collateral loans; farmland foreclosure; free labor; peasant ownership; early modern Japan.
JEL: G18; K11; K12; O12; Q15.

* This work was supported by JSPS KAKENHI Grant Number JP17K18558.
†

Historiographical Research Group, Editing Office of the History of the City of Osaka, Osaka Municipal
Library.
‡
Institute of Social Science, The University of Tokyo. Corresponding address: Institute of Social Science,
The University of Tokyo, Hongo 7–3–1, 103–0033 Tokyo, Japan. E-Mail: mn@iss.u-tokyo.ac.jp

Introduction
Introduction
To regulate foreclosure or not. The decision depends on how to measure the benefit of stabilizing the society and the cost of congealing the financial market. This was the challenge
facing state governments in the US after the financial crisis, for instance, because a rush of
foreclosure could have a substantial negative spillover through the rise in crime rate and thefall in property prices (Schuetz, Been and Ellen (2008); Alm, Buschman and Sjoquist (2014);
Hartley (2014); Zhang and Leonard (2014); Gerardi, Rosenblatt, Willen and Yao (2015); Ihlanfeldt and Mayock (2015); and Cui and Walsh (2015)). Furthermore, a foreclosure tends
to be costly, regarding the transaction cost, to both the lender and the borrower (Posner andZingales (2009) and White (2014)). With the justification, regulation of and intervention in
foreclosures are often politicized (Agarwal, Amromin, Ben-David and Dinc (forthcoming)).
The challenge is a conundrum to authorities. In the first place, a more borrower-friendly
foreclosure law might not decrease the number of default (Demiroglu, Dudley and James(2014)). Furthermore, regulations of foreclosure increase the loan losses of lenders (Clauretieand Herzog (1990)). Thus, protection of borrowers by the regulations on foreclosure, being
internalized by lenders, might raise borrowing costs of riskier borrowers in particular (Goodman and Levitin (2014)) or check the supply of derivative finance (Milonas (forthcoming)).
Furthermore, the lenders’ loss due to regulations of foreclosure might contain the credit supply
and involve the welfare reduction (Gerardi, Lambie-Hanson and S. (2013); Xu (2014); Cordelland Lambie-Hanson (2016); Jou and Lee (2016); Dagher and Sun (2016); and Li and Oswald(2017)). A foreclosure regulation is thus inevitably accompanied by a trade-off between theeconomic growth and the social stability. Due to these entangled elements, the foreclosure
process has evolved being often driven by case laws rather than statute laws (Ghent (2014)),1

except for emergencies like the 1930s or the late 2000s.
If possibly foreclosed assets are production inputs, i.e., farmland, the trade-off could beeven more complicated. Foreclosures largely depend on the gap between farmers’ optimistic
expectation of business cycles and the realized ones (Alston (1983)). While a possibilityof foreclosure gives a discipline to farmers, it might trigger an unrest in a contagion (Stock(1984)). A longer tenure or a better legally protected tenure tends to provide cultivators withgreater incentives for investment (Place and Otsuka (2001); Smith (2004); and Fenske (2011)).
The longest tenure is the infinite one, secured property right (Toumanoff (1984)). These visions often prompt authorities to intervene in the private agricultural financial markets (Alston(1984)).
Institutional arrangements of farmland-collateral loans directly affect significance of cultivators’ claim (Johnson (2001)). Peasants’ property right without access to the farmlandcollateral loans would diminish the significance of the property right itself. Meanwhile, thoroughly deregulated farmland-collateral loans might hurt the long-term growth and the social
stability (Guinnane and Miller (1997)). A practical and endogenously formed solution is coexistence of formal and informal financial sectors. The existence of informal sector that tends
to avoid collateral foreclosure lowers the rate of foreclosure of the formal sector through thecompetition (Guirkinger (2008)). Another common way is the intervention in the formal financial market as mentioned above. The shogunate of Japan in the eighteenth century was facedwith the challenge when it sought the optimal regulation of agricultural financial markets tobalance the economic growth with the financial stability.
In the last millennium, Japan saw three distinctive phases of growth in per capita grossdomestic product. The first was from the late fourteenth century when Japan began to catch
up with China. The second one was from the eighteenth century when Japan surpassed China
and caught up peripheral Europe (Figure 1). After outperforming Eastern Europe, it saw the2third phase from the late nineteenth century, which continued to the 1970s when Japan caught
up with ordinary advanced economies such as the UK, though the US and Nordic countries
are still far ahead. We focus on the institutional arrangement of property right protection by
the shogunate in the eighteenth century, a critical moment for Japan to rise beyond China andto catch peripheral Europe.
Several transformations of the state regime and institutions of property right protection until the seventeenth century prepared the growth in the eighteenth century. Until the fourteenth
century, Japan’s soil was under the manorial system where several agents were entitled to fixedincome from a parcel of farmland. Agents who claimed fixed income included the manoriallords at the top such as the Emperor, the imperial family members, large Buddhist temples
and Shinto shrines, nobles, the intermediary rulers such as vassal samurais of the shogunate
and samurais under the Emperor, and the local managers such as landlord farmers. On the
farmland, landlord farmers subcontracted cultivation to landless families. Subcontracting cultivators were residual claimant after paying all tax and rent to the upper stakeholders.
Under this institutional arrangement, multiple agents shared the risk of harvest volatility,and hence it was suitable to medieval Japan whose agricultural productivity was so low thatits per capita output was roughly half China’s (Figure 1). However, under this regime, any
agent had neither the resource nor incentive to make a substantial investment in irrigation or
to make long-term effort to improve the fertility of a parcel of farmland. Manorial lords were
hesitant to invest in the irrigation. Subcontracting cultivators did not settle in a specific placeand moved seeking a better annual contract (Nishitani, Hayashima and Nakabayashi (2017)).
Financial markets were not regulated, and coercive labor, either indefinite or definite, waslegal. Recurrent financial crises accompanied the laissez-faire financial and coercive labormarkets, and when impoverishment by a crisis went beyond the socially acceptable threshold,cultivators rioted demanding for writing-off of their debts. The Muromachi (Ashikaga) shogu-

3Figure 1: Par capita Gross Domestic Product, 730–1850.

Par capita Gross Domestic Product, 7301850

1990 Geary–Khamis dollar
3,000

Japan
China
England

2,500

Northwestern Europe (including England)Southern Europe
Central and Eastern Europe (including Germany)
2,000

1,500

1,000

500

0
730

950

980

1020

1150

1090

1120

1280

1300

1400

1450

1500

1570

1600

1650

1700

1750

1800

1850

Year

Sources: Japan: Fukao, Saito, Takashima and Kida (2017a) and Fukao, Saito, Takashima andImamura (2017b). China: Broadberry, Guan and Li (2017). England, Northwestern Europe,and Southern Europe: Broadberry (2016).
Notes: Point years of estimate for Japan: 730, 586, 1150, 1280, 1300, 1400, 1450, 1500,
1600, 1650, 1700, 1750, 1800, 1850. For China: 863, 878, 980, 982, 1020, 1300, 1400, 1450,
1500, 1570, 1600, 1650, 1700, 1750, 1800, 1850. For England, Northwestern Europe, andSouthern Europe: 1300, 1400, 1500, 1600, 1650, 1700, 1750, 1800, 1850. The other years
are filled by the linear trends between the estimate point years.

4

nate several times promulgated the Ordinance for the Virtuous Governance, which in practiceforced financiers to write off the outstanding debts, responding to a riot, to keep the order ofthe society (Nishitani and Nakabayashi (2017)).
Technological conditions evolved in the fourteenth century. Rice is initially from Southeastern Asia and paddy cultivation in the subtropical zone was extensive. However, incremental technical improvements to make rice cultivation resilient against the cold weather createda labor and skill intensive rice cultivation. It augmented the contribution of more significant
and continuous effort by cultivators. In the fifteenth century, cultivators came to settle in a
specific place and to form a village community with landlord farmers. While landlord farmers
had been responsible for investment in the improvement of paddy fields and drain networks
within a village, the village community as a whole took over the responsibility (Nagahara andYamamura (1988); Nishitani (2017); and Nishitani et al. (2017)).
Furthermore, from the fifteenth century to the sixteenth century, leading samurais emerged
as feudal lords excluding the manorial lords. A lord, now the exclusive state power, often
concluded a contract with a village community in own domain such that as long as the village
paid the stipulated land tax, the lord recognized the autonomy of the village. Now, the village
protected the collective property right of villagers against the lord.
Among lords, Hideyoshi Toyotomi (1561–1598) established the administration of the effective central government first since the Onin war, 1467–1477, and his administration commenced a large-scale land surveillance. The surveillance project intended to specify individual
cultivating peasant family of a specific parcel of farmland, to register the family’s name on theLand Surveillance Book (Kenchi Cho), and to protect the individual peasant family’s property right of the parcel the family cultivated. Thus, the plan was to transform ex-cultivators
into small owner peasants. The Edo shogunate, 1600–1868, succeeded and completed thewithin own “crown domain” in the 1670s (Nagahara and with Kozo Yamamura (1981); Aoki

5

(2001), pp. 257–258; Nishitani et al. (2017); and Nakabayashi and Moriguchi (2017)), lordsin the backward regions did not necessarily introduce the property right protection of peasantsbecause provision of property right meant imposition of the risk of harvest volatility on peasants and hence not desirable if productivity was low and farmers were vulnerable to the risk.1
However, most lords in advanced regions followed the shogunate institution of property rightprotection.
Early modern Japan was a federation where the shogunate and lords assumed exclusive
sovereignty for domestic affairs within own domains. Exerting the exclusive taxation authority, now the shogunate and lords had both the motivation and the resource for investment inmass reclamation. Reclamation of alluvial plains was conducted across the country in theseventeenth century (Yamamura (1981)). From 1600 to 1721, rice output is estimated to haverisen from 31 million koku2 to 49 million koku and the population from 17 million to 31 million.3
The combination of the mass investment in infrastructure and the protection of peasants’property right provided a technological environment for intensive rice cultivation and incentives for peasants to improve techniques and to make more significant and continuous effort
for generations. The combination resulted in a jump of the size of the Japanese economy
in the seventeenth century. The achievement, however, presented another challenge to the
shogunate. The property right, composed of the residual control right and residual claim (Hart(1988)), provides the property holder with incentives to use the property better. To enhanceefforts of cultivating peasants, the shogunate and lords recognized the property right of them.
Furthermore, to improve the productivity of the intensive rice cultivation by peasants, agricultural finance for fertilizers was essential. Thus, the shogunate needed to allow peasants1

A typical example is the Lord of Kaga, which is now Ishikawa prefecture. See Brwon (1993), pp. 39–112.
1 koku = 1.81 litters.
3
See Fukao et al. (2017b), pp. 284–285.
2

6

to borrow to realize the potential gain from the protection of property right. However, if thefinancial market were not regulated at all, the outcome would be the polarization of farmland
ownership again as with the medieval times, and the social instability of medieval Japan would
be provoked. Therefore, the shogunate needed to regulate the markets of farmland-collateralloans in some measure.
Meanwhile, case studies related to foreclosure regulations indicate that the regulation on
foreclosures is likely to lower the supply credit (Xu (2014); Cordell and Lambie-Hanson(2016); Jou and Lee (2016); Dagher and Sun (2016); Li and Oswald (2017); and Chaudharyand Swamy (2017)). Regulating foreclosure meant to balance the economic growth and thefinancial stability. This was the challenge that faced the shogunate from the late seventeenth
century. In the mid-seventeenth century, the shogunate banned farmland trades in principle(Saito (2009)). From the late seventeenth century to the early eighteenth century, the shogunate attempted to go further to ban foreclosure due to loans pledged by farmland but repealed
it because the ban tightened the credit.
We focus on this maneuver by the shogunate to balance the economic growth and the financial stability and analyze legislation toward legalization of foreclosure of farmland whileclarifying the right of borrowers in the early eighteenth century. The previous works, suchas Oishi (1975) and Otsuka (2002), commonly judged the shogunate’s trial and error fromthe seventeenth to the early eighteenth centuries as merely inconsistent. They concluded the
shogunate finally had to follow and tolerate the expansion of agricultural financial markets
despite its idealism to protect peasant economy against the forces of the market economy. We
have an entirely different view. With counting the shogunate objective function, peasants’ risk
attitude, and the harvest volatility risk, we can consistently understand the apparently contradictory policies tried by the shogunate from the seventeenth to the eighteenth centuries. From
our viewpoint, the shogunate’s on-off regulation and deregulation depended on its measure-7

ment error of peasants’ risk attitude, in despite of holding the consistent vision for policymaking. Then, completion of the legislation in the 1740s to balance the market dynamism and thefinancial stability prepared a further growth from the late eighteenth century.
The rest of the paper is organized as follows. In section 1, we show our analytical framework to depict and evaluate the shogunate’s legislation. Section 2 describes the legislationfrom the late seventeenth century to the early eighteenth century with an emphasis on thedetails of the process from the 1720s to the 1740s. Section 3 examines the outcome of thelegislation in the agricultural financial market, citing a case of a village near in the suburban
region of greater Osaka.

1

Analytical road map of the shogunate history

1.1

Laissez-faire medieval times as the first best

Consider a risk-neutral financier and a risk-averse peasant. The latter borrows principal P in
the spring and repays it back in the fall with interest r. Between the spring and the fall, theborrower finances own life by the loan and might work or not. The shogunate court enforces
the contract, and hence in the fall, the peasant is forced to pay P + r regardless of crop.
The outcome in the fall is assumed to be observable and verifiable while it is assumed to beunobservable whether the borrower has worked between the spring and the fall. Following
Holmstrom and Milgrom (1987), we assume that peasant’s payoff u is approximated by(1)u(e) = 1 − exp{−α [y(e) − (c(e) + r)]},8

where α is the constant risk averse coefficient, y(e) is the outcome in the fall, c(e) is the costof life and effort and e is the level of effort such that e = 1 if the borrower works and e = 0
otherwise. For simplicity, we assume that y(1) = Y +  > 0, y(0) = 0, c(1) = C > 0,c(0) = c > 0, C > c, and Y > C. Here  is a random variable such that E[] = 0 andV[] = σ 2 and captures natural shocks on crop. We consider c as the subsistence level of life.
Let us standardize the reservation utility is 0. Then, the individual rationality constraint of
the peasant is
Y − (C + r) − α

σ2
≥ 0,
2

or,

r ≤Y −C −α

(2)

σ2
.
2

We also standardize the reservation utility of the financier is 0, and hence the financier provides
agricultural finance if r ≥ 0.
The incentive compatibility constraint of the peasant, E[u(1)] ≥ E[u(0)], is,σ2Y − (C + r) − α ≥ 0 − (c + r),
2
or,

(3)

Y ≥C −c+ασ2.
2Condition (3) just means that the effort by the peasant is technically productive given own
risk attitude, α. That is, as long as the effort is technically desirable, the peasant works andinterest rate r is set such that all surplus belongs to the financier where condition (2) is satisfied
by equality, r∗ = Y − C − ασ 2 /2. An increase in productivity is earned by the financier and9wealth inequality between the financier, and the peasant grows year by year.

1.2

Liberalization of labor

Incentive compatibility constraint (3) assumes that in case of a bad crop, y(e) = 0, the payoffof the peasant is −(c + r) or −(c + r) − ασ 2 /2, depending on whether he has worked. This
amount should be somehow financed. It is feasible if he sells himself as a coercive laborer
and receives the cost of his subsistence level of life, c and the return on his effort in a season,r. Now suppose that the shogunate decides that coercive labor be inhuman and bans it. Then,in case of a bad crop, the financier has to disclaim interest r and to transfer the cost of a
subsistence level of life c from the principal P . Now, the incentive compatibility constraint
with abolition of slavery and indentured labor is,

Y − (C + r) − α

σ2
≥ c,
2

or,

(4)



σ2
r ≤Y − C +c+α.
2
Condition (4) implies the optimal interest rate is,(5)r† = Y − (C + c + ασ 2 /2).

Thus, if agriculture is reasonably productive in labor input such that Y ≥ C + c + ασ 2 /2,
agricultural finance would be offered, but it would not otherwise. In other words, the free labor
is socially affordable only in a productive economy but not otherwise. It is not occasional thatcoercive labor like slavery and indentured labor has been experienced in many economies in

10their early stages of development (Steinfeld (1991, 2001)).

1.3

Regulation of foreclosure

Now assume that the shogunate is the maximizer of the utility of peasant such that peasantsare enthusiastic political supporters of the shogunate and assume that it regulates foreclosure
somehow. We characterize the regulation such that in case of a bad crop, the financier has todisclaim interest r and some portion of the principal, sP , where s ∈ [0, 1]. Incentive constraintof this case is,

Y − (C + r) − α

σ2≥ sP + c,
2

or,

(6)



σ2
r ≤ Y − C + c + sP + α.
2Condition (6) and r ≥ 0 imply

(7)

s≤

2 (Y − C − c) − ασ 2≡ s∗
2PFor s > s∗ , agricultural finance is not offered and hence peasants instead suffer fromthe regulation. Thus, provided that now Japanese economy is productive enough to prohibit
coercive labor such that Y ≥ C + c + ασ 2 /2, the shogunate must pin down s∗ . If s > s∗ ,peasants would find themselves in difficulty raising fund for fertilizers. If s < s∗ , wealthinequality would rise year after year and finally peasants might riot against the shogunate.
Here is a conundrum facing the shogunate.
Proposition 1. The more volatile the harvest is, or, the more risk-averse the peasants are, the11less should be stringent the regulation of foreclosure of farmland.
Proof. s∗ is decreasing in α and σ 2 .
Furthermore, given s, the optimal interest rate is given byσ2
r = Y − C + c + sP + α
,
2
‡

(8)

from condition (6). From (5) and (8), we define the transfer by the foreclosure regulation as

T ≡ r† − r‡ = sP.

(9)

An immediate result is,
Proposition 2. Given that condition (7) is satisfied, the transfer from the financier to thepeasant is increasing in the degree of foreclosure regulation, s.
Note that optimal degree of intervention is not increasing but decreasing in the degree ofrisk-averseness of peasants or the magnitude of crop volatility. The upper bound of s by (7),s∗ , where r = 0, decreases in the degree of risk-averseness α and the variance of crop σ 2 .
Thus, if α or σ 2 increases but the shogunate does not lower s, agricultural finance would not
be offered, and the peasant would suffer from the credit crunch. The greater risk or greaterrisk-averseness implies a greater risk premium to satisfy incentive compatibility constraint(6) and hence, implies a smaller degree of regulation of foreclosure s∗ . A greater regulationof foreclosure, s, corresponds not more but less risk-averse peasants in a not more but lessvolatile environment.

12

2Trade off between the growth and the stability

2.1

Creation of mass property owners

The village contractor system, under which a village and the lord who governed the village
concluded a contract that as long as the village paid the stipulated land tax, the lord respected the autonomy of the village, prevailed in the advanced regions in the sixteenth century.
Hideyoshi Toyotomi reunified Japan and implemented a land surveillance project. Regarding
the land tax collection, the Toyotomi administration recognized the village contractor system.
An institutional development was on property right protection. Under the pre-existing village contractor system, lords in practice admitted the joint property right of the villagers as awhole. By contrast, the land surveillance by the Toyotomi administration intended to specify
a cultivator of each parcel of farmland and to recognize the cultivator’s family as the ownerof the parcel as long as the family paid the stipulated land tax. The Toyotomi administration
requested other lords to follow the policy (Araki (1986) and Hall (1981)).
Ieyasu Tokugawa (1543–1616), who established the third shogunate in Edo in 1600, inherited the policy. The Edo shogunate completed the land surveillance project in the 1670s in
its “crown domain” it directly ruled. The results of the surveillance were recorded in the Land
Surveillance Book (Kenchi Cho) that specified each parcel of farmland and the name of thehousehold head of the family that cultivated the parcel. Two copies of the Land SurveillanceBook (Kenchi Cho) were created. One copy was held by the magistrate who governed theregion, and the other was held by the mayor (nanushi) of the village. The mayor was selectedfrom farmers of the village by the shogunate. The land surveillance was not often conducted,
and changes of owner due to transfer and inheritance were recorded in the Name Collection
Book (Nayose Cho) by the mayor.
Under the shogunate judiciary system, the village mayor (nanushi)was the judge for the13

first instance. The mayor (nanushi) was also responsible for land tax collection from families
registered in the Land Surveillance Book (Kenchi Cho) or the Name Collection Book (Nayose
Cho). Thus, the village handled daily administrative and legal procedures related to the transfer of the property right and land tax collection. However, whenever a party had a complaint
against a judgment by the mayor in dispute, the party was allowed to file the complaint at the
court of the magistrate who governed the region. Different from mayors, magistrates were
shogunate officials of the samurai class. If the issue was considered to be hard to judge basedon precedents, the magistrate sent the case to the Conference Chamber (Hyojo Sho) of the Edo
Castle. The Conference Chamber consisted of the Governor of Temples and Shrines (Jisha
Bugyo), the Secretary of Treasury (Kanjo Bugyo), and the Governor of Edo (Machi Bugyo)
and was the last court of appeal. Thus, registration of the name of the household head withspecifying the parcel of farmland the family cultivated on the Land Surveillance Book or theName Collection Book satisfied the requirement of perfection for the family’s property rightof the parcel. The shogunate court protected the family’s property right against any bystanderwith its enforcement ability (Mandai and Nakabayashi (2017)).
Along with its effort to specify cultivating peasant families as small property owners and tolegally protect their claim, the shogunate also banned “perpetual” sale and purchase of farmland in 1643. While the ban aimed to keep owner peasants from falling into landless tenant
farmers, the ban made owner peasants face a difficulty in borrowing. Loan contracts pledged
by a parcel of farmland (shichiire) were strictly enforced by the shogunate court and hence
was the least risky if foreclosure of a pledged parcel of farmland was legal. However, foreclosure of farmland implies a “perpetual” transfer of land ownership and hence, with the ban of“perpetual” sale and purchase of farmland, enforcement of foreclosure by the shogunate court
could be tricky. Because the shogunate delegated daily administrative tasks to villages, it wastechnically difficult for the shogunate to monitor trades of farmland directly. However, any

14

transfer of property right had to be signed and sealed by the mayor (nanushi) of the village inwhich the parties dwelt for the transferred property right to be legally protected by the shogunate court. Then, if a mayor signed and sealed a contract to sell and purchase “perpetually”
a parcel of farmland, the mayor was removed by the shogunate.4 The removal of the mayor
could be the case if one party filed a complaint at the court of the magistrate. Trades between
two parties who dwelt in different villages were technically impossible because neither mayor
had jurisdiction and a legal authorization had to be given by the magistrate. Therefore, although it was technically possible to perpetually “sell” a parcel of farmland if the both parties
were residents of the same village and neither party had a complaint, most mayors would wantto avoid it.
A circumvention was a sale contract with a finite duration or a pledge contract with a clausethat allowed the borrower to redeem the pledged parcel of farmland after it was foreclosed(Otsuka (2002) and Saito (2009)). A similar tendency of informal deferring or exemption of
foreclosure is observed among US small community banks. The more banks depended on asmall local mortgage market, the less likely was the foreclosed the collateral in the US in the
2000s (Fogel, Kali and Yeager (2011)).
Meanwhile, a letter by the Secretary of Treasury (Kanjo Bugyo) of the shogunate in 1666
required seals from the mayor (nanushi) and the five fellow villagers, adding to those of thelender and borrower, in the contract of pledging (shichiire) contract, while it reconfirmed theban of “perpetual” sale and purchase of farmland. The requirement was for the obligation andclaim of pledging (shichiire) contract to be protected by the shogunate court, thus to make it
clear that pledging was legal.5 By this law, pledging (shichiire) was formally protected by the4“Decision in 1744, in case of perpetually selling a parcel of farmland, the mayor who sealed the contract should be removed,” decision by the Conference Chamber (Hyojo Sho) in 1744, “Kujikata Osadame Gaki
(Judiciary Rules)” in the Legal History Society and Ryosuke Ishii, eds., Tokugawa Kinreiko, Bekkan (Bans by
Tokugawa, Supplementary Volume), Tokyo: Sobunsha, 1961, p. 72.
5
It was in the reign of the fifth shogun, Tsunayoshi Tokugawa (1646–1709), in office from 1680 to 1709.

15

shogunate court without exception as “cases related to real right (honkuji).” The shogunate
understood that the legal protection of pledge was the essential benefit of peasants because it
lowered interest rates when they borrowed (Oishi (1975), p. 95).
With the legal protection, the lenders’ loss was expected to be smaller for a pledge contract
without a special clause on redemption after foreclosure than that with such a special clause
and would offer lower interest rates due to the smaller expected loss. Accordingly, moreborrowers chose pledge contracts without a special clause of redemption after foreclosure.
Then foreclosure emerged as a sensitive issue. If the foreclosure were permitted and legally
protected, it would obscure the ban of “perpetual” sale and purchase of farmland. Handling
this was a new challenge facing the shogunate in the late sixteenth century.

2.2

To regulate foreclosure or not

In 1687, the shogunate banned foreclosure. Observing that the ordinance tightened credit,in 1695, the shogunate introduced legislation toward legalization of foreclosure. The newlegislation required that a loan contract specified the condition under which the borrower could
redeem the pledged parcel of farmland before the due of repayment and that the lender andthe borrower concluded a tenancy contract under which the latter performed cultivation as atenant farmer, adding to the loan contract. Provided that these conditions be met, foreclosure
was enforced by the shogunate court (Oishi (1975), pp. 98–118).
The shogunate once suspended this legalization in the reign of the eighth shogun, Yoshimune
Tokugawa (1684–1751), in office from 1716 to 1745. In 1722, the shogunate banned foreclosure again, intending to stabilize the peasant economy. The outcome was only a turmoil in
agricultural finance, and the shogun repealed the ban in 1723. However, the repeal was not a
simple resumption of legislation before 1722. The shogunate attempted to develop legislation
to protect borrower’s claims securely.

16

First, in case of nonfulfillment of obligation of a loan pledged by a parcel of farmland(shichiire), the magistrate in charge of the county set a new time limit for repayment, depending on the borrowed amount, after the lender filed a suit. Then, only if the borrower did not
repay the loan by the new limit, foreclosure was enforced.6 The new limit, or the extension
was 30 days if the amount was less than 5 ryo in cash or 5 koku in rice, 60 days if 5–10 ryo
or 5–10 koku, 100 days if 10–50 ryo or 10–50 koku, and 250 days if 50–100 ryo or 50–100
koku.7
Three types of tenancy contract were considered. The first was “direct tenancy (jikikosaku)” contract, by which the borrower of a loan contract pledged by a parcel of farmland utilized the pledged parcel of farmland as the tenant farmer. The second was “different
tenancy (betsu kosaku)” contract, by which the pledged parcel of farmland was utilized by another farmer than the borrower of a pledged loan contract. The last one was “registered paddy
field tenancy (myoden kosaku)” contract, by which a farmer utilized a parcel of farmland thatwas not pledged. In the first case, if the stipulated rent was not paid by the due date, the magistrate in charge of the county set a new limit after the lender filed a complaint and allowed
foreclosure of the pledged parcel when the rent was not paid during the extension. In thesecond and the third cases, if the rent was not paid by the due date, the magistrate in chargeof the county set a new limit. If the rent was not paid during the extension, the magistrate
forced the tenant farmer to back the parcel he utilized to the owner, seized the tenant’s home
6

September 2, 1723, decision by the Conference Chamber (Hyojo Sho);
As was until 1721, the new limit shall be ordered if the contract period expires, and if it is notcleared (during the extension), regardless of whether the contract specifies foreclosure, eithertransfer or foreclosure shall be allowed, and in this regard, the procedure shall be applied to acontract with call provisions (that allows the borrower to repay before the due).

“Kyoho Senyo Ruishu, Shi no Ge, Kuji Saikyo no Bu Sanju Hachi (Selected Acts from Kyoho (Japanese calendar,
1716–1736), Second Half of Volume 4, Section of Judiciary, 38), included in the Digital Collection of the Libraryof the Diet (http://doi.org/10.11501/2572769).
7
October 2, 1723, decision by the Conference Chamber (Hyojo Sho), “Kyoho Senyo Ruishu, Shi no Ge Kuji
Saikyo no Bu, Sanju Hachi (Selected Acts from Kyoho (Japanese calendar, 1716–1736), Second Half of Volume
4, Section of Judiciary, 38).”

17

and contents, and forced the tenant to pay the rent by the seized home and contents.8
A point was in procedures of the foreclosure in case “direct tenancy (jiki kosaku)” contract,which was a typical setting of finance for owner peasants. When the borrower continued toutilize the pledged parcel of farmland, the lender and the borrower were required to conclude
a “direct tenancy (jikikosaku)” contract. If the borrower was not the mayor (nanushi), bothcontracts should be sealed by the mayor, and if the borrower was mayor, the contracts should
be sealed by the vice mayor (kumigashira). If these procedural requirements were not met,a complaint filed by the lender should be rejected by the act of 1723.9 Then the act of 1729
allowed such a complaint to be filed, but stipulated that it should be handled as a secured loan
contract (kakiire), which was a “legal case of financial claim (kane kuji),” not as a pledged
8

September 2, 1723, decision by the Conference Chamber (Hyojo Sho);If (the rent payment of) the direct tenancy (jiki kosaku) is overdue, then the new limit shall beordered depending on the amount (for which the tenant is responsible), and if it is not cleared(during the extension), then the pledged parcel of farmland shall be seized within the duration (ofthe pledged loan contract) and shall be transferred to the lender.
If (the rent payment of) a different tenancy (betsu kosaku) is overdue, then the new limit shallbe ordered depending on the amount (for which the tenant is responsible), and it is not cleared(during the extension), then the tenanted parcel of farmland shall be restored to the owner and theall possessions of the tenant shall be seized.
If (the rent payment of) tenancy of the registered paddy field (myoden kosaku) that is not pledged
is overdue, then the new limit shall be ordered following the preceding item, and if it is not cleared(during the extension), the parcel of farmland shall be restored to the owner and all possessions of
the tenant shall be seized.

“Kyoho Senyo Ruishu, Shi no Ge Kuji Saikyo no Bu, Sanju Hachi (Selected Acts from Kyoho (Japanese calendar,
1716–1736), Second Half of Volume 4, Section of Judiciary, 38).”
9This procedure was reconfirmation of the decision in 1718.
August 11, 1718, decision by the Conference Chamber (Hyojo Sho);
If a pledged loan contract is not sealed by the mayor, the case shall be rejected, and in case (theborrower) is the mayor, if it is not sealed by the fellow mayor (ai nanushi) or by the vice mayor(kumigashira), then the case shall be rejected.
September 2, 1723, decision of the Conference Chamber (Hyojo Sho);
Without being sealed by the mayor (nanushi), the case shall be rejected, but even if the seal is (notofficial but) for (private) contract, shall be taken as long as it is sealed, in this regard, however, if
the mayor is the overdue borrower, the case shall be rejected if it is not sealed by the fellow mayor(ai nanushi) or the vice mayor (kumigashira).
In case a village was composed by benefices of more than one vassal samurais, more than one mayor could be
appointed, and they were called fellow mayors (ai nanushi).

18

loan contract (shichiire), which was a “legal case of real right (hon kuji).”10 The legal protection of a “legal case of financial claim (kane kuji)” was so weak that enforcement by the
shogunate was not warranted, but a private settlement was encouraged. Furthermore, in casethe claim of a pledged loan contract should be rejected because the contract did not meet therequirements, the claim for rent from the tenancy contract with the borrower was dismissed,
too.11 In addition, in case of foreclosure of the pledged parcel of farmland with the “direct
tenancy (jiki kosaku)” contract, foreclosure of the pledged parcel of farmland was enforced,
but the lender was forced to renounce the claim for unpaid rent by the act of 1738.12
The shogunate also elaborated conditions for redemption after foreclosure by the act of1737. The shogunate allowed redemption after foreclosure for ten years from the due dateof the original loan contract if the original contract did not mention the due of redemption
and ten years from the date of borrowing if the contract indicated call provisions. Beyond theduration of redemption, the “perpetual” that allowed redemption, transfer of property right tothe lender was confirmed.13
The delay of foreclosure process and possible redemption after foreclosure are the mea10

September 21, 1736, decision by the Conference Chamber (Hyojo Sho);
Since 1729, if a loan contract pledged by a parcel of farmland shall not be considered a loan
contract pledged by a parcel of farmland because it lacks the seal of the mayor (nanushi) or thesignature and the address (of the mayor), it shall be handled as a secured loan contract (kaki ire).

11

August 4, 1725, decision by the Conference Chamber (Hyojo Sho);
In case (a suit of) the primary contract of a loan pledged by a parcel of farmland is entirely rejected,
the overdue of rent payment shall be rejected, too.

12

February 25, 1738, decision by the Conference Chamber (Hyojo Sho);
In case an overdue of the direct tenancy (jiki kosaku) of a loan contract pledged by a parcel offarmland is filed, the pledged parcel shall be foreclosed to the lender, and the lender shall beordered to renounce the claim for overdue of the rent.

The Legal History Society and Ryosuke Ishii, eds., Tokugawa Kinreiko, Koshu Daini (Bans by Tokugawa, Second
Series, Volume 2), Tokyo: Sobunsha, 1960, p.161
13“Ordinance of loans pledged by a parcel of farmland,” from the magistrate to villages in Kanto and the Stateof Izu, February 1737, in the Legal History Society and Ryosuke Ishii, eds., Tokugawa Kinreiko, Koshu Daini(Bans by Tokugawa, Second Series, Volume 2), p. 158.

19

sures taken by some states in the US, in particular, in the mortgage crisis from 2008 (Gerardi
et al. (2013); Demiroglu et al. (2014); Goodman and Levitin (2014); Xu (2014); Cordell andLambie-Hanson (2016); Jou and Lee (2016); Dagher and Sun (2016); and Li and Oswald(2017)). The shogunate shared the aim and measure to protect borrowers with such states.

2.3

Measurement error of risk tolerance with a consistent viewpoint

The ban of foreclosure of 1722 and the repeal of it in 1723 have been primarily considered
an unrealistic nostalgist policy and its failure. Previous works such as Oishi (1975) or Otsuka(2002) argued that the failure showed the shogunate’s incompetence to resist the forces of themarket and to protect owner peasants by its legislation. Thus they held that the shogunate
made a fundamental shift in its land policy between 1722 and 1723, from an idealist antimarket approach to a reluctant acceptance of ongoing market expansion, assuming that theshift was driven by contrasting and contradictory aims. In particular, Oishi (1975) attributed
the ban of foreclosure of 1722 to the leadership of a minister in the cabinet (Roju), Masamine
Inoue, who was more progressive or idealist than the other ministers. He was one of theleading ministers who agreed with the appointment of Yoshimune Tokugawa as the eighth
shogun, and so the other ministers and even the shogun himself hesitated to oppose to hisleadership when he suggested the ban, Oishi (1975) argued (Oishi (1975), pp. 119–133).
However, the policies for free-entry markets whose pillars were the abolition of guilds(za) and legal enforcement of contracts were adopted by the leading lords in the late sixteenth
century, like Nobunaga Oda (1534–1582) and his successor, Hideyoshi Toyotomi (Wakita andwith James L. McClain (1981)). The shogunate purposefully implemented the policy in its“crown domain,” which included the financial, commercial and political centers Osaka, Kyoto, and Edo (Sakurai (2002)). For instance, when the Magistrate of Kyoto (Kyoto Shoshidai),
Shigemune Itakura promulgated an act that reconfirmed the free entry market policy, he re-20

assured that “the promotion of free trades of merchants from various states (within Japan)
is compelling to the utility of the people.”14 The shogunate officials had pursued marketenhancing policies by intention, and it is unlikely that they did not understand the virtue of themarket economy as of the early seventeenth century.
At the same time, the laissez-faire policy of the Muromachi shogunate led to recurrent
financial crises and resulted in riots of peasants who demanded the authority to force financiers
to write off their debts. Responding to the riots, the Muromachi shogunate and lords frequently
promulgated the Ordinance for Virtuous Governance that forced financiers to write off debts.
Lords had learned the experiences. They are likely to have understood that to avoid the turmoilof the financial markets due to forced renunciation of financial claims and to promote theexpansion of free-entry markets, both the capable judicial system and the contained financial
instability were necessary. A reasonable inference would be that they attempted to balance thelegal protection of financial claims and the financial stability to be bolsters by regulation.
Indeed, our detailed inquiry on legislation during the reign of Yoshimune Tokugawa depicts a facet consistent with the inference. From 1723 to the 1730s, the shogunate designed
specific terms that should be met for a pledged loan contract to be legally protected as a “legal case of real right (honkuji)” by the shogunate court. Clarifying the conditions reduced
expected lenders’ loss due to ambiguity and hence the policy was likely to lower the interest
rates. At the same time, the procedural requirements established under the reign of Yoshimune
Tokugawa raised transaction costs as it required the lender to file the first lawsuit at the time of
overdue and to file the second complaint at the time of non-fulfillment of the repayment during
the extension set by the magistrate. The intention of the acts was likely to raise transaction
costs of foreclosure of a pledged parcel of farmland of owner peasants. Although effects of
14“Machi ju furegaki (Ordinance to the City),” Shigemune Itakura, Governor of Kyoto, August 20,
1622 (http://www.wul.waseda.ac.jp/kotenseki/html/bunko12/bunko12_00109_0001/
index.html).

21

the policy might have conflicted one another, the policy came about from one aim to protect
interests of owner peasants and stabilize the peasant economy.
Furthermore, our analytical framework captures intrinsically consistent rationale of boththe ban of foreclosure and the approval of foreclosure with building procedural requirementsof foreclosure. The ban of foreclosure of 1722 was, in short, the maximum regulation of
foreclosure, s = 1, and allowing foreclosure with additional procedural requirements wass ∈ (0, 1).
To evaluate the land policy of the reign of Yoshimune Tokugawa, we may also focus on
the tax reform under the administration. Under the Yshimune administration, the land tax
was transformed from the fixed rate of the crop, roughly 30 percent of agricultural output and20 percent of total output, to the fixed amount (Nakabayashi (forthcoming)). With the fixedamount taxation, the residual entirely belonged to owner peasants while peasants incurred all
the risk of crop volatility. Therefore, if the peasant was sufficiently risk-tolerant or the crop
volatility was sufficiently small, the peasants would be more strongly motivated to make efforts under the same expected land tax. Therefore, the fixed amount taxation was introduced
by lords in advanced Kinki regions surrounding Osaka and Kyoto. The Yoshimune administration followed suit in the shogunate “crown domain,” which dispersed across the country
while it concentrated in Kanto surrounding Edo and Kinki. The policy was successful andeconomic growth picked up. In other words, the Yoshimune administration considered thatowner peasants were highly risk-tolerant when implementing the reforms. (Araki (1986) andNakabayashi (2012, ?)). The shogunate decision of transformation to the fixed amount taxation means that the shogunate evaluated σ 2 became sufficiently small or α became sufficiently
small.
The most optimistic evaluation of σ 2 and α implies s = 1, that is, the ban of foreclosureof 1722. If it was an error, however, a credit crunch should occur as predicted by Proposition22

2, and it did. Then the shogunate attempted to pin down optimal s∗ by building the procedural
requirements for foreclosure. Next, we examine the outcome of the policy from 1723.

3

Outcome of the policy

3.1

Trend of the real interest rates

First, let us review the general trend of the interest rates in early modern Japan. Figure 1 draws
real interest rates by a significant financier, Konoike of Osaka, to lords. A tendency was thatinterest rates of new loans were higher than those of existing loans, reflecting relational financethen. If a lord defaulted, a case between Konoike, a shogunate subject, and the lord was theinter-domain one whose jurisdiction was technically assumed by the shogunate. However, acharge to a lord had to be drafted by the Conference Chamber (Hyojosho) composed of theGovernor of Temples and Shrines (Jisha Bugyo), the Secretary of Treasury (Kanjo Bugyo), and
the Governor of Edo (Edo Machi Bugyo), approved by the Cabinet (Roju), and given by the
shogun. In short, in early modern federal Japan, an intervention in lords by the shogunate wascomplicated and troublesome. Thus, the shogunate in principle did not intervene in lending
from a financier in a shogunate city to a lord. In transactions with lords, financier needed
to rely on relational finance that motivated the client lords to repay the debt by a long-term
relationship. Thus we see a gap between the new loans and the existing loans, but a definite
trend was that interest rates of both were decreasing throughout the early modern times. The
reputation mechanism in the financial market disciplined lords well, and the risk premium
declined over time. Also, the age of mass reclamation ended by the early eighteenth century.
The decrease in interest rates seemed to reflect the matured economy, too.
The same trend was observed in loans to farmers. Figure 3 takes a case of lending by awealthy farmer, Kondo, in the Village of Tarotayu, Kato County, State of Harima, near Osaka.
23

Figure 2: Real interest rates of loans to lords, 1670–1852.

annual rate, %Real interest rates of loans to Lords, 16701852

18401844 prices

70

60
Existing loans

New loans

50

40

30

20

10

1670
1673
1676
1679
1682
1685
1688
1691
1694
1697
1700
1703
1706
1709
1712
1715
1718
1721
1724
1727
1730
1733
1736
1739
1742
1745
1748
1751
1754
1757
1760
1763
1766
1769
1772
1775
1778
1781
1784
1787
1790
1793
1796
1799
1802
1805
1808
1811
1814
1817
1820
1823
1826
1829
1832
1835
1838
1841
1844
1847
1850

0

Sources: Interest rates: Yasuoka (1998), pp. 50–53. Price index: Fukao et al. (2017a), pp.
288–291.
Notes: Interest rates of loans by the financier, Konoike of Osaka, to lords. The price index
until 1724 is the rice price in Hiroshima, and that from 1725 is the commodity price index of
Kyoto and Osaka.

24The village was under the jurisdiction of the shogunate or partially by the shogunate andpartially by a lord. In such a village, the shogunate law was enforced. Documents that had
been preserved by Kondo family included two kinds of the loan contract. One was of loans
without collateral or secured (kakiire) by a parcel of farmland, and the other was of loans
pledged (shichiire) by a parcel of farmland. Under the shogunate law, a “pledge (shichiire)”
contract required land tax payment by the lender during the duration, while under a “secure(kakiire)” contract, the owner of the collateral-farmland, that is, the borrower, paid land tax.
The difference in legal protection between these contract was substantial. A lawsuit related
to “secure (kakiire)” contract was considered as a “legal case of financial claim (kanekuji)”
and a lawsuit related to “pledge (shichiire)” contract was considered as a “legal case of real
right (honkuji).” The latter could have a recourse to the shogunate court without exception
while the shogunate in principle recommended a private settlement to the former, as describedabove. In short, legal protection of a “pledge (shichiire)” contract was much stronger than thatof “secure (kakiire)” contract.
In a “pledge (shichiire)” contract, often the owner of the pledged parcel of farmland continued to cultivate his parcel of farmland. In such a case, the lender and borrower were required
to make another contract of “direct tenancy (jiki kosaku)” under the act of 1723. Otherwise,
the lender’s claim was not protected by the shogunate court, as described above. Regarding
such contracts, Figure 3 counts tenancy rent from the pledged parcel of farmland over the
borrowed value as the interest rate.
An evident trend was that interest rates were declining over time, keeping a gap between
the interest rates of loans without collateral or “secured (kakiire)” and those “pledged (shichiire). Thus, although the difference in legal protection left the difference in interest rates, bothrates continuously declined through the eighteenth and nineteenth century. The trend seems
to reflect improved law enforcement and matured economy.

25

Figure 3: Real interest rates of loans to farmers, 1748–1867.

annual, %Real interest rates of loans to farmers, 17481867
1840-1844 prices

40

Without collateral or secured by farmland
Pledged by farmland
Pledged by farmland and punctually repaid

35

30

25

20

15

10

5

1748
1750
1752
1754
1756
1758
1760
1762
1764
1766
1768
1770
1772
1774
1776
1778
1780
1782
1784
1786
1788
1790
1792
1794
1796
1798
1800
1802
1804
1806
1808
1810
1812
1814
1816
1818
1820
1822
1824
1826
1828
1830
1832
1834
1836
1838
1840
1842
1844
1846
1848
1850
1852
1854
1856
1858
1860
1862
1864
1866

0

year

Sources: Interest rates: Uemura (1979), pp. 648–649, and the original source is the Archiveof the Kondo Family, housed by the Library of Economic History Group, Graduate School of
Economics., Osaka University. Price index: Fukao et al. (2017b), pp. 288–291.
Notes: Interest rates of loans by a farmer, Kondo of the Village of Tarotayu, Kato County,
State of Harima, to other farmers. The price index is the commodity price index of Kyoto andOsaka.

26

3.2

Discount by legal protection and transfer by foreclosure regulation

Contracts preserved at the Kondo family often included a special clause to discount interest
rates/rents if the borrower timely repaid the debt and a foreclosure of the pledged parcel offarmland was unnecessary. Figure 3 draws this series too. If the shogunate’ legislation did notincur additional transaction costs on lenders in case of foreclosure (s = 0), there should notexist a difference in interest rates of loans that were “pledged (shichiire)” and timely repaid
and those that were “pledged (shichiire)” and foreclosed. In reality, there did exist a certain
difference between them, as shown in Figure 3. Figure 4 draws the difference [(real interest
rates of loans without collateral or “secured (kakiire))–(real interest rates of loans “pledged(shichiire)” and timely repaid)] as the legal protection discount. The value of the discount is
expected to be positive if the shogunate law enforcement was effective. Figure 4 also draws
the difference [(real interest rates of loans “pledged (shichiire)”)–real interest rates of loans“pledged (shichiire) and foreclosed] as the foreclosure regulation premium. If procedural
requirements of foreclosure were trivial or additional transaction costs due to the requirements
were not internalized by the lender, the value should be zero. Otherwise, it will take a positive
value.
Figure 4 shows that the effect of the shogunate legal enforcement was augmented throughthe eighteenth and nineteenth century as shown by the legal enforcement discount. Since
the effective litigation reduces expected loss of financial claim, an improved legal enforcement lowered interest rates. To our interest, intriguing is the foreclosure regulation premium
incurred by delinquent borrowers. When the shogunate completed its legislation toward legalization of foreclosure, it carefully defined the borrowers’ rights. The legislation provided
the borrowers with the gracious period after being filed at the shogunate court, and also, evenredemption after the foreclosure for ten years from the original due date was stipulated by theact of 1737, as described above.

27

Figure 4: Discount by legal protection and premium by foreclosure regulation, 1751–1825.

Discount by legal protection and premium by foreclosure regulation, 17511825

annual, %18401844 prices

15
Legal protection discountForeclosure regulation premium
10

5

0

-5

-10

-15

1825

1823

1821

1819

1817

1815

1813

1811

1809

1807

1805

1803

1801

1799

1797

1795

1793

1791

1789

1787

1785

1783

1781

1779

1777

1775

1773

1771

1769

1767

1765

1763

1761

1759

1757

1755

1753

1751

-20

year

Sources: Interest rates: Uemura (1979), pp. 648–649. Price index: Fukao et al. (2017b), pp.
288–291.
Notes Interest rates of loans by a farmer, Kondo of the Village of Tarotayu, Kato County,
State of Harima, to other farmers. The price index is the commodity price index of Kyoto andOsaka.

28

The deliberated regulations raised the transaction costs for foreclosure and the costs wereinternalized by the lender, Kondo, in the form of the foreclosure regulation premium imposedon delinquent borrowers, as shown in Figure 3 and Figure 4. As seen in the US (Clauretieand Herzog (1990); Gerardi et al. (2013); Goodman and Levitin (2014); Dagher and Sun(2016); Cordell and Lambie-Hanson (2016); and Milonas (forthcoming)), the regulation on
foreclosure was internalized by the lender.
Then, what occurred in shogunate Japan was that setting the subprime interest rate as
the benchmark interest rate and discounted the rate after timely repayment, probably throughwaving the last period repayment and so on. Thus, the difference between the interest rate of
the “pledged” and foreclosed loans and that of the “pledged” and timely repaid loans captures
the transfer T of (9) from the lender to the borrower under regulations by the acts of 1723 and
1737. Lenders internalized the procedural requirements of foreclosure in the way prudential
owner peasants obtained substantial discount of interest rates while delinquent borrowers paid
higher interest rates than otherwise.

3.3

Trial and error in the reign of Yoshimune Tokugawa

We admit that the ban of foreclosure of 1722 was an error, but we do not consider the policy as
inconsistent with the following legislation for the formal legalization of foreclosure regarding
principle. If peasants were sufficiently risk-tolerant (α is sufficiently small) or the risk is
sufficiently small (igma2 is sufficiently small), the optimal regulation of foreclosure, s∗ , would
be high and vice versa. It is likely that the shogunate miscalculated the risk attitude of peasants.
If owner peasants were sufficiently risk-tolerant or the risk is sufficiently small, Proposition
2 predicts that the ban of foreclosure might have worked instead. In reality, owner peasantswere not so risk-tolerant as the shogunate expected. The ban of foreclosure (s = 1) was aglaring error. Then the legislation that technically allowed foreclosure of pledged farmland

29

with procedural requirements that took time (0 < s < 1) allowed the owner peasants who
punctually repaid to earn transfer T . Now did work the consistent policy to benefit ownerpeasants who reasonably used the financial markets.

Conclusion
The ban of foreclosure in 1722 was an error that choked off the credit for agriculture. Then,the legalization of foreclosure with deliberate protection of borrowers from 1723 allowed theborrowers of “pledged” loans (shichiire) to earn a substantial transfer as the form of discountedinterest rates to borrowers who punctually repaid the loans, while the regulation punished thedelinquent borrowers. At least, the regulation prompted transfer from the lender to sustainableowner peasants. However, related regulations were repealed after the Meiji Restoration in
1868.
The ban on “perpetual” sale and purchase of farmland was repealed in 1872. The Land
Tax Reform Act (Chiso Kaisei Jorei) of 1873 re-confirmed the property right of owner peasants through direct handling the property right registration by the central government. The
Ordinance of Secured and Pledged Farmland (Jisho Shichiire Kakiire Kisoku) of 1873 equally
protected the claims of lenders in both of a loan “pledged” by a parcel of farmland (shichiire)
under which the land tax was paid by the lender and a loan “secured” by a parcel of farmland(kakiire) under which the land tax was paid by the borrower who was the owner of the parcel
before foreclosure. It meant that not only a parcel of farmland that “pledged” a loan (shichiire)
but also a secured parcel of farmland that “secured” a loan (kakiire) was now foreclosed by
the state court if the repayment was overdue. Any regulation on the trades and foreclosures offarmland were abandoned in the early 1870s.
As of the early 1870s, the ratio of tenanted farmland over farmland across the country
is estimated to be 27 percent (Furushima (1958), p. 332). The ratio rose to 45 percent in30

the 1900s (Sakane (2002), p. 410). The rise indicates that the shogunate regulations on the
trades and foreclosures of farmland contained the growth in concentration of land ownership.
Other quantitative evidence supports the conjecture. Saito (2015) showed that in the midnineteenth century, income distribution in the state of Choshu, renamed Yamaguchi prefecture
after the Meiji Restoration, was, Samurai class: Merchant class: Farmer class=1.2:1.1:1.0, on
average. Overall, samurais and merchants were wealthier than farmers just 10 to 20 percent.
Income inequality within the same class was undoubtedly substantial. However, as of the
1880s, income inequality of Japan was smaller than the contemporary US and UK although
it was higher than that of contemporary Japan and Germany (Moriguchi and Saez (2008)
and Milanovic, Lindert and Williamson (2021)). Early modern Japan was less egalitarian thancontemporary heavy-weight welfare states like Japan and Germany, but much more egalitarian
than the contemporary laissez-faire states like the US and the UK. A less unequal society
was the long-term result of the regulations of the trades and foreclosures of farmland by the
shogunate.
Although full liberalization of land market accelerated economic growth from the 1880s(Fukao, Settsu and Nakabayashi (2017c)), the cost was social instability. On the one hand,
the land ownership concentrated. On the other hand, as the modern sector grew, reservation
wages of landless farmers rose. They became more demanding concerning the tenancy rent
and requested its reduction in the 1920s, which resulted in tenancy disputes (Arimoto and
Sakane (2008)). Government officials recognized it necessary to roll off the concentration ofland ownership. The Ordinance for Creation and Preservation of Owner Farmers (Jisakuno
Sosetsu Iji Kisoku) of 1926 introduced a mechanism to help tenant farmers to buy out parcels
of farmland they cultivated. It financed from the postal life insurance run by the Ministry of
Finance tenant farmers who wanted to buy the parcel of farmland from landlords. The ordinance was drastically strengthened in 1946 under the US occupation. The landlordism was31dissolved, and the farmland trades were heavily regulated again, which created the contemporary Japanese agriculture dominated by small family farms.
The regulations of the farmland markets by the shogunate contributed to the social stability.
Meanwhile, regulated factor markets appear to have led to less efficient resource allocation of
the entire economy, as the regulations were likely to lower the credit supply. Evaluation of
welfare implication of the benefit and cost of the regulation is beyond our scope. However,at least we can conclude that the shogunate regulations consistently attempted to balance thefinancial stability and economic growth by searching the optimal extent of the regulations.

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