ECONOMICBUSINESS&
4-s"vllft,,KIEil./t

THE RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS
KOBE UNIVERSITY

1957

CONTENTS

Page
The Impact of Exchange Po!icy on the International Economy
of Japan During the Period l930--1940••••••••--••••••••••• Laurence P. DowD •.. 1

A Note on the Recent Trends of Japan's Foreign Trade•••••• Fukuo KAwATA ••. 59
The Development of Overseas Banking System in Japanin the Meiji Era•••••••••-••••••-•••••-•-•••t••i-•J••--•••••••-•-•i Masahiro FuJiTA ••` 69

More on the Structure of National Income Distribution
in Japan••••-•••-••t•••-••••E••••-•••••••••-•-••••••••••••••••••••••••••••••• Nobuko NosE ••• 91

Reconstruction of the Theory of Purchasing Power Parity•••••• Hikoji KATANo ••.125
Tramp Shipping Freights and International Trade ••••••••••L-t•• Ginjiro SHIBATA •••149

A Little Study on the Transition from the Sailing
Vessel to Stearner in Japan•-•--••-••-••••-•••••••••••••••••••-••••-••••-••Seiji SAsAKi ••.165

On the Regulating Policy of Japan Against the Shipping
Conference-Especially in Relation to the Refusal of
the Entry to New Comers ••••--••••••••-+•••••••••-•••••••••• Hiromasa YAMAMoTo ...177

The Price Fluctuation Reserve System in Japan •••••,•••••• Susumu WATANABE ...195

Locational Problem in the New Major Branches ofJapanese Industries from 1954 to 1956•-•••••••••••••••••-•••••-• Minoru BEiKA •••205
Business Problems in an International Situtation••••••••-•••••••-•Tadakatsu INouE ...215

KOBE

ECONOMIC & BUSINESSREVIEW4,<"llgÅé./g

THE

RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS
KOBE UNIVERSITY

1957

Copyright. 19S7, b)' The Researeh

Institute For Econo)nies

and Businegs Administration. The

I<obe Universit)'

THE IMPACT OF EXCHANGE POLICY ON
THE INTERNATIONAL ECONOMY OF
JAPAN DURING THE PERIOD 1930--1940

LAURENCE PHILLIPS DOWD, Ph.D.

CHAPTER IEXCHANGE POLICY AND THE EXPORT TRADE OF JAPAN
Importance of the Continental Venture
Impact on .17aPanese exPorts. One aspect of the export tradeof Japan not generally observed or evaluated by analysts of theJapanese economy was the impact of Japan's continental venture onexports. Prior to 1930, and even in that year, nearly all of Japanese

exports to Manchuria and China earned foreign exchange, whereas
after 1931 a large part was paid for by loans floated in Japan or bydirect investment by Japanese corporations. Yet from the initiationof the venture Japan attempted to develop the Asiatic Continent militaristically, politically, and economically as a major market for Japanese

products and as a source of supply of raw materials for its industries.

Consequently, throughout the decade that area came to be of everincreasing importance in Japan's total exports, and whereas China,
including Manchuria and the Kwantung Leased Territory, received only1

2 LAURENCE PHILLIPS DOWD
a total of 23.4 per cent of total exports in l930, by 1940 the area took

56.1 per cent of the reported total. These figures in themselves weresignificant, but complicating factors, which otherwise adversely affected

Japan's exchange position, made them misleading.
Immediately following the first invasion of Manchuria the Chinese
initiated a boycott ofJapanese products. Consequent reduction of tradewith the unoccupied areas of China meant that a constantly larger
proportioq of total Chinese trade was destined for Manchuria and theoccupi'ed areas. As early as 1934 Japanese exports to Manchuria alone
had increased to \107,151,OOO from \25,947,OOO, or by 313 per cent.
From then until the end of the decade shipments mounted steadily toa peak of \581,592,OOO. In addition Japanese shipments to Dairen,a large part of which were destined for Manchuria, grew from\65,541,OOO in 1930 to \755,829,OOO in 1939, dropping offto \604,294,OOO

in 1940. After 1935 all failed to earn Japan any foreign exchange;
for with the creation of the Yen Bloc the currency became, to all
intents and purposes, the Japanese Yen ; yet the trade still continued

to be included in total Japanese export statistics and in balance of

payments compilations. Had the commodities been manufactured fromraw materials originating in .Japan, the adverse effect on Japan's
international position would not have been serious, though it would

have withdrawn commodities from domestic markets or markets inwhich ,Japan could have earned foreign exchange. However, with theattempt of the Japanese military leaders to develop Manchuria as anindustrial reservoir, the effects were far more serious, for the shipments

to Manchuria consisted in large measure of capital equipment manufactured out of raw materials imported from foreign countries. Fur-thermore, as is discussed more fu11y in the following chapter,
Manchuria and subsequently North China failed to become in any
large measure a substitute source of supply of commodities previously

imported from other areas. •Impact on the exchange Position of the countr2. In addition
to the adverse position in which Japan was placed in her trade with

THE IMPAGT OF EXCHANGE POLICY OF JAPAN 3
Manchuria and the Kwantung Leased Territory, expansion into North
China worsened rather than bettered the exchanges. Whereas purchasesof railroad equipment, machinery and other supplies had previously

been made in Europe and America from Chinese foreign exchange,these supplies were now furnished by Japan, earning no exchange forthat country yet requiring the purchase abroad of a large part of the
raw materials. On top of all this, military operations in China brought

about a severe food shortage requiring diversion of Japanese commodities to that area. Evidence of the impact of the continental
venture on the export of commodities is strikingly apparent from an
examination of commodity trade statistics. For example, machinery
exports stood at \8,392,OOO in 1931, dropped to \6,831,OOO in 1932,
tripled to \18,292,OOO in 1933, and rapidly climbed thereafter to\160,240,OOO in 1940. Marine products rose from \3,535,OOO in 1931
to \57,632,OOO in 1940; canned foods from \639,OOO to \27,297,OOO;
timber from \2,844,OOO to \91,879,OOO and wheatflour from \9,202,OOO
to \54,976,OOO. Cotton fabrics, which stood at \165,441,OOO in l929

and \96,066,OOO in 1930, rose to \285,709,OOO in l937 and thendropped to \204,OOI,OOO in 1939 and \166,589,OOO in 1940. Examina-tion of other commodity statistics shows similar trends to these:that is, capital equipment and foodstuffs climbed steadily with thecaptured market becoming the prime destination of exports, while
non-essential goods after initial rises tended to decline in the latteryears of the decade.
The expansion of exports to the dominated areas caused a continued
drain on exchange reserves to a point that it became necessary for theJapanese authorities to place shipments to the Yen Bloc under oflicial

restrictions which became increasingly severe as time passed. These
ranged from placing a prohibition on the movement of flour milled in

Shanghai to the Yen Bloc area on October 2, 1936, to the exclusionof the region from the link system, and finally to issuance of an orderby the Minister of Commerce and Industry on September 20, 1939,
requiring the specific permission of the control authorities for exports

4 LAURENCE PHILLIPS DOWD
to the Yen Bloc of certain designated commodities. Consequently, an
area which had optimistically been regarded as a new market for the
products of industry and a reservoir of productive capacity for the

military machine came to be a millstone around the neck of theJapanese economy, and forced the political and military authorities todrastically revise their plans for economic development.

The importance of Japan's continental venture was underscored in

an article in the Far Etzstern SurveJ when the observation was madethat:••••••we are forced to conclude, after careful examination of thefacts, that so far as her balance of international payments is con-cerned, Japan's recent diMculties are due not to anything in therealm of trade, but rather to her huge, continuous and in part
artificially forced export of capital to Manchoukuo.
Nevertheless, as serious as the continental venture in itself may havebeen, through absorbing products which otherwise would have been
available for sale in world markets, depreciation of the Yen at the endof 1931 added to the gravity of the situation by making imports fromforeign countries which were destined for the region far more costly

than they would have been had the Yen not been depreciated. Iteven appears likely that without depreciation it might have beenpossible to avoid the severe restrictions on trade subsequently imposed,

and the economic development planned by the political and military
authorities might have been more nearly achieved.

Changes in the Composition of Exports
Decline of the silk trade, Various explanations might be offered
for the failure of raw silk exports to respond to the depreciation of

the Yen at the end of 1932. 0ne of the most obvious would be thatJapanese authorities were pursuing a conscious policy of diversification,and thereby deliberately discouraging the silk trade. However, suchan interpretation is quickly disproved by the fact that the government
actively encouraged Japanese shipping companies to construct new, highTHE IMPACT OF EXCHANGE POLICY OF JAPAN 5
speed vessels, especially designed to permit rapid transportation directly

to New York through the Panama Canal, in the hope of reducing
delivered costs. Another explanation might be that there was serious

over-production in Japan so serious as to make raw silk a glut on
the market. This explanation might be tenable except for the factthat at no time after depreciation did the quantity exported reach thetotals of either 1931 or the years before 1930.

The most probable explanation for the failure of raw silk to
respond to depreciation is that the demand for silk was income elastic
rather than price elastic. This involves the nature of silk as a consumer

good and the position of Japan in total world production. Silk was
and is --- typically a luxury products, and normally luxury pro-ducts respond more to changes in income than to changes in price,
Thus, notwithstanding a substantial reduction in price in the New York

market, with intensification of the depression in the United States

people turned from the purchase of silk to cheaper and more basic
textiles such as rayon and cotton which met biological, though
not aesthetic, needs almost as satisfactorily. With gradual recovery
some increases in purchases of silk took place even at higher prices;

however, the stimulus to American producers to develop satisfactory
substitute textiles curtailed subsequent potential sales as recovery progressed.

The price inelasticity of demand in the United States would nothave been serious for Japan had that country produced only a small
percentage of total consumption. Under such circumstances the depreciation of the Yen would have placed Japan in an extremely favorable
position; for it would have been able to undersell other countries.
However, since it was almost the sole producer of silk traded in world
markets such a beneficial effect was lost, and the general price inelas-ticity of demand reacted directly upon Japan in the form of reduced
fgreign exchange earnings.
The net effect of demonstrated price inelasticity was that the index

of quantity exported up to the inception of World War II showed6 LAURENCE PHILLIPS DOWD
some correlation to changes in personal income in the United States,
but almost no correlation to the average Dollar import price. Explanation of the failure of total value received to correlate with quantity

shipped also rested on internal conditions in Japan, including, as themost important factor, the size of the yearly yield. In any event,depreciation of the Yen failed to bring about recovery of the silk
trade, and at no time in the decade did either quantity or value reachthe total of 1929, and Yen value totals surpassed that of the deflation

year of 1930 only in 1939 and 1940. More important, from 1929
through 1934 Dollar exchange earnings---the largest single sourceof Dollars, since cotton textiles, the other major export product, wasmarketed principally in Asiatic areas----- diminished steadily, and evenafter l934 never reached the amount earned as late as 1931. Although

there was never any one admission--or for that matter even
implied admission--the failure of the reimposition of the gold
embargo ancl the depreciation of the Yen to revive the silk trademust have been a great disappointment to the Japanese financial
authorities, and probably a source of considerable anxiety. It is be-lieved that they had great expections and never considered the possibility that silk would prove to be price inelastic.

Rise of cotton textiles. A superficial examination of cotton
exports would indicate that depreciation had proved beneficial to thatimportant industry in the Japanese economy, for immediately following
depreciation the export value rose sharply and continued to rise until

the inception of the inflation period. However, within these total

figures there were several noteworthy developments which must be
taken into consideration before a decision can be reached. First andmost important, from 1933 through 1938 an ever increasing part ofthe exports was destined for the Yen Bloc area. This meant thata constantly diminishing portion was earning foreign exchange for thecountry. Large and increasing proportion of exports to the Yen Bloc
also meant that the apparent increasing percentage of cotton fabrics
in total exports was an actual decreasing percentage in expor.ts toTHE IMPACT OF EXCHANGE POLICY OF JAPAN 7
foreign countries. Further evidence on this point was found in thepages of the Oriental Economist in 1937 in which there was a report
that, of seventy-two countries to which Japanese cotton textiles were
exported, forty-two were importing less in that year than in previous
years, and only thirty were buying the same or larger quantities.
What an examination of export figures also fails to reveal is therelation between total production of cotton fabrics and total exports.

From 1932 to 1939 the trend in the proportion of production exported

was generally upward. Rising exports in proportion to production
signified that relative output available for domestic consumption was
being reduced. No wonder, therefore, if it was necessary to maintainor increase foreign sales to earn exchange, that the government wascompelled to impese restrictions on production and distribution fordomestic consumption, including production controls, price controls andfinally rationing.

Finally, export figures fail to show that as exports of cotton textilesrose, imports of raw cotton rose proportionately, since there was nodomestic production of raw cotton. Increasing shortages of dollar
exchange, the consequence of the loss of the silk market in the UnitedStates, forced Japan to turn to other sources of supply, and to negotiate"linked" sales and barter agreements, an aspect which is discussed
more fully in the following chapter.

Growth ofnew export indecstries.- A particularly notable change
in the Japanese export trade by commodities was the growth during
the period of industries, the products of which previously had not been

exported, or experted only in small quantities. One of the mostspectacular of these was rayon textiles. Prior to l930 almost no rayon

was produced domestically;but commencing in that year the industry

was firmly established. In the following years its development was
phenomenal ; yet it depended upon exports to absorb consistently overhalf of total output -in fact 1938 nearly 85 per cent was destinedfor areas outside Japan. Until 1938, with the exception of 1933,
yearly output expanded from one hundred to two hundred million

8 LAURENCE PHILLIPS DOWD
square yards, and export quantities and values increased commensurately, As a result, as a percentage of total exports of the country,

rayon fabrics climbed from nothing in 1930 to 5.3 per cent in 1936.
Initially, the government encouraged the expansion to develop a textile

trade free from reliance on foreign sources of raw materials, and in
the early stages domestic supplies of pulp were adequate to accommodate

the industry, However, subsequently, production reached the pointthat imported pulp was required to supplement domestic sources. As
exchange reserves became increasingly short, it became necessary to
reduce output and restrict consumption in the same manner as in thecase of cotton.

Depreciation of the Yen served to introduce into world markets
many products not previously exported from Japan in large quantities.
Included in the Iist were such items as electric light bulbs, various
types of machinery, and other manufactured products as well as sugar

and flour. However, the benefits accruing to thÅë country were more
apparent than real. Most ofthe products previously had been producedfor home consumption. With greater profits to be realized from export

sales they frequently were withdrawn from the domestic market, thus
creating shortages at home. In those industries in which there was

the necessary expansion to take care of both home and foreign
markets, rather commonly there was reliance upon foreign sources ofraw materials, and part of the added foreign exchange earnings had
to go to pay for the raw materials,

Although, singly, the minor industries were not impertant, in
totality they came to have a fairly important pesition in Japanese

export trade. The percent of total trade represented by the ten
leading exports in 1930, after increasing slig. htly in the second yearof the deflation period, fell steadily from 62.4 per cent in 1931 to only

36.4 per cent at the end of the decade. As of the middle of thedecade--the fourth year of the reflation period -the Orientat
Economist reported that the value of miscellaneous goods experted
those not specifically listed elsewhere had expanded to \l,233

THE IMPACT OF EXCHANGE POLICY OF JAPAN 9
million or 49.3 per cent of the total as against \4}7 million or 36.3

per cent in 1931, These figures were, as a matter of fact, somewhat
too high, for not all of the commodities except the leading ten were

under the heading "miscellaneous". In any case the trade statistics
emphasize the rise of new export industries, a growth deliberately
encouraged by the Japanese authorities to provide diversification ofindustry, By this two goals were achieved:earning additional foreignexchange, and reducing as far as possible reliance on imported raw
materials, a condition which existed when exports depended heavily
on cotton textiles.

Shifts in Markets for Japanese Products

Decline in imPertance of the United States,----The year 1932,
with resumption of the gold embargo and depreciation of the Yen,brought with it the commencement of important changes in the direction ofJapanese trade. The United States, under the continued influence of the depression and consequent continued reduction of raw
silk purchases, became less important as a market and as early as 1934
was the destination for less than one-fourth of total exports instead ofamounts in excess of one-third whi6h had prevailed in the preceding
years. Although subsequent years saw a rising trend in sales in termsof Yen until exchange control restrictions and attempts to develop newmarkets brought with it a reversal, never again did the value of
shipments to the United States exceed one-fourth of total exports.
Moreover, although total United States imports gradually revived
after 1932, it is particularly noteworthy that Japanese sales failed tokeep pace with the general trend. •Rdse in importance of the Asiatic Mainland. A superficial glanceat trade statistics would give the impression that depreciationof the Yen and additional exchange policy which followed promoted
export trade to China. However, it must be remembered and has
frequently been forgotten in analyses which have unqualifiedly concluded that Japan experienced an export "boom" following depre-

10 LAURENCE PHILLIPS DOWD
ciation that shipments to Manchuria and, subsequently, the entire
Yen Bloc area, were included in those figures. As a matter of fa(:t,as years passed, a constantly larger part of the total was either paid
for in Yen received from the Yen Bloc or paid for domestically throughloans and investments. Unfortunately, the Japanese failed to abstract

trade with Free China from the total reported. Were such figuresavailable undoubtedly they would show an ever smaller total as aresult of the Chinese boycotts of Japanese goods and increasing economic diMculties in China associated with Japanese military operations
against that country.

The consequence of expanding trade with China, including the
Yen Bloc, and contracting trade with the United States was that in1934 the former country supplanted the latter as the leading export
market for Japanese products, However, to the extent that gain insales to China constituted shipments to the Yen Bloc area, supplanting

sales to the uncontrolled areas, this constituted the substitution ofa non-foreign exchange earning for a foreign exchange earning desti-

nation. Undoubtedly this change was a primary reason for new exchange control measures adopted in subsequent years.

Diversication of exPort markets. One important consequenceof Japanese exchange policy-- perhaps the most favorable-- wasthe diversification of markets for Japanese exports particularly during
the reflation period, because it meant the reliance upon the conditionsof demand in the two chief countries for the success of Japanese
export trade was reduced.

Japan's attempts to diversify export markets through direct andindirect exchange control is well exemplified by tracing the course of

trade with a few particular countries. With the sole exception of theUnion of South Africa, trade declined in 1930 as compared to 1929.

In l931 a further decline was experienced with the exception o'f
Belgium and the Union of South Africa; but commencing with 1932
important changes set in. In that year the outstanding expansion
occurred in trade with British India and Australia. Exports to India

THE IMPACT OF EXCHANGE POLICY OF JAPAN 11
increased from \110 million in 1931 to \192 million in 1932, or 75

per cent and shipments to Australia mounted from \l8 million to\37 million, or slightly over IOO per cent. Further expansion was
experienced until 1935 with both of these countries, but then was
followed in l936 by an absolute contraction. Signing of barter agreements in l937 brought a rise in that year, followed by new reductions

as Japan was unable to fulfill its commitments to purchase Indian
cotton and Australian wool.
The most striking changes in the Japanese export trade were withthose countries which can only be classed as secondary markets, but
it must be noted that many of these changes did not occur either in1930 or 1932, which means that they may have been the result of
infiuences other than changes in the value of the Yen. For example,
shipments to Africa expanded by nearly \50 million annually in 1933
and 1934 as against an increment of only approximately \27 million
in 1932 over 1931; and these increases followed the despatch to thecontinent of trade missions which granted price and other concessions

to buyers. Among other countries to which exports mounted abruptly
during this period was Mexico. After successive decreases in 1930,l931 and 1932, exports thereto rose by 134 per cent in 1933 and by

a further 169 per cent in 1934. Subsequently exports continued toincrease, but at a greatly reduced rate. Exports to other Latin American countries increased in 1932 by 42 per cent over 1931, l40 per centin 1933 and 116 per cent in 1934. In 1935 and 1936 exports were
almost stable at the l934 figure; fo11owed by a rise of 50 per cent in1937 and a fall of 46 per cent in 1938. Similar abrupt changes werenoted in exports to European countries. For instance, in 1933 exports

to France expanded 80 per cent over l932 but was followed by acontraction of 1 per cent in 1934, even though total exports to Europe

were 25 per cent larger. Exports to Belgium increased 70 per centin l932 over l931 and a further 86 per cent in l933.
Particularly noticeable is that almost every country experienced
a sudden rise at some time during the period, but not all in the same

12 LAURENCE PHILLIPS DOWD
year; and some of the greatest percentage expansions occurred several
years after depreciation of the Yen. Further, subsequent declines in
the rate of expansion on several occasions were followed by absolutedecreases, or by increases at a rate much less than the growth inJapan's total exports or even exports to the general area. Also, whenaggregate Japanese exports shrank by 15 per cent from 1937 to 1938,
the movement of commodities to exchange earning areas declined bya percentage greater than the total since included was a 47 per centincrease to China. Thus, for example, shipments to Great Britain
declined 20 per cent;to Egypt 57 per cent; to the Netherlands East

Indies 48 per cent; to India 37 per cent: and even 23 per cent toGerman, with whom Japan by this time had concluded a closely.
binding trade agreement.

Ssme Particular InY7uences on the ExPort Tlrade. Of course,
depreciation of the Yen in itself did serve to increase sales ofJapanesemerchandise or, alternatively, prevent further reductions; but not all
the beneficial effects can be attrlbuted to it, nor can the failure of

trade to expand more be blamed entirely upon depression. There
were other influences which in part serve to explain the limited
expansion but in part should have accounted for an even larger growth.

Contradictory as it may seem a portion of the enlarged trade in 1932

and the immediately following years may be attributed to the beginning of recovery in a few countries ; but some portion may be ascribed
to continued depression, though there is no way of ascertaining statisti-cally the relative importance of each influence. For example, theprice inelasticity of raw silk sales and the influence of the depression

in the United States has already been discussed. On the other hand,
after several years of low incomes many of the peoples of the world
had exhausted what little personal financial resources they had pos-sessed and, accordingly, were required to lower their standards ofliving. Reduced purchasing power in some cases approaching
dangerously close to the minimum subsistence level left, not a
choice between buying high grade manufactured products of Europe

THE IMPACT OF EXCHANGE POLICY OF JAPAN 13'
or America, or Japanese merchandiseof poor quality, but a choice
between purchasing inexpensive, low grade Japanese merchandise, orno purchases at all. Evidence of this statement may be found in thepages of the Oriental Economist of the period which frequently
mentioned shifts to sales of inferior, lower priced grades of merchandise. Particularly outstanding evidence of this shift was in the increaseof exports of poorer grade textiles to Southeastern Asia and in theboom in sales of electric light bulbs to the United States thequality of which is well remembered by persons in the United States
who lived through the depression. Further support for this point iscontained in the return to purchasing higher grade merchandise•as
the depression lessened in the latter part of the decade. Yet again
the impossibility of compiling exact statistical evidence is well exempli-

fied here ; for it may be argued that had the Yen not been depreciatedeven the cheap Japanese merchandise would have been too high-priced
for as much enlarged sales as did occur.
Notwithstanding such conflicting influences, the significant facts

are that in terms of foreign exchange earnings Japanese exports wereless following depreciation than before and that the fractional gain inpercentage of total world trade was achieved only through sales to thedominated area of the Asiatic Continent.

In some instances in which depreciation did serve to influence
trade there is evidence that it also disrupted the normal flow. For

example, in the Africa, South America, and other minor markets
depreciation was followed by an immediate boom in sales ; but in morethan one case the expansion was excessive and swamped the local
market. The consequence was that shortly there was an equally drastic
decline until surpluses were abated at which time shipments were again
increased. In other markets, the outstanding examples of which appear

in Europe, buyers, rather than increasing purchases of Japanese products actually reduced orders anticipating further depreciation. Consequently, in these markets the greatest increases were in 1933, overa fu11 year after the initial devaluation of the Yen, and at a time

14 LAURENCE PHILLIPS DOWD
when some appreciation had occurred.
Further, such initial advantages as were evoked by the reductionof the value of the Yen were lost as time passed as a result of advanced

costs ofimported raw materials. Examination of export statistics showsa subsidence in commodities manufactured from imported raw materials

occurring at the same time as a continued enhancement of those few
commodities which utilized domestic materials. The infiuence of higher
costs of irriported raw materials had a particularly notable effect in1937 and 1938, during which time there occurred a noticeable recession

in world ,trade from the recovery of the preceding years. At thattime Japan was unable to recapture depression markets as had been
done in 1932.
Finally, the attempt ofJapan to export her depression by depreciating the Yen was not accepted with equanimity by the other membersof the family of nations. Although it must be admitted that the various
countries placed general restrictions on imports to attempt to alleviatedomestic unemployment by eliminating competition from foreign countries, restrictions imposed especially against Japan multiplied following

depreciation. In the words of a Japanese, as early as l933, "Japanesemerchandise has been made the object of obstructionist policies inalmost all the trading areas of the world." By 1937 the commodity
now ranking first in Japanese exports--- cotton textiles--- was subjected to restrictive measures by no less than 78 countries. The restraints included quota systems, licensing of imports, discriminating
tariffs, control of exchange and other measgres. Thus it can be concluded that some of the early beneficial effects of the devaluation

were offset by retaliation. Of course, even had the Yen not been
devalued, there undoubtedly would have been some restrictions placedon the products of which Japan was one of the world's leading
competitive producers, but it seems clear from evidence contained in
the oMcial records of the period that depreciation brought forth added
special discrimination against Japanese commodities.

What would have been the course of Japanese exports had theTHE IMPACT OF EXCHANGE POLICY OF JAPAN 15
Yen not been depreciated can only be a matter of conjecture. Undoubtedly revival after 1931 would have been slower, but also it would

have been on a much sounder and less restrictive basis. Considering

the changes in the world economic situation during the decade, it, trend depended more on world
would seem that any favorable generalbusiness conditions or other factors than upon the influence of the
reduction of the value of the Yen. Actually, devalutation and thepolicy of holding the Yen at a low level appears to have had more
unfavorable effects than favorable. In any event the acceptance ofmilitary policy by the people was made easier by the argument that
control of the continent would provide a trading bloc thus freeing thecountry from dependence upon the liberal policies of other nations.

Overlooked was the extreme dependence of the country on imported materials. This was a dependence so great that with disruptionof the free inward flow of commodities, the consequence of the reduced

value of the Yen, Japan not only was unable to develop the continent

as had been optimistically planned, but also was propelled along
a path of domestic as well as of export regimentation. For thesereasons, it now becomes important to examine the impact of exchange
policy on the import trade, for only from such an examination can the

totality of exchange policy be comprehended.

CHAPTER IIEXCHANGE POLICY AND THE IMPORT TRADE
Changes in the Composition of Imports
Fluctuations in textite raw materials. Various explanations havebeen offered for the advance in imports of textile raw materials
especially in view of continued diminishing exports of textiles.
Study of the Japanese textile industry indicates that the paramountreason was speculation in anticipation of the reimposition of the gold

embargo. Evidence of this existed in the excessively large purchasesin the second half of 1931, during which times inventories increased

16 LAURENCE PHILLIPS DOWD
to well over a year's normal supply at then current and anticipatedrates of production. Reaction to speculative purchases was felt in 1932

when imports again contracted to 669,409 tons; but at this time theimpact of the devaluation 'of the Yen was felt, for total value mounted

to \447,400,OOO in spite of a continued decline of world prices. At
that time raw cotton climbed in relative importance in total imports
to 31.2 per cent as against 24.0 per cent in 1931, principally the resultof revival of textile exports.

Although there was an initial speculative flurry in 1931, a greater

speculative impact of exchange policy began to be felt in 1936. Inthat year and to some extent in 1937, after a steady growth associatedwith expanding exports, imports in both quantity and value rose notably.
Japanese cotton textile executives by that time were able to see clearly

the path which Japan was following and engaged in intensive speculation in anticipation of severe import restrictions. Consequently, a few

mills were reported to have acquired stocks of raw materials suMcient
for as much as ten years normal operations.
Although it has been impossible to ascertain the exact extent, it
seems probable that initiation of the link system and barter agreements

caused the Japanese to pay somewhat higher than'normal prices for

raw cotton. The reason for this seems to have been that rather
commonly the Japanese were compelled to pay premium prices asa condition of the selling country's willingness to receive Japanese
products in return. In any event, the increase in price of cotton was
not as great as the reduction in price of textiles necessary to provide

effectiveness for such arrangements, More important, the contraction

in imports was not accompanied by a corresponding contraction inexports. As a result, the output of cotton piece goods was maintained

only by drawing heavily on existing stocks of raw material, and as
early as the latter part of l938 total inventories of all mills reacheda low of two months supply. To alleviate this situation without
increasing imports it became necessary to impose drastic restrictions on

domestic consumption.

THE IMPACT OF EXCHANGE POLICY OF JAPAN 17
Raw wool imports followed a somewhat similar trend to that ofraw cotton. Q;uantity fluctuations from l932 to l937 mirror the tradedispute with Australia and the spasmodically successfu1 attempts todevelop Argentina and the Union of South Africa as substitute sourcesof supply. After 1937, with the urgency to conserve foreign exchange,

imports of raw wool were curtailed even more than cotton, for wool
textiles were not exported extensively and therefQre not an importantsource of foreign exchange earnings; however, to provide uniforms
for the military force domestic consumption was totally forbidden.
The impact of exchange policy on textiles is most clearly observedin the trade in pulp for rayon manufacture. Deflation in 1930 and1931 had little effect on imports, for in those years imports remained

at approximately the same proportion of domestic production about
one fifth. But, beginning in 1933 imports began to climb steadily
relative to domestic production, unti! in 1937 they were over fifty
per cent. More important, as the indices of quantity and value show,commencing in 1933 the value of imports rose more rapidly than did
the quantity and placed an ever heavier burden on exchange reserves.
This waxing of imports raised the percentage of pulp in total commodities purchased from foreign countries from less than one per centto 3.4 per cent and moved it from an insignificant position to thesixth most important. The explanation for this is simple. Continued
world depression had generated a demand for cheaper substitute textiles

and rayon was the one which best met requirements. Furthermore,
the pulp-rayon relationship provided proportionately more exchange
since pulp constituted a smaller part of the cost of the finished textile

than did cotton. Also, a minor part of the explanation was that asless and less cotton and wool were made available for the domestic
market greater reliance was placed on rayon to clothe the population.

Consequently, imports expanded until the serious exchange situation
which developed in 1938 forced restrictions on all imports.

Advance of other raw maten'ats. The results of exchange policy
can perhaps best be seen in imports ofindustrial raw materials. Almost'18 LAURENCE PHILLIPS DOWD
without exception, expansion commenced shortly after the inception of
the reflation period and continued up to the time when it was necessary
to restrict severely all imports. For those materials absolutely essential

for the economy expansion even continued to the end of the decade.

Particularly noteworthy among these imports was copper. Prior to1933 Japan was almost completely self-suMcient in production andin fact from time to time even had some surplus available for export;

however, by 1934 imports exceeded domestic production in spite ofof continually expanding exploitation of domestic resources. Likewise,prior to 1932 domestic production of salt surpassed imports, but thereafter imports were greater and to an ever increasing extent. Of course,

the explanation for these trends was the need for munitions; but it
did mean that industrial expansion p!aced pressure on the exchanges
to supply commodities previously provided domestically in adequate
quantltles.

Industrial development and the diversion of imports from finishedcommodities to raw materials, was not entirely beneficial, Throughout

the entire period Japan was extremely deficient in heavy industry;and hence, capital equipment had to be procured from foreign sourcesin large quantities, thus consuming in part savings of exchange effectedby the movement of Iess finished goods. From an almost constantannual total of \10 million in the years 1929 to 1932, overseas purchases, mounted steadily from 1933 to 1940 with total spending in thelast year of the decade having been nearly twenty times that of l932,

though the quantity of machinery received in terms of tonnage wasonly approximately six times as great. Within this large, catchall
category reports of the period indicated several important individualchanges. Most important, those items of machinery which might bedesignated consumer goods were replaced by industrial equipment,
For example, between 1931 and 1933 imports of sewing machines andparts were reported to have been reduced by 20 per cent, and automobiles and parts by i5 per cent. Some shifts occurred even inindustrial commodities with electrical machinery declining by 18 per

THE IMPACT OF EXCHANGE POLICY OF JAPAN 19
cent during the same period. After 1933 the bulk of the expanded
import total was the consequence of an enormously increased demand
for machine tools.

Decline of consumer goods. Part of the program of national
self-suMciency, introduced almost simultaneously with the reflation
period, included freedom from reliance on foreign sources of supply of

consumer goods. As the period progressed, growing shortages of ex-change reserves gave impetus to the movement beyond a mere desire
to be independent of other countries. However, with the notable
exception of textiles, the Japanese population bought few imported
consumer goods except foodstuffs; but even in foodstuffs every effort
was made to replace foreign with domestic products. Domestic production was encouraged, and although it was not possible to eliminate
imports entirely, they were reduced as far as possible.

As part of the national self-sufficiency program of the reflation

period domestic production of wheat was encouraged to replace these
foreign sources. Nonetheless, complete self-suMciency could not be
achieved. To conserve exchange, domestic flour mills were constructed,

and by the middle of the decade raw wheat had almost completely
replaced flour. Further, the source of supply was shifted to a large

extent from the United States and Canada to Australia. By this it
was possible to shift some exchange requirements from the Doller,
supply of which was extremely scarce and the value high in terms ofYen, to the Pound, supply of which was more plentiful and value
stabilized at a more favorable rate.

One last product lumber should be mentioned because theeffect of exchange policy on the import trade had an important domestic

reaction. Over the years Japan had adopted a positive policy ofpreserving and building up forest resources to prevent soil erosion andfloods;and by relying on foreign sources of lumber, balance had beenachieved domestically. However, with imposition of exchange restric-

tions to conserve exchange, procurement from foreign sources wassteadily reduced in quantity though the annual outlay climbed steadily

20 LAURENCE PHILLIPS DOWD
until 1937. But more vital to Japan was that increasing populationand industrial expansion added to the total requirements for lumber.
Consequently, domestic cutting was intensified to a point far in excess

of reforestation; and by the infiation period there was serious apprehension of the geophysical effects within the country.

Analysis of Changes in Sources of Supply

Change in importance ef the United States. Devaluation of the
Yen at the end of 1931 accompanied important consequences inimports from the United States. As a source of supply that country
immediately rose in importance from furnishing 28 to 29 per cent of
the total to 36 per cent in 1932, principally the result of continued

large purchases of raw cotton at prices in depreciated Yen, and atemporary shift from ordering in India to ordering in the United States.

Subsequent diversification of Japanese industry tied the economy evenmore closely to the United States, and imports continued at from 32
to 34 per cent of the total in every year thereafter. Purchases of cotton

continued at a high level with from 700 to 900 million pounds being
imported annually through the reflation period, or from 40 to 65 percent of total Japanese imports of cotton. But at the same time the
new industries required raw materials of which the United States was

the leading producer. Consequently imports of petroleum, pig andscrap iron, copper, and pulp rose steadily. In addition to this, since
the United States was the primary producer of machine tools, purchasesin that classification likewise mounted. Yet all of this increase waspaid for with Yen having a considerably reduced value. In fact, in1932 and 1933 much of the apparent increased Yen value merelyreflected depreciation. The Dollar value of exports to Japan was Iessin 1932 than in 1931 and only slightly higher in l933 than in 1932.

After that imports consistently exceeded the 1930 figure in termsof both Yen and Dollars, reaching an all time high in 1937 of\1,269,541,OOO with a Dollar equivalent of $288,558,OOO. Even extensionof exchange controls in the inflation period failed to relieve materiallyTHE IMPACT OF EXCHANGE POLICY OF JAPAN 21
the dependence ofJapan upon the United States. Though imports in
Dollars were somewhat smaller, renewed depreciation in the value of
the Yen kept the Yen value close to pre-inflation levels with the
exception of 1938, in which year there was a general world recession.

One additional point is that United State exports to Japan shrankless than did those to the rest of the world in the deflation period andexpanded more in the reflation period. In other words, during thedecade Japan propertionately bought more from and sold Iess to theUnited States than did the other countries of the world; hence,
depreciation rather than relieving a shortage of Dollars actually served

to worsen it, especially since sales of raw silk proved to be exchange
price inelastic. Had the Yen not been depreciated the costs of industrial

expansion to the country would have been far less. 'Total trade figures in either Dollars or the Yen fail to reveal thatthe volume and value of imports would have been even more substantial
had the policy of self-suMciency not been carried through vigorously.
Restrictions on imports. of consumer goods, especially wheat and lumber,and the shift from high cost steel to lower cost pig and scrap ironpermitted substantial reduction in imports of those commodities. In
other words, the United States became a supplier of commodities
essential for fulfi11ment of Japanese political and military policies : thatis, of producers' goods rather than consumers' goods.

Europe as a Source of SuPPI2 The importance of Europe
diminished steadily during the entire decade. Two reasons stand out
in explanation. In the first place, although export sales did expand

somewhat, the products of Japanese industries were either not in
suMcient demand in European markets or were competitive with
European industries and, hence, were subjected to various trade rest-

rictions. Consequently, exports failed to earn adequate additional
exchange capable of being utilized to purchase a substantially larger

volume of imports. More important, Europe was primarily an indust-

rial area, and with the governmental policy of actively fostering
industrial development the country was searching for raw m.aterials

22 LAURENCE PHILLIPS DOWD
rather than finished products. One minor exception was the purchaseof Scandinavian pulp, but this source never become large in theJapanese import trade.
Outstanding in this declining trend was trade with Great Britain.
Of course, as a prominent producer of industrial equipment of thetypes required by Japan, that country continued throughout the reflation period to have sizable annual sales. Yet as early as 1933 GreatBritain had slipped from fourth to sixth place with total sales contracting from \153,271,OOO to \82,548,OOO. Furthermore, quantitatively

sales shrank even more, for the 1933 totals were in terms of thedepreciated Yen. Tying of the Yen to the Pound did nothing toenhance Britain's position, for the proportion of total imports, which

had stood at seven per cent in 1929, fell steadily throughout the
decade and never exceeded three per cent after 1934.

Even the conclusion of the Tri-Partite Agreement with the othermembers of the Axis Germany and ltaly which the Authorities had hoped would serve to improve trade relations with those twocountries, failed to live up to expectations. Japan quickly found that

Italian products were competitive with those produced domestically,

and the needs of Germany were essentially the same as hers. Germany was an important producer of machine tools but Japanese purchases never increased substantially for the reason that only limited
quantities and varieties of commodities required by that country could

be offered as barter in return. The conquest of Machuria had raised

high hopes in Japan that Germany could be utilized as a source ofindustrial equipment, by furnishing soy beans and other agricultural
products of that area in payment. To this end, a barter agreement
was signed in April, 1936; however, the failure of Manchuria as amajor source of agricultural production quickly destroyed Japan's
expectations in that direction.

Detailed presentation ofJapan's import trade from other countries

is unnecessary, for it would merely show trends similar to thosealready presented. Countries having raw materials vital to JapaneseTHEIMPACT OF EXCHANGE POLICY OF JAPANindustry experienced larger sales for varying periods of time. Includedin this classification were the Netherlands East Indies and the Philippine Islands. Countries previously furnishing finished items, especiallyof consumer goods or "peace" industry classifications, experienced
smaller sales always relatively and usually absolutely. These included

the European countries particularly. In those countries in which
Japanese purchases tended to become excessive, active sales campaigns

would be initiated to alleviate pressure on the exchange. However,competition with domestic producers and belief that Japan was engaging in dumping usually resulted in imposition of festrictive measures.

Trade missions would be dispatched and negotiations entered into.
Barter agreements would be signed. But in nearly all those cases inwhich the country was furnishing materials vital to Japan the provisions would be unfavorable, and in practice would prove to be unworkable. Subsequently, Japan would be compelled to impose restric-

tions either on the importation of the commodity or on domestic
consumption when the product was required to further military or
political policy.

Failure of the continental venture.----In the latter part of the1920 decade China, including Dairen and Manchuria, furnished Japan
from 350 to 400 million Yen worth of commodities annually, or from17 to 19 per cent of total imports. The depression reduced that area

as a source of supply to \283,106,OOO in 1930 and \235,862,OOO in
1931, but as all imports had shrunk extensively, the percentage remained constant. Military operations in Manchuria and the inceptionof a boycott by the Chinese on trade with Japan further reduced
imports in 1932 to \205,463,OOO, or 14 per cent of the total. The
Japanese undoubtedly expected such a temporary decline, but anticipated that upon reestablishment of peaceful conditions production of
the continent would boom and a new era in trade would be established. In fact, the military forces sold the population on its policies

on the basis that control of first Manchuria and then North China
would provide a lucrative source of supply free from dependence23

24 LAURENCE •PHILLIPS DOWD
upon procurement of foreign exchange. However, except for a relati-

vely minor expansion, expected results were not achieved, and therelative impertance of the area as a source of supply declined until
exchange restrictions in the inflation period caused reductions inpurchases from other areas of the world.
The reasons for the failure of the continent as a source of supply

are several. As military operations expanded, trade with the freeareas of China contracted through extension of the Chinese boycottand the diversion of production to supplying the domestic economy.
Milita'ry operations also disrupted agricultural production, destroyed

productive capacity and dislocated the population. Even return ofpeacefu1 conditions and rehabilitation failed to bring about substantial

improvement. In agriculture total productivity could not be expanded
suMciently to provide adequate quantities of foodstuffs to provision
the domestic population and substantially fi11 Japan's requirements.

Though there were somewhat larger shipments of soy beans to Japan,
they were insuMcient to replace shipments from foreign countries andoilcake never equalled the quantity imported in I930. Manchuria andNorth China had been considered to be potentially a major substitutesource of raw cotton ; however, as with other industrial crops, includ-ing tobacco and hemp, it was quickly perceived that expansion of
acreage would entail a disastrous abandonment of food crops. Furthermore, it was found that the raw cotton produced there was notof a quality suitable to the Japanese textile industry. Manchurian
coal and iron output, though expanded slightly, could not keep pacewith Japanese industry. In fact, only production of salt was suMcient
to supplant foreign sources.

As a result, the proportion of imports supplied shrank from the
17 to 19 per cent existing before the invasion of the continent to l2
to 14 per cent, and continued at that level until the inflation period,

Hence, instead of becoming a great reservoir of products for industry

and consumer goods for the population, enabling the area to becomea self-suMcient political and economic unit, military expenditures,

THE IMPACT OF EXCHANGE POLICY OF JAPAN 25
support of the Manchurian and Chinese population and rehabilitationof devastated areas proved to be a wellnigh bottom!ess pit into which

Japanese production was poured production largely using raw
materials from foreign countries paid for from ever smaller supplies offoreign exchange. Were it possible to secure adequate data, it would beinteresting to compare the increment in volume and value of commodities secured from the continent with the drain of those secured
from foreign sources into military activities alone. AIthough such is
not possible, it is believed that it would show a net deficit; that is,more imports were consumed by military operations than were obtained
additionally from the conquered areas.

Some Particular Influences on the Import Trade. •,As with all the family of nations, the onset of world depression

caused a reduction in imports, but Japan was particularly affected
because of the functional relationship between exports and imports.
Consequently, reduction of the percentage of total exports of the worldfrom 3.0 per cent to 2.8 per cent occasioned a corresponding reduction

in imports from 2.9 per cent to 2.7 per cent. Perhaps it was thiscontraction which led Finance Minister Takahashi to reimpose thegold embargo and allow the Yen to depreciate. Apparently he failed
to realize at the time that the country in 1931 had regained its former
position in exports and likewise in imports, and that action to promotefurther export expansion would mean that imports would also be
expanded.. Moreover, notwithstanding a desire to achieve domestic
self-suMciency an expansionist domestic policy would necessitate aneven greater volume of imports. In any event the decision was macle,
and the country was started along its path of restrictive exchange
policy.

If Japan had possessed reasonably adequate supplies of domestic
raw materials, as had the United States, Germany, France, or Brazil,
or if it had been a creditor on capital account, as was Great Britain,
exchange depreciation might have benefited the country's international

26 LAURENCE PHILLIPS DOWD
trade to the extent of more nearly equalizing commodity imports andexports by expanding exports and reducing imports. However, witha paucity of resources exchange policy and other efforts exerted to
expand exports meant that imports had to increase rather than decrease. Had there been no other domestic developements during theperiod, the problem of paying for larger imports perhaps could havebeen alleviated by securing products containing smaller quantities ofcapital and labor; in other words, by shifting from finished goods to

raw materials. By this not only would scarce foreign exchange re-serves have been conserved but also domestic ecomomic recovery
would have been promoted through more complete utilization ofdomestic Iabor resources and capital equipment. But increased exports

to both foreign markets and the continent, expansion of military
preparedness and the promotion of industrial development leading to
self-suMciency offset the favorable effects of the downward trend in
the extent of processing by foreign suppliers and worsend rather than
improved Japan's exchange position.

CHAPTER III

EXCHANGE POLICY AND THE BALANCE
AND TERMS OF TRADE
Balance of Trade
Introduction.----Widely different conclusions have been drawn
concerning the effcct of the exchange policy of the decade upon thebalance of trade. They have ranged from the extreme that after the
middle of the decade Japan was able to achieve an active balance tothe opposite that there was a steadily larger passive balance. Japanese
economists in particular, using trade figures only to the year 1936 andfor Japan Proper embracing the four main islands of Honshu, Shikoku, Kyushu, and Hokkaido, plus the southern half of Saghalien
maintained that after 1931 exchange policy served to improve thebalance. However, following the custom of the Japanese statisticians,

THE IMPACT OF EXCHANGE POLICY OF JAPAN 27
they invariably included trade with Manchuria and the Yen Bloc
area in arriving at their conclusions. Others, Particularly those writers

in foreign countries who criticized Japanese military, economic or
political policies, maintained on the basis of trade figures of theJapanese Empire embracing Japan Proper, Korea, Formosa, andthe Lurile and Ryukyu Islands---and including the year 1937, thatthe balance failed to improve substantially. A few, apparently arguing

intuitively---for they usually failed to furnish supportng evidence
even concluded that the balance deteriorated.

The question is, how was it possible for those using the same
statistics to arrive at such completely differing conclusions? Strangely

enough, the opposing points of view were substantially correct, but
only because each writer used a different basis of analysis or strove
for divergent objectives. When the objective was merely an analysisof the total flow of commodities into or out of Japan Proper andstatistics for particular years, especially those before 1937, were used,

the favorable conclusion was correct; and the balance of payments

as published by the Japanese could be accepted without serious
question. When a study of the total flow of commodities of theJapanese Empire was undertaken, a less favorable conclusion had to be

drawn. When the. purpose was to determine the demand for or supplyof foreign exchange usually that of a particular country, especially

the United States the conclusion was usually unfavorable.
In this study, rather than merely a study of commodity flow, theobjective is an analysis of the impact of exchange policy. To reachthis objective a modified base of analysis will have to be usedthat which abstracts trade with Manchuria and subsequently the entire
Yen Bloc area, for such trade involved no foreign exchange.

7rhe 7apanese Empire. When the commodity trade of theJapanese Empire is examined--as it rightly should be for an evaluation ofexchange policy, since the demand for or supply of foreignexchange encompassed the trade of the entire area--a rather unfavorable picture is presented, for depreciation of the Yen failed to28 LAURENCE PHILLIPS DOWD
react immediately as favorably on the Empire as a whole as on Japan
Proper. Though exports and imports of both climbed in l932, importsof the colonial area climbed more than in proprtion to those ofJapan

Proper. Consequently, though the unfavorable balance of the Empire
was less than in the deflation period, it was not as much reduced as thatof the home area. Improvement in demand for export products of thecolonies to a greater extent than for those of Japan Proper combinedwith a new expansion of industrial commodity imports kept the
proportionate rise in the unfavorable balance of trade for the Empire

for 1933 and 1934 below that of Japan Proper. However, whereasthat area showed a favorable balance in 1935, the Empire had an
unfavorable balance of \17,285,OOO; andvnot until the imposition ofstringent import controls in the infiation period did the trade balanceof the Empire become favorable, reaching a total of \803,380,OOO in
1939.

Manchun'a and the ren Bloc excluded. -- Actually the balanceof trade totals cited above--though important in consideration of
the total flow of commodities into and out of Japan --- are misleadingin terms of foreign exchange;for inculded are the figures of trade with

Manchuria and the Yen Bloc. From the establishment of Manchuria
as a separate "independent" country the currency of that area wasclosely associated with the Japanese Yen. Yen circulated freely andpurchases and sales were made in terms of it, while creation of the
Yen Bloc made the currency of the area virtually the Japan Yen.
Accordingly, to gain a clear picture of the exchange position ofJapan it is necessary to abstract trade with the Japanese-controlledcontinental areas from total trade.

Deducting trade with these areas from the totals reveals thatexports did increase after consecutive declines to 1931, but to only
\2,384,l61,OOO in 1937 instead of \3,175,418,OOO. During the same
period, the failure of Manchuria to develop as a source of supply left
Japan with no alternative but to purchase increasing quantities of commodities from the rest of the world with the total reaching \3,345,272,OOO.

THE IMPACT OF EXCHANGE POLICY OF JAPAN 29'' 'On the basis of these modified totals the adverse balance of trade ofJapan Proper in 1932, the first year of the C`independent" State ofManchoukuo, was \92,O15,OOO rather than the reported \21 million.
In 1935, the first year in which Japanese statistics reported an activebalance for Japan Proper,actually there was a passive balance of\197,926,OOO, Two years later the aggregate import excess reached thestaggering sum of \961,lll,OOO, an amount approaching total imports
from all sources in 1931;and in the inflation years of I938 to 1940

reported active balances were actually passive balances averaging
over seven times as great as that of 1931.

With the United States.--If reimposition of the gold embargo
and devaluation of the Yen was intended to improve the trade balancewith the United States, it failed to accomplish its purpose. Rather

than improving the balance, devaluation consistently worsened it.
IneMcacy of depreciation to improve the silk trade combined with asizable advance in the Yen cost of imports brought a prompt importsurplus in l932 of \64,726,OOO. Thereafter, the adverse balance mounted,

reaching a total of \630,113,OOO in 1937 and \671,500,OOO in 1940.
United States statistical sources showed no substantial difference fromthe Yen totals except for 1932. Based on figures published in theForeign Commerce and JVavigation of the United States b2 Calender Tears

an export surplus of $ll4,470,OOO in l930 and $50,634,OOO in l931
became an import surplus of $910,OOO in 1932, $91,229,OOO in 1934
and $51,886,OOO in I935, the year in which Japanese statistics showed

an export surplus for the total trade of Japan Proper, In 1938 thethe passive balance was $112,900,OOO, an unfavorable amount almost

as large as was the favorable total of 1930. •With the rest of the 'world. Some revealing figures are uncovered when the balance with the Asiatic continent and with theUnited States is deducted from the total trade ofJapan Proper. In 1929

the excess of imports from the rest of the world was \422,477,OOO.

Thereafter the excess of purchases was less than \110 mMion withthe exception of 1937 and 1940. More important, in 1934 and l935

30 LAURENCE PHILLIPS DOWD
Japan enjoyed an export surplus with the rest of the world---orin other words the adverse balance of trade with the United States
was larger than the total adverse balance- and in all of the years
after 1931 the major part of the total unfavorable balance was attributable to trade with the United States.

Problems of balance of trade anal7sds. Within these totals
there are some complicating problems. Those Japanese who defended

exchange policy but recognized that the unfavorable balance oftrade was not materially smaller attributed the slowing down of theincrease of exports and in some cases there were actual decreases
to intensified restrictions placed on Japanese goods by foreign
nations. But they failed to indicate and statistics failed to show thatat the same time an even larger unfavorable balance was prevented byadded restrictions on imports into Japan.

In addition, Japanese statistics published before World War II did

not disclose -and as far as can be determined no student of theperiod has taken into consideration--action taken by government
statisticians in 1936. To make trade totals appear more favorable, thecompilation of trade statistics was revised from reporting imports on
a c. i. f. Japan to a f. a. s. foreign port cost basis. By this it waspossible to exclude freight charges from cost of imports and thus reduce

import totals. If total freight charges could be added to reported
import values for the years from 1936 the unfavorable balance would

appear much larger, for the great majority of commodities were
hauled long distances. However, it has not been possible to do so, for

it has been impossible to determine the total freight bill. Even
attempts to furnish some indication of this amount by comparison of
the United States and Japanese statistics of imports from the UnitedStates prior to 1936 during which time the figures were ostensibly
f. a. s. American port and c. i. Åí Japanese port respectively has proved

unavailing because of differences in methods of calculation and in
exchange rate utilized. However, one possible indication is containedin the shipping account of the balance of payments which shows a

THE IMPACT OF EXCHANGE POLICY OF JAPAN 31
jump of \66 million in payments in the year 1937, but this at best
reveals only payments for carriage of goods in foreign bottoms anddoes not include freight paid on commodities in Japanese bottoms.
Still further, there were several important developments not readily
ascertainable in total figures. As pointed out in the discussions of thechanges in the nature of exports and imports in the previous chapters,

products dependent upon domestic raw materials maintained export
expansion while those dependent upon foreign raw materials suchas cotton and iron and steel products---tended to decline as costs,
and hence values, of such imports rose. From this it might beconcluded that devaluation of the Yen and restrictions on the allocationof exchange, by increasing the costs of imports and hence the costsof production, held down expansion in the value of exports.

Finally, adoption of the link system and negotiation of barter
agreements served to reduce substantially the excess of imports. But
this reduction was at the expense of exports as well as imports, andin the last three years of the decade net exports in terms of Yen were

not far above the levels prevailing at the beginning of the period.

Yet higher world prices, reduced eMciency in the conduct of tradethrough the obligation to purchase from high cost sources and procurement in many instances of inferior quality merchandise meant thereceipt of far smaller real quantities than previously. Furthermore,
the compulsion to acquire essential military supplies forced the regulation of domestic industry to produce commodities of the quality
and at a price which would insure continued purchasing by foreigncountries. In other words, the less unfavorable balance of the inflation period was achieved at the expense of the domestic econmy.

Terms of Trade
7rrend in terms of total trade.---Analysis of the balance oftrade of a country in relation to exchange policy is inadequate andincomplete without reference to the terms of trade, for it might bepossible for a country experiencing a more unfavorable balance actually

32 LAURENCE PHILLIPS DOWD
to be gaining a real advantage economically if at the same time theterms of trade were becoming more favorable. This normally could
only be accomplished if the costs of imports were declining while theprices of.exports were rising--in other words, if the quantities ofgoods received were increasing in proprtion to value while quantities
shipped were decreasing in proportion to value. However, this did notprove to be the case for Japan. A more unfavorable balance of trade
was accompanied by a worsening in the terms of trade.
An excellent analysis of changes in the terms of total trade iscontained in the Department of State, Intelligence Research RePort,OCL-2815. Using a number of important commodities imported andexported, weighted indices of import and export prices were arrived
at for the years l930 to 1939. 1930 was selected as a base since prices

in that year were close to the average of the preceding decade and ahalf. Davaluation of the Yen at the end of 1931 was followed bysome rise in export prices in terms of Yen, but import prices roseeven more and exceeded the 1930 average as early as 1933. Consequently, the ratio of export and import prices declined to 91 in
1932, 83 in !933 and a low of 68 in 1934. In other words the termsof trade as early as 1934 moved against Japan to such an extent thatthe exports which would have paid for a given volume in 1930 paidfor only approximately two-thirds that volume in 1934. From 1935
through 1938 the ratio rose by a slight two points a year. The
impending outbreak of World War II in 1939, combined with drastically increased controls by Japan on imports and domestic prices,brought a sharp rise to 88, but still below the leve}s of the deflation
years.

A correlative of the shifting of the terms of trade against Japan
was the position of exports and imports in the national income. While

imports remained stable or decreased slightly as a percentage ofnational income, the percentage of exports increased. This meant
that, though production and national income were increasing, thenecessity of exporting a continuously larger proportion of the products

THE IMPACT OF EXCHANGE POLICY OF JAPAN 33
of industry left the economy with a smaller fraction of total output

for domestic consumption and investment. 'CHAPTER IVEXCHANGE POLICY AND THE BALANCE OF PAYMENTS
In the previous chapter it was established that, in trade withforeign exchange requiring countries, imports exceeded exports forevery year of the decade. A question which must, therefore, beanswered is: in the Japanese balance of payments how was balanceachieved ? More specifically the important question to be answered at

this point is:what'effect did exchange policy have on the accounts
in the balance of payments other than commodity movements in theircapacity to offset the excess of imports. In the following sections of

this chapter each of the major accounts reported in the Japanesestatistics will be examined in turn in order to furnish answers to thesequestlons.

Service Account Items

Shipping. Following the economic development of Japan asa consequence of World War I, foreign earnings of the Japanesemerchant marine were regularly one of the largest sources of foreignexchange. In fact, next to the physical commodities, raw silk andcotton textiles, shipping ranked third in importance as a contributor

to income in the balance of payments. This position remained
unchanged through 1938, and similar to the general trend in Japan's
export trade the total annual receipts increased to that year. From alow of \166,911,OOO in 1931 income from this source rose steadily to\303,180,OOO in 1936, then jumped to \429,157,OOO in 1937 and to\493,483,OOO in 1938.
Nevertheless, the gains were not as great as might have been if

Japan's exchange policy had been other than as adopted. When
exports to the United States, particularly raw silk, failed to respond

34

LAURENCE PHILLIPS DOWD

to depreciation the Japanese were compelled to seek other meansof stimulating sales. One was by economizing in transportation costs.

Formerly, a substantial part of total shipments were consigned toWest Coast ports and then transported by rail across the country. To

reduce this expense the trade route through the Panama Canal direct

to the East Coast was expanded. However, since import cargoes
originated largely on the West Coast of the United States, the return

voyage from New York failed to produce much revenue, nor did theoutbound voyage for vessels sailing directly to the West Coast. This

meant that the one-way movement in each case had to bear the bruntof total operating costs with consequent effects on shipping income.
Further, to deliver the raw silk without deterioration it was necessary

to place a fairly large number of the newly constructed, high speed
freighters on the New York run, thus removing them from competition
for other established trade routes.

It is believed, though it has been impossible to prove, that partof the sudden rise of shipping income in 1937 was the outgrowth of
the shift in reporting imports from a c. i. f. to a Åí a. s. basis in 1936.

Where freight paid in Yen to Japanese steamship operators for commodities carried in Japanese bottoms had previously been included incommodity import values, it seems probable that it now was reported

separately as shipping income. This would account for the sudden
increase in 1937 over 1936. However, it did not result in any actual
increase in exchange earnings.

Offsetting the gain in shipping income were increases in shipping
expenses. Not all cargoes moving from Japan were carried in Japanese vessels. For those moving in foreign bottoms depreciation result-ed in a proportionate rise in freight payments in Yen. This is mostclearly shown in the enhancement of payments on shipping accounts
from the low figure of \66,270,OOO in 1931 to \88,142,OOO in 1932
and \I05,748,OOO in 1933. Costs ot ship charter are reflected in the riseto \125,520,OOO in 1935 and in the further growth in the following

years reaching \314,909,OOO in 1938. Furthermore, as previously

POLICY OF JAPAN
THEIMPACT OFEXCHANGE
pointed out the shift from the c. i. f. to f. a. s, basis for reporting

commodity imports added to shipping expense to the extent that thosecommodities were being carried in foreign vessels or freight was
prepaid in foreign currencies for Japanese vessels. However, this item

did not add to total outpayments, being merely a diversion frommerchandise imports to shipping expense.

The net effect of these conflicting influences on the shipping
account was that the contribution of the merchant marine to equality

in the balance of payments was less that might have been expected.

In 1930 net income---excess of income over payments--was\125,345,OOO; and in 1931 \IOO,641,OOO. In the first year of depreciation there was a reduction to \99,701,OOO. In the following years
net earnings climbed, reaching \177,660,OOO in 1935 and \222,065,OOO

in 1937. But in 1938, the year in which income showed the largest
total, net earnings dropped off to \178,574,OOO. in other words, inthe best year-- 1937--total additions to the balance of payments
were only approximately \100 million more than in the worst yearof deflation. And this addition was in Yen with a considerably depreciated value.

It must be assumed that, since trade with the Yen BIoc area isincluded in commodity totals, income and expenses associated withcarrying the commodities also were included in the shipping account.
Though it has been impossible to ascertain the amount of contribution
to that account, the large excess of exports of commodities necessarily

made income substantially larger than payments. Consequently, net
foreign exchange earnings were even smaller than reported totals.
Furthermore, if the assumption is true that after 1936 freight paid in

Yen on imports carried in Japanese vessels was included in total in-come, it would mean that actually Iess net foreign exchange fromshipping was being received than in the worst year of deflation. In
any event depreciation of the Yen failed to increase income from thissource suMciently to offset material lythe large unfavorable balance oftrade.

35

36 LAURENCE PHILLIPS DOWD
Insurance. • During the first two decades of the twentiethcentury writing of insurance by Japanese companies became wellestablished. However, because of earlier founding of firms in othercountries, a large volume of coverage in Japan continued to be written by foreign firms. This proved particularly true for fire, casualty,

and .marine insurance. The tradition of relying on well organized
British and American companies for these types overcame any beneficial effects to businesses of other countries of securing insurance inJapan at lower rates as a consequence of a depreciated Yen. But
devalUation did mean that Japanese firms securing coverage fromforeign countries were required to pay larger premiums in terms ofYen. Consequently, although foreign firms were still utilized extensi-

vely, there was some tendency for Japanese business firms to transfer

their insurance accounts to Japanese insurance firms, thus reducing
expenses in the insurance account. It is believed, though no evidence

could be found, that by the latter part of the decade government
regulation of foreign exchange made it extremely diMcult to secure
exc hang.e to pay insurance premiums to foreign firms for other thanmarlne lnsurance.
As the value of trade increased in the decade there was, of course,

some increase in earnings from marine insurance on the sale of products on a c. i. f. basis. However, expenditures likewise increased on

foreign sales to Japan on the same basis. Furthermore, although theseis no documented evidence to the effect, on the basis of casual con-versations with persons engaged in trade with Japan there is reason
to believe that there was some shifting, because of the uncertainties

arising out of Japan's exchange policy, from purchasing from Japanon a c. i. f. basis to an Åío. b. basis and sales to Japan to a c. i. f. basis

from an f. o. b. basis. This would mean that an ever larger amount
was going to foreign marine insurance companies which might otherwise have accrued to Japanese companies.
Similar to the shipping account, receipts from sales of insurance

shrank slightly in the deflation year of 1931 to \108,812,OOO from

THE IMPACT OF EXCHANGE POLICY OF JAPAN 37\116,218,OOO in 1930, and mounted again, beginning in 1932,
to \117,258,OOO in that year, \138,517,OOO in 1934 and finally to\170,029,OOO in l938. Yet, while shipping receipts climbed steadily,insurance income contracted temporarily in l935 to \128,629,OOO before
continuing its rise. Outbreak of the war and uncertainty of the futureof Japan brought a sharp drop in 1939 and l940 to \23,317,OOO and\28,166,OOO respectively. Payments followed the same path; butwhereas shipping income was on the average over \IOO million inexcess of payments, insurance payments closely approximated income.
Thus, outpayments dropped from \115,854,OOO in }930 to \105,896,OOO
in 1931, rose to \151,125,OOO in l938. Exchange controls and world
uncertainty resulted in a contraction to \26,533,OOO in 1939 and\31,516,OOO in 1940.
The net effect, as far as contributions to the balance of payments
were concerned, of the insurance account was insignificant. It is unnecessary to itemize net income for the significant years, for at the

maximum point in 1934 only \23,437,OOO was contributed to thebalance of payments, an amount insuMcient to have any substantial
effect.

Emigrant remittances, tourist and business exPenditures. Emigrant

remittances were never a large source of foreign exchange earnings

for the simple reason that the number of Japanese living overseas

retaining contact with the parent country was small. For thatreason what small amounts were returned were included with
tourist and business expenditures. Likewise, immigrant rcmittanceswere non-existent as Japan was a surplus population area with migrants leaving the country rather than entering. Expenditures by
tourists and by businessmen and their families residing in Japan werea source of foreign exchang earnings almost ffiom the date of the reopening of Japan. Depreciation of a country's currency usually resu!ts

in a considerable increase in earnings through this channel. But it
failed for Japan for three reasons. In the first place the devaluation
was effected in the midst of the depression in the United States, and38 LAURENCE PHILLIPS DOWD
Americans, the world's leading tourists, had little in the way of funds

to spend on touring no matter how favorable the exchange rate.
Furthermore, those few who might have visited Japan began to avoid
the area because of the uncertainties arising out of the military activities and the general unfavorable conditions for tourists. Last, incre-

asing shortages of commodities in Japan, increasing complexity of
doing business and finally military intervention in their activities

caused many businessmen to leave the country. .
Consequently, after the usual decline in income in the deflation

period from \50,730,OOO in l930 to \43,166,OOO in 1931 the only
substantial increase was through the effects of currency conversion bybusinessmen and their families to meet living expenses in the years inwhich the Yen was depreciating. In terms of foreign currencies thiswas negligible. However, in Yen, income from this source rose to\57,l58,OOO in 1932 and \69,458,OOO in 1933. After mounting to apeak of \107,688,OOO in 1936, this account as a source of foreignexchange declined thereafter to a low of \19,819,OOO in l939.

Accompanying the absence of additions of emigrant remittances,
tourist expenditures and business expenditures to exchange earnings
in any material amount, were corresponding limitations on payments.
The effect of depreciation on Japanese tourism was negligible; for,similar to the populations of most countries with low income levels,
the Japanese were never tourists to foreign countries to any great extent

even at the appreciated va}ue of the Yen in 1930. Japanese businessmen, before depreciation, travelled widely promoting their activities;
but, the increased cost of such business trips and subsequent restrictionsof exchange controls seriously limited their ability to travel. Some of

the larger organizations maintained overseas oflices in the principal
cities of the world staffed with their own personnel. Costs of continued

eperation of these oMces, together with expenses for some necessary
business trips, prevented reduction of this account --- rather depreciation

caused a slight increase. Therefore, from a Iow of \44,897,OOO in

l931 outpayments on this account rose to \51,258,OOO in 1932,

THE IMPACT OF EXCHANGE POLICY OF JAPAN 39\68,462,OOO in l933 and hovered around that level until 1938. In thatyear there was a reported \165,907,OOO, but all attempts to discover

the cause of this sudden jump have been unavailing. It can only be
assumed that this was either associated with completing businessnegotiations under the link system or barter agreements, or in thatyear alone for some reasons business expenses in the Yen Bloc area
were included in the totals. In any event the following year saw theusual sharp contraction in service outpayments.

Governmental exPenditures. Governmental overseas revenue wasnever a large source of foreign exchange during the decade understudy. In 1930 \15,834,OOO was derived from this source. Thereafter, to 1935 the total varied between \5 and \7 million. In,
1935 the accountshows an increase to \18,253,OOO, followed by further
increases to \35 to \37 million in 1936,1937, and 1938. The amazingsums of \463,799,000 and \813,405,OOO are reported for the years 1939

and l940. However, study of the Special Accounts of the goverment
indicates that the sources of these were governmental activies in the
Yen Bloc area, and therefore must be discounted almost entirely assources of foreign exchange.

Outstanding in the governmental account was the growth in
expenditures. From \30,058,OOO in 1930 and \37,896,OOO in 1931
outpayment jumped to \92,882,OOO in i932, the first year of devaluati-

on. In the following years expansion was steady to \164,526,OOO in
1936. Enhanced political activity on the continent caused a sudden

jump to \430,765,OOO in 1937, to \1,O14,365,OOO in 1938, and to\1,901,118,OOO in 1940, But not all of this increment constituted
additional demands for foreign exchange. Administrative expenses of
the government in the occupied areas were included, and being within

the Yen Bloc area they were paid in Yen.
Depreciation of the Yen was a substantial direct influence on theinitial expansion in 1932 and l933. However, indirect causes weremore important in subsequent years. In attempts to develop newmarkets and sources of supply it was necessary for Japanese businessmen

40 LAURENCE PHILLIPS DOWD
and government oMcials to visit foreign countries. This was accom-

plished by governmentally financed "trade missions" so frequently
mentioned and commented upon in the press of the period. Albeit

these missions were to promote private business, since they were
financed by the government, the cost were charged to "government
expenditures;" Hence, there occurred a large and steady increase inthis account, offsetting the almost constant figure for private business

expenditures abroad.

It is impossible to determine the division of exchange demanding,for the Japanese did not publish separate figures for the costs of trade

missions and governmental administrative expenses in the occupied
areas. But, notwithstanding the lack of specific figures the large excess
of expenditures over revenues in, this account again indicates the failureof this account to bring about equality in the balance of payments.

Income Accounts
Interest on securities. Receipt of interest on foreign rentier
investment was never a large source of foreign exchange for Japan, forneither Japanese business nor the government invested extensively
abroad except in Manchuria and China and most of those were of anentrepreneurial nature. Consequently, income from this source varied
only from a low of \IO,451,OOO in 1930 to a high of \22,274,OOO in
1936. A change in statistical compilation in 1938 and 1939 makes thetotals for those years appear large, but they included a substantial
volume of dividends and profits. In 1937 and 1940 interest income
was reported to have been \55,378,OOO and \69,976,OOO respectively;
but a large part of this additional amount over 1936 was derived frominvestments in the Yen Bloc areas and yielded no foreign exchange.
As distinct from interest income both the government and private
business had borrowed extensively from foreign countries. Being of acontractual nature interest payment was required whether or not there
was depression or depreciation. Onset of depression resulted in somedefaulting of interest with the result that payments shrank from

THE IMPACT OF EXCHANGE POLICY OF JAPAN 41\89,805,OOO in 1930 to \80,122,OOO in 1931. Thereafter the impact ofdevaluation of the Yen can be seen readily. Initial depreciation fromthe 1931 average Dollar rate of $O,4885 to $O.2811 in 1932 caused an

immediate advance in payments to \97,752,OOO. Further devaluationin 1933 caused a further increase to \113,l58,OOO. Appreciation invalue in 1934 brought payments back to \97,211,OOO, Thereafter payments declined gradually as previously incurred loans matured andwere retired until new depreciation in the latter part of 1939 again
raised the total to \102,810,OOO in 1940.

Outstanding in the interest account is that, when the Yen stoodat approximately its gold par in 1930, net excess of payments overreceipts were \78,l46,OOO ; but when the Yen reached its lowst averagelevel in 1933 the excess mounted to \96,922,OOO, an increase of 24 percent. In other words, instead of reducing net interest outpayments, theeffect of depreciation was to add an additional \20 million burden,

Dividends and Profits. To the extent that income was derived
from investments in foreign countries devaluation of the Yen proved
beneficial; for it meant that a given amount of profits or a given
dividend declaration when converted into Yen yielded as much moreas there was devaluation. However, not all of the expansion from\97,499,OOO in 1931 to \l66,387,OOO in 1932 can be attributed to thissource; for as early as 1932 Japanese firms had begun investing in
Manchuria with returns received as early as the Iatter part of the year.

Had Japanese investments been in foreign countries and been a sourceof foreign exchange there would have been corresponding increases ininterest income to those in profits. In fact, it might even be argued

that the larger dividends reported represented an actual decrease in

net foreign exchange earnings; for at the time of the greatest enhancement the world was experiencing a severe depression, and typically dividends, being residual payments, decrease more than interest

payments, being contractual payments.

The significance of entrepreneurial investment in Manchuria andChina is indicated in the years after 1932, As more and more political

42 LAURENCE PHILLIPS DOWD
control was exercised and more and more investment made, dividends
and profits waxed. From the low of 1931 the amount received grewsteadily to the end of the decade, with the exception of a slightrecession in 1937 and allowing for a temporary change in statisticalcompilation in 1938. By I940 it attained the unprecedented sum of\373,530,OOO. What part of this constituted foreign exchange earnings
is impossible to ascertain ; however, it is believed to have been quite

small. As the following section on capital movements shows clearly,
beginning in 1934 Japanese overseas investments were sold to financeimports. Reduced overseas investment necessarily meant reduced income from that source. Consequently, it is believed that foreign exchange earning income was never Jnuch larger than \100 million andin all probability was somewhat less.

The small volume of entrepreneurial investment in Japan is shownin dividend and profit payments. Depression and reduced profitability ofenterprises lowered payments from \28,980,OOO in l930 to \22,128,OOO

in 1931; while depreciation caused an expansion to \32,221,OOO in1932. Thereafter improved business conditions resulted in a gradualexpansion to \47,469,OOO in 1935. A sharp increase occurred in 1937

and even more so in 1939; but from all evidence obtainable theseamounts represented earnings of firms incorporated in the Yen Bloc
area with investments in Japan and did not represent actual outpayment across the exchanges.
Particularly noteworthy at this point is a comparison of the interest

account with dividends and profits. It has been noted frequently by
students of the Japanese economic system that Japanese financiers tended

to borrow rentier from foreign countries and invest entrepreneurial inenterprises on the Asiatic mainland. This relationship is well brought

out in the excess of interest payments and dividend and profit receipts. But the inception of the continental venture and the bringing

of Manchuria and other areas under Japanese political domination
meant that receipts of dividends and profits were in Yen and payments
of interest was in foreign currencies. Devaluation resulted in little

THE IMPACT OF EXCHANGE POLICY OF JAPAN 43
additional foreign exchange income, but large additional payment.

Summar2 of service and income accounts. Summing up all service

and income accounts, total receipts mounted steadily from a lowof \446,764,OOO in 1931 to a high of \1,541,498,OOO in l940, but the

major part of this increase was from Japanese dominated areas andyielded little or no foreign exchange. Payments, on the other hand,also mounted steadily from a low of \363,144,OOO in 1931 to a highof \2,331,137,OOO with the balance becoming unfavorable after 1936.
At this point the question might be asked : "How did exchange
policy affect these accounts ? " In the deflation period income dropped

by l5 per cent and payments by only 7 per cent; but this was thenormal result of world depression and Japan's position of deriving
income largely from rendering services to the other countries of theworld and making payments of a contractual or fixed nature. Reimpos-

ition of the gold embargo at the end of 1931 was followed promptly

by a rise of income by 30 per cent and payment by 32 per cent,indicating that the initial depreciation of the Yen affected paymentsslightly more than income. Further depreciation in 1933 was accompa-

nied by a further rise in income by 19 per cent and payments by 22
per cent, another slight increment in the proportion. Again considering

the nature of the accounts this relationship was to be expected; for,though the cheaper Yen gave rise to some tendency to utilize Japaneseservices, continued depression and the other factors previously discussed

restricted earnings from these sources. Cancelling the benefits of therise in income were larger payments because of the obligation to meet
fixed expenses. It is probable that had there been no other internal

developments the influence of exchange depreciation would have hadfavorable effects on the service and income accounts as world economic

conditions improved, for fixed payments would have remained stable

while income continued to improve. However, as it worked out depreciation was probably an extremely poor policy. Military prepared-

ness, political policy and the exigency of seeking new markets andsources of supply occasioned more dependence on receiving services,from44 LAURENCE PHILLIPS DOWD
foreign.countries than in rendering services thereto, more payments for

trade promotion and continued payment of interest while dividend andprofit income earned in foreign countries declined relatively. Conse-•

quently, the trend of the years immediately following depreciation

continued until in l937 payments became larger than income. Thus,
rather than providing additional income to offset the adverse balanceof trade, the exchange policy adopted tended to reduce it. Moreover,
the true condition was worse than even balance of payments statistics

showed, for an ever larger part of receipts was derived from nonforeign exchange earning sources while payments mounted to exchange
requiring destinations. In any event the worsening of the balance on
servic,e and income accounts became one of the causes of additional
exchange controls made necessary in the later years, particulary thoseof the infiation period,

Capital Accounts

Long term investment. For Japan the capital accounts wereparticularly important, As early as 1936 Japanese economists saw that" exclusive of capital movements, Japanese ordinar'y invisible trade has

resulted in an export balance for Japan every year, it is true. But,

even here, the favorable balance dwindles to almost nothing in thelight of repayment of matured foreign loans for the government,
private banks, and corporations••••••" To understand the reasons forthis statement and, more important, to recognize that it was in reality

an understatement, it is essential to summarize briefly the history ofJapanese foreign investment.

Almost from the reopening of trade between Japan and the westernworld in 1854 the country was a debtor nation. With the exceptionof the years during and immediately following the First World War,the size of the long term foreign debt of the country grew continually.

Obligations were incurred for several purposes, perhaps most importantof which were for the procurement of capital equipment for industry,
harbor improvement, electrification programs, waterworks and similar

THE IMPACT OF EXCHANGE POLICY OF JAPAN 45
types of economic development of the country. In addition funds wereobtained from foreign sources to replenish specie reserves in years ofabnormal import excess, such as those following the Great Earthquakeof 1923, and for correcting an adverse balance of payments to relievestrain on Japan's money markets. At the end of 1930 the peakyear of foreign indebtedness ---a classified list of the foreign incurreddebt of Japan included:
National Government Bonds issued abroad••••••-••••••••••••-••••\1,567,325,397
Internal Bonds purchased abroad •••••••-•-•••••••••-••-•-•••••-•.••• 84,178,Ooo

Local Government Bonds issued abroad ••••-•••••••••••••••••••••• 245,l73,768
Corporate Debentures floated abroad •••••••••••••••••••••••--••••• 455,867,068
Foreign investment in domestic securities of banks and businesses l13,828,ooO

TOTAL \'2,466,372,203
AIthough it has been impossible to find a corresponding breakdown
for Japanese investments abroad, at the end of 1929 it was estimatedto total \1,81 1,OOO,OOO. Not included in this were claims against China

of 270 million Yen and against Russia of 240 million Yen, both ofwhich were unsecured and considered bad debts. Thus, using the 1929
figures for investment abroad, and there is no reason for assuming that

there was any substantial additional investing during 1930, Japan was

a net debtor nation in 1930 to the extent of 655 million Yen. But
this fails to tell the whole story; for a large share of Japanese investments abroad was of an enterpreneurial nature in Manchuria andChina investments representing indernnities received from previous
military activities, or shipments of capital equipment from Japan
without going through the foreign exchange markets. Sale of theseinvestments to investors in foreign nations after 1931 to secure ad-ditional exchange was politically impossible. 'After 1930, in an attempt to become economically independent,
Japan floated no further long-term loans in foreign countries. Further,even if Japan had tried to secure additional funds the success of sucha move would have been doubtful, for with the devaluation of the
Yen and the undertaking of hostilities on the continent her credit46 LAURENCE PHILLIPS DOWD
rating, which had long been high in London and New York financial
circles, dropped drastically to the point that there was reported to be

no longer a market for any new Japanese security issues. Moreover,the European nations which might have been disposed for politicalreasons to extend credit had little dollar exchange exchange mostbadly needed by Japan.
As against the absence of new investment in Japan, there werelarge speculative purchases by Japanese nationals of Japanese securities

denominated in foreign currencies and in foreign government securities

in 1930 and especially in the Autumn of 1931 in anticipation ofdevaluation of the Yen. This placed extreme pressure on the foreignexchange reserves and was probably one factor which brought about
depreciation. Yet depreciation failed to stop this movement and theflight of capital from Japan continued in the first part of 1932. Suchmovement placed the country in an untenable international financial
position and compelled enactment of the "Capital Flight Prevention

Law." For the purposes of evaluation of exchange policy, however,the failure to continue to borrow abroad, combined with the requirement of meeting principal payments on Ioans previously floated, added
to Japan's balance of payments diMculties. Nor did depreciation solve
the problem ; for it merely meant that the Japanese financial authori-ties had to allocate more Yen than before to make a given amortization payment. Of course, not all of the increase in payments on capital

account after 1932 can be attributed to enlarged costs of servicing
previously incurred debts. Beginning in 1933 Japanese business firms

and the government began investing extensively in Manchuria andlater in North China, In 1933 the total investments in this area werereported to have been approximately \220,100,OOO, in 1934
\310,800,OOO, and in the following years successively greater as thearea under control became larger. These investments represented
for the most part shipment of capital equipment from Japan;and suchactual funds as were expended on the continent, although included in

the balance of payment totals, represented no demand for exchange.

THE IMPACT OF EXCHANGE POLICY OF JAPAN 47
With enactment of the Foreign Exchange Control Law, enforced fromMay 1, 1933, allocation of exchange for the purpose of purchasing
either Japanese or foreign securities in foreign countries was prohibited.

Hence, thereafter the only long-term debit items which required exchange were for purposes of redeeming matured loans, amounts whichranged from \50 to \100 million annually.
Returning to long term credit items, ineluctable requirement for
exchange to cover the adverse balance of trade, service and income
accounts compelled Japanese financiers to sell foreign securities held inJapan, to collect the proceeds of foreign loans at maturity and to
dispose of businesses owned overseas. According to a very reliablecalculation sale or redemption of foreign securities amounted to \22.8

million in 1933 and \136.8 million in 1934 but only \28.l million in

1935, indicating exhaustion of this source of funds. Collection offoreign loans, prior to repayment of those made in the Yen BIoc area,

were important only in the year 1933 with 76.2 million having been
received. Outstanding was the sale of businesses owned in foreigncountries. This became an important source of exchange in 1933 withreceipts of \75.3 million. In 1935 such sales netted \129.4 million
and in l936 \270.0 million. Although these sales provided large sums
temporarily, in the long run sale of overseas investments was detrimental

for it reduced future income potential.

Short term investment. Although short term capital movementsfrom Japan as part of the " flight of capital" were Iarge in 1930 withan estimated \221 million exported, in subsequent years they little
influenced the balance of payments. Since it was not a major international money market, there were almost no short-term balances owned

by foreigners on deposit in Japan. Thus it was possible for the financial authorities to ignore in planning exchange policy the dangerof such speculative movements away from the country. Of course thedanger existed that Japanese-owned funds might move out, a danger
which in the early years proved quite real; for it was quite widely
rumored during the Iatter part of 1931 that the large firms, especially

48 LAURENCE PHILLIPS DOWD
the Mitsui and Mitsubishi organizations, were shifting short-term funds

abroad speculating on possible devaluation of the Yen. After l932
pressure was relieved by the successively more severe exchange control
laws specifically preventing such movements.
Unfortunately all balance of payments statistics fail to distinguishbetween new short term borrowing and drawing down balances held
abroad. Undoubtedly some funds were obtained from the first source,
though they were probably not large, for the same reasons cited abovein discussing long term credits; namely, the decline in the credit

standing of Japan in world money markets arising out of Japan's
financial policies and uncertainties concerning future political andmilitary plans. As later evidence of this, the Japanese Departmentof Finance in 1937 prevailed upon the Japan Cotton Spinners Association to attempt to obtain foreign credits for the purchase of raw
cotton in excess of the legally permissible exchange allocation. But all

attempts to secure such credits proved futile. In fact, during theperiod previously established terms of payment, normally providing for

ninety day sight drafts, were reported being reduced to thirty days,
and in some cases time bills were completely eliminated.
The failure to secure foreign short-term credits combined with the
reduction of time accommodation in payments compelled the authorities
to draw on foreign balances and short term credits previously obtained.

From a low of \35.2 million in 1933 income derived from this sourcerose to \148.0 million out of the total "receipts of foreign capital"

in 1935 of \193.0 million. Credits rose further to \378.4 million in1937 and to \869.7 million in 1938. Though it cannot be determined
for the lack of any breakdown for figures after l936 it is believedthat a substantial part of this was a final using up of balances held
abroad; for in 1939 and 1940 the account declined drastically, indicating exhaustion of foreign short-term holdings.

Summar2 of caPital account items. The separate items in thecapital accounts have been presented in considerable detail, but thiswas essential to establish correctly the exact manner in which theseTHE IMPACT OF EXCHANGE POLICY OF JAPAN 49
accounts were used and to disclose the impact of exchange policy on
the particular items. However, to see the overall picture it is desirable

to bring them together in a summary. In 1930 payments exceeded
income by \!47,818,OOO. Speculative movements of funds in anticipation of devaluation or other positive action increased the excess to\232,664,OOO in 1931. Imposition of controls over the fiight of capitalin 1932 resulted in a reduction to \100,136,OOO in that year, and further

extension of controls in 1933 brought the capital accounts almost inbalance with an excess of only \20,976,OOO. This trend toward equality

was reversed in 1934 with payments exceeding income by \183,441,OOO.

From that year to the end of the decade the new trend continued
with the exception of 1938. For instance, in 1937 debits were larger
than credits by \565,094,OOO and in 1940 by \1,300,408,OOO.
. Were it possible to abstract investment on the continent from debit
totals it is conceivable that credits might have exceeded debits after
1933, but unfortunately no accurate estimates of Japanese investmentsin the Yen Bloc have been discovered. As opposed to the smaller debit

total, however, credits also would have been somewhat smaller by theamount of repayment of loans thereto and by the amount of purchaseof Japanese securities by individuals and firms resident in the area.

More impertant for our analysis were the means by which foreignexchange was secured. Through either lack of desire or sheer inability,

borrowing in foreign countries was discontinued after 1930 except fora small, though undeterminable amount of short-term credits. As aresult, as early as 1933 it became necessary to begin selling foreign
securities held in the country as well as assets held in foreign countries.

So vital did income from this source become that in 1937 extension ofthe

Foreign Exchange Control Law gave the government the power toacquire and dispose of all privately held foreign assets. Meanwhile, toprovide exchange, banks commenced drawing down balances held inother countries and failed to renew loans previously extended. From1933 through 1936 these two sources of funds enabled the country tocover the adverse balance in other accounts. But by the end of that

50 LAURENCE PHILLIPS DOWD
year the point of exhaustion was reached.

The question can now be asked -and answered: how did exchange policy affect the capital accounts? Whether or not the resumption of gold payments at the beginning of l930 infiuenced thefiight of capital in 1930 and 1931 is problematical. It might be argued
that the consequent loss of gold reserves scared investors or forewarned

them that depreciation would follow. In opposition, it might be argued

that economic conditicms in Japan were such as to have induced theflight in any event, On balance, the first argument appears to be thestronger, for loss of gold could not continue indefinitely, and investors

could have recognized easily that some action would have to be taken
at an international level, with reimposition of the gold embargo follow•-

ed by depreciation being the most logical. " Tipping off" insiders wasreally unnecessary except that it provided information as to the exact

time that action would be taken.
Depreciation in itself adversely affected the capital accounts, for it

meant that, since both the government and private business were large
debtors to foreign nations, more Yen had to be allocated for maturingloans. Had the country been a creditor or had it borrowed anew the

opposite would have been true and depreciation would have hadfavorable effects to the extent that proceeds were remitted for use
internally. Had the proceeds of sale of foreign assets been remitted
depreciation would also have been favorable. However, as the proceeds
were almost entirely utilized to meet payments in foreign countries the
direct eff'ect was neither favorable nor adverse.

Military preparedness had no direct influence on the capital accounts through depreciation; but the indirect effects were important.
Increased import requirements and loss of shipping income in particularwere compelling infiuences bringing about complete restrictions on new
foreign investment and in the later compulsory sale of assets. Furthermore, through the loss of confidence, the ability to secure evpn shortterm credits was limited.

THE IMPACT OF EXCHANGE POLICY OF JAPAN51

Gold and Silver
ExPorts in Dej7ation and ReY7ation Periods.--When one considers

that the large adverse balance of merchandise trade was notcounterbalanced by receipts on service and income accounts or by new

investment in Japan or by new borrowing in foreign countries thequestion is raised: how was the country able to maintain its international position as long as it did? The answer lies in the movementof gold and silver. In l930 the excess of payment on current andcapital accounts was met by a net shipment of gold and silver of\288,158,OOO and in 1931 of \387,282,OOQ. These large shipments.;
were reported to have depleted
Japanese g'old reserves by more than
50 per cent. The loss of reserves was stated to have been the causeof the resignation of the Cabinet and the conclusive factor in thedecision to reimpose the gold embargo. Yet, even with depreciationand the introduction of exchange controls, net shipments abroad in l933

still totalled \120,905,OOO. By further restriction on exchange, ship-ments of gold and silver were almost entirely prevented in 1934 witha net outflow of only \600,OOO in gold and \13,168,OOO in silver inthat year. In l935 shipments again increased; but due to attempts
to conserve gold, payments were made in silver in the amount of\146,805,OOO.

Encouragement of gold mining together with subsequent enactmentof the Gold Purchase Law in April, 1934, expanded gold reserves froma low of \425,OOO,OOO in 1932 and 1933 to \466,OOO,OOO in 1934, to\504,OOO,OOO in 1935 and to \548,OOO,OOO in 1936. In 1937 gold reserves

were revalued at 290 milligrams per Yen from the previous 750
milligrams per Yen providing a book profit of \747,OOO,OOO. Of thisarriount \412,OOO,OOO was placed in a "Gold Fund Special Account."

ResumPtion of gold exPorts in 1937. Fortunate it was for Japanthat gold mining had been encouraged, for after 1936, during
which net exports of silver were only \28,474,OOO, the depletion offoreign balances forced reconsideration of the policy of not shipping52 LAURENCE PHILLIPS DOWD
gold of the previous three years. In March, 1937, the Minister ofFinance, Toyotaro Yuki, resigned to the fact that there would befurther increases in the import surplus as a consequence of domestic
economic and military policies, reluctantly reversed the decision of theprevious years and agreed to the resumption of exports to strengthen

the Yen by restoring overseas balances. During the balance of theyear total shipments amounted to \866,878,OOO. This unprecedented
sums however, failed to have any appreciable effect, and in 1938 an-other \660,639,OOO in gold and \l5,622,OOO in silver was exported,followed by \663,794,OOO and \320,141,OOO worth of gold plus
\22,953,OOO and \30,946,OOO of silver in 1939 and 1940.
Although estimates of gold reserves at the end of 1940 have neverbeen published, subtracting shipments for 1937 through 1940 fromreserves existing in 1937 plus probable production leaves one with theinescapable conclusion that, in the pessimistic words of the Oriental
Economist, by June, 1940, "gold, silver, and foreign securities haveabout been used up,"

Evaluation of the Influences of Exchange Policyon the Balance of Payments
Since considerable detail has been presented in the preceding
analysis of exports, imports, the balance of trade, the terms of tradeand fin'ally the balance of payments, it is desirable to present insummary an evaluation of the influences of exchange policy on thebalance of payments as a whole before turning to the effects on thedomestic economy. By this the answers to the questions raised at the
beginning of this chapter will be presented more explicitly.

Analyzing the b,alance of payments in light of the three periodsof financial policy that is, the three successive periods of deflation,
refiation and inflation -- some striking developments are to be found.
In the first, or deflation, period exports of merchandise declined quite

noticeably, yet the decline in Japanese exports was not as great pro-THE IMPACT OF EXCHANGE POLICY OF JAPAN 53
portionately as was the decline of exports from the United States.
Imports likewise declined, but not to the extent of exports. In particular there was a smaller decline from 1930 to l931 than from 1929

to 1930. More shrinking of exports than imports in itself provided
apparent evidence of diMculties at the international level; but the
failure of imports to clecline in proportion to exports was in large

measure due to anticipations of exchange manipulation. Orders forJapanese products were being delayed in anticipation of devaluationof the Yen, and Japanese manufacturers were stockpiling and engaging
in speculative buying for the same reason, While receipts from service,income and capital accounts were decreasing, payments were increasing.
Foreigners were reluctant to invest in or lend to Japan because of thedepression and uncertainties concerning the future, and the government

was unwilling to borrow because of a growing nationalistic attitude;
yet Japanese investors were engaging in speculative capital movements.
The effect of the large excess of demand for foreign funds over supply
made necessary large exports of gold ; and this,in turn reduced domestic

monetary reserves to a dangerously low level. At the end of 1931
Finance Minister Takahashi announced what had been anticipated forsome time -a reimposition of the gold embargo. The immediate
consequence was depreciation of the value of the Yen by nearly thirty
per cent, followed by a further reduction in 1933.

In terms of the depreciated Yen, exports in 1933 and in thesubsequent years of the reflation period revived; but in terms of theformer value of the Yen a reduction in real values continued;that is,

the quantity of necessary imports which could be purchased with agiven quantity of exports decreased. Within total export figures there

were three notable developments. First, and perhaps most important,
was the failure of raw silk exports to revive. One author stated that
this was the result of high silk prices in the deflation period during

which time there was widespread shift in the American market to theuse of substitutes, especially rayon and finer grades of cotton, However,since there had long existed a preference by American women for

54 LAURENCE PHILLIPS DOWD
silk stockings and lingerie, it seems more probable that the substitution

was enforced rather than voluntary, brought on by the reduced incomesof the American depression. Moreover, the import price into theUnited States declined steadily to 1934 and reached a point some sixty-

five per cent below that prevailing in 1930 without noticeably stimu-

lating sales. In any event silk failed miserably to earn foreign ex-change during the period. A second notable development was the
expansion in exports of poorer grade materials. From an overall
examination of trade statistics there is strong reason to believe that

this development would have occurred whether or not the Yen had
been depreciated, for in many cases world depression meant for buyersthat it was a question of either purchasing cheap, inferior quality
Japanese products or not purchasing at all, This trend was noted evenin the American market in which consumers bought large quantitiesof tungsten light globes of inferior quality from Japan rather than thefar superior, but higher priced, American product. However, of great-

est importance in commodity exports was the sale of cheap cotton
textiles to Southeast Asia. In fact, sales of this and other cheap
products to that area helped maintain the volume of Japanese shipments to the Asian market even though those to areas of China notunder Japanese control were declining rapidly. The third major development in trade was the attempt to promote new markets. Though
the program had some success, it was a costly venture, for the expenseof sending trade missions to promote sales undoubtedly in some cases

was greater than profits realized. Furthermore, additional costs oftransportation to the new and usually more distant markets reduced thefinancial gain derived from the sale.

More important in the reflation period in its influence on thebalance of payments was the advance of imports. Initially, stimulation

was provided by enhanced demand for products required by the exportindustries; however, as military plans unfolded emphasis was changed
to the provision of military supplies. Yet larger munitions requirements

in turn placed pressure on the economy to provide more exports andTHE IMPACT OF EXCHANGE POLICY OF JAPAN 55
this created more demand for imports. To reduce the adverse balanceof trade and free the country from dependence on foreign production
as far as possible, expansion ofindustry was encouraged. By this some

shift from importation of semi-finished and finished commodities to
raw materials was achieved ; but continued reliance on foreign sourcesof capital equipment cancelled some of the benefits therefrom. As
penetration of the continent progressed import demand became evengreater to provide supplies and equiprnent to carry out economic plans,counteracted only by imposition of restrictions on imports for domestic

consumption. Finally, though it has been impossible to work it out
precisely, as production and employment expanded, the well-recognizedmultiplier effect was generated and served to enhance further exchange

diMculties and create the need, for even more direct restrictions onimports. But notwithstanding all attempts to relieve the pressure, thevalue of imports both absolutely and relative to exports continued tomount and the balance of trade to worsen.

In the service accounts there was some improvement in earnings
from such items, as shipping, insurance, etc. ; but world depression anduncertainty concerning the political and military future of the country

held down income possibilities, especially from the merchant marine
and from tourist expenditures. Conversely, the reduced value of the
Yen required larger payments in that currency for services secured
abroad ; and more rather than less services were required.

Speculative movements of capital were almost completely stopped
by steadily more severe controls over exchange; but still Japan was
faced with the necessity of meeting interest and principal payments on
previously incurred debts. For several years it was possible to continue

business by drawing on foreign balances and by sale of foreign assets.

But by the end of the reflation period these balances were almost
exhausted, and in the following period the financial authorities wereforced to resume shipment of gold. One fact, generally overlooked by
students of the period was that in one year 1935 part of the deficit in

the balance was met by shipment of silver to the extent of some \200

56 LAURENCE PHILLIPS DOWD
million, for silver was included as an item in the merchandise tradeof the country.

The third period of the decade inflation--proved mostfateful for Japan. Imports for domestic consumption were almost completely stopped except for those absolutely vital for the maintenance ofthe population. Raw materials for industry were restricted to thosenecessary for military supplies or for export products which could be soldon world markets to pay for munitions not available domestically.
Export totals appeared larger than they were in reality; for included
in statistics were shipments to the Yen Bloc shipments which earned
no urgently needed foreign exchange. Added to the diMculties ofcontrolling trade to procure military supplies, the "China Incident"
brought forth a wave of boycotts against Japanese products not onlyin China, but also in those countries the exports of which were vitalto Japan. During the period such boycotts were noted in the UnitedStates, Great Britain, the Netherlands Indies, Malaya, and Australia.
With all of this, the adverse balance of merchandise trade quickly
assumed record proportions, Successive waves of direct and indirectcontrol, discussed in Chapter IV, followed until even Japanese economists were forced to make the plea that:
Due to over-anxiety about balancing international payments, there isdanger of the authorities unbalancing them still further and thereby pre-cipitating the very evil which they want to avert. The restriction ofimports is liable undermine the competitive powers of Japan's industries andresult in export movements being curtailed.

Notwithstanding this and other pleas the import excess continued
to rise and restrictions to increase. Nor did the service accounts lessen

the exchange diMculties. Merchant shipping as a source of revenue
declined with withdrawals of ships from world trade routes to transport

men and supplies to the continent. In fact, the shortage became sosevere that Japan was faced with the necessity of going into the world
charter market to secure additional vessels, thus further intensifying

her exchange dithculties. Uncertainties as to the future of Japan

THE IMPACT OF EXCHANGE POLICY OF JAPAN 57'
brought forth a shift of marine insurance underwriting from Japanese

to foreign companies. And those persons who, with economic revival
in other countries, might have become tourists in Japan hesitated tovisit the region. Added to all'this was continuing government expenditures overseas to develop new sources of supply and new markets.

The culmination of all these developments was that, with exhaustion of income potential from the capital accounts, beginning withthe first year of the inflation period --- l937 ----Japan's only alterna-

tive was the resupmption of gold shipments, and on a previously unheard of scale. In that one year shipments amounted to more than totalreserves existing in Japan at the beginning of the decade. The deci-sion to resume shipment, followed almost immediately by large movements, gave rise to further questioning of the overall financial policy

with the economists asking••••••whether import demand could grow so overwhelmingly heavy thatthey would make this debit balance in international payments too large to

bc met by gold shipments. Such a situation is unthinkable exoept when
the government is amiss in its fiscal pelicy, and if an unsound fiscal policy

is the underlying cause of foreign exchange weakness, then any control
system, however ingenious, will prove powerless to save the country from
ultimate bankruptcy and ruin. However, such a devastating fiscal blunder

could not be committed by a government because the mere working of
economic laws would prevent it, This is especially the case with the Japa-

nese Government which, as a matter of course, has announced that its
guiding financial principle will be efforts to insure harmony in commodity

demand-supply and a balance in international payments.

Yet notwithstanding the government's "guiding financial principle" shipments of gold continued at the unprecedented rate. These
shipments, combined with anticipations of further tightening of controls,

gave rise to additional demands for exchange to purchase commodities
to stockpile ; and this gave rise to the necessity for further gold exports

and further controls. Thus, by the end of the decade the country
became so enmeshed in controls over trade both direct and indirect as

58 LAURENCE PHILLIPS DOWD
to render maintenance of any semblance of free private international
trade virtually an impossibility. And with the loss of virtually allinternational financial reserves in all forms the country was faced withwhat might be termed international bankruptcy though it seemed to bewell prepared to undertake a great war.

One may wonder what course the financial leaders would havefollowed had Japan not become embroiled in World War II in thefollowing year. But embroiled she was, and therefore the question
must remain unanswered.

The foregoing article by professor Dr. Dowd is an extract of a much longer
study entitled "Japanese Foreign Exchange Policy, 1930-1940". That study consistedof three parts divided into: I. A History of the Development of Japanese Exchange
Policy in the l930 Decade; II. The Impact of Exchange Policy on the International
Economy of Japan; and III. Influences of Exchange Policy on the Domestic Economy.
Because of space Iimitations only an extract of Part II has been published here ; yet it
is believed this will be of greatest interest for economists in Japan. InsuMcient space
has also necessitated deletion of all statistical tables and references. However, in theoriginal study all statements have been documented statistically and numerous Japanesesource references have been cited.

The Editor

A NOTE ON THE RECENT TRENDS
OF JAPAN'S FOREIGN TRADE

Fukuo KAwArrA

1. The expansion of Japan's foreign trade has of late years beenvery remarkable. Since l953, when a severe deflationary policy was
enforced to check the deficit- of our international balance of payments,

Japan's export has continued to rise and in l956, it became about
twice as large as in 1953. Japan's import also expanded, though withsmaller pace, growing one and a half times during these years.
(Table 1)
Table 1. Japan's Foreign Trade in Value(in millions of U. S. dollars)
ExportImportBalance

1953

I,274.8

2,409.6-1,134.8

1954

1,629.2

2,399.4

1955

2,OIO.6

2,471.4

1956

2,501.0

3,229.6- 770.2- 460.8- 728.5

Source: Ministry of Finane, Customs Statistics.

When we compare the rate of growthwith those of principal trading nations, we

was the progress that had been achieved byunder review. Look at the following table.

59of Japan's trade volume
realize how remarkable
Japan during the period(Table 2)

60

FUKUO KAWATA
Table 2. Year to year changes of Trade Volume of Selected

Countries. (percentages of the previous year's figures)

ImportExportCountryJapan
UnitedStates
United

1954

1955

1956

+33

+31

+6
+4

+10

+20
+12

+8

+4 +16

Kingdom
Germany+24 +17

France+16 . +12

Italy

19531956

J+8•I+15

+15
-10
+12

+108

+31
+ 65
+ 17
+ 12

1954

1955

1956

19531956

+4
-7

+5

+25

+38
+11

+12

+8
-1

+l2

+26

+21

+71

+8
+2

+12
+11

+12
+14

+1

+11

+8

+38
+22

li6urce: Japan's figures are those published by the Ministry of Finance.
9itnhaenrciafiigUsrt:Stistairces.deriVed frOM thase pubiished by the iMF, internationai

Japan's rates of growth of export volume (as compared with theprevious year's figure) were 339o in l954, 319o in 1955, 200/e in 1956,

and I08e/o throughout the period from l953 to 1956. While her rates
of increase of import volume were 40/e in 1954, 59o in 1955, 25e/b in

1956, qhd 389o throughout the period above mentioned.
It is noteworthy that the rate of growth of our export volume isdiminishing year after year, while that of our import volume isincreasing, especially in 1956, during the period under investigation.

As regards the international comparison of the growth rate, Japanranks first in export and second to Germany in import growthduring these years.

2. Now let us examine in what kinds of commodities and inwhat direction Japan has made such a remarkable expansion of trade.
In the first place, we classify our 'exports and imports into several

commodity groups, and examine which groups have made rapid
progress. According to table 3, we find that it is in such items as woodand wood products, machinery, and miscellaneous articles that Japan

has made larger growth of export than the average rate during theperiod from 1953 to I956.

Those commodity groups whose expansion of export were above

A NOTE ON THE RECENT TRENDS OF JAPAN'S FOREIGN TRADE 61
Table 3. Changes of Japan's Export Volume, classified by commodity groups(as percentages of the previons year's figures)

General

Foodandbeverages

l954

1955

l956

+ 33

+ 31
+ 13
+ 20
+ 53
+ 25
+ 34

+
+ 29
+ 14

29

-

Textilernanufactures

7

+
+ 48
+ loll+ 4

Metals&metal

manufactures
Non-Metallicminerals&productsthereof

49

oils&fats[
Chemicals&' ++106
26

phermaceuticalsIWood&woodproductsi'

1956aspercentages of1934-36

208

86

136

58

204

58

165

l41

+
+ 18

l76

gg

165

37

++ 27

207

111

H

27

l

33

34

367

68

+
+ 30 [ + 43

+
+ 29

290

285

239

1OO

Machinery; /+ 12
MiscellaneousarticlesI'++20

1956aspercentagesof 1953

41

85

Source: Ministry of Finance.

average, were, in 1954, wood and wood products, textiles, metals andmetal manufactures; in 1955, metals and metal manufactures, machinery, miscellaneous articles, oils and fats, wood and wood products ;in 1956, machinery, wood and wood products, food and beverages, andmiscellaneous articles, non-metalic minerals and their products andchemicals and pharmaceuticals. It is to be noted that the export
volume of metals and metal manufactures declined in 1956 by 27e/o ;this is because of the brisk demand at home. It is also a matter ofconcern that rate of growth of the export volume of textiles, which
are our traditional export commodities, are declining, although theexport volume doubled during the period from 1953 to 1956.
If we compare the export volume in 1956 with that in I934-l936,

we find that the volume in I956 is only 86% that of the pre-war
years. Commodity groups whose export volume reached or exceeded
the pre-war level were machinery, metals and metal manufactures andchemicals and pharmaceuticals. This tells us the industrial advanceof Japan in post-war years.

Commodity groups whose import volume showed a more rapid
growth than the average rate are food and beverages, metal ores, oils

62 FUKUO KAWATA
and fats and machinery in 1954 ; oils and fats, chemicals and pharmaceuticals, miscellaneous articles, raw metrials other than those for tex-tiles, mineral fuels, metal ores in 1955; metal ores, miscellaneousarticles, textile raw materials, chemicals and pharmaceuticals andmachinery in 1956.
Table 4. Year to year changes of Japan's Import Volumeclassified by commodity groups(percentages of the previous year's figures)

1956as1956aspercentages

percentages

1954

1955

1956

+4

+5

+27

138

-8

107

101

125

•86

of1953GeneralF(x)dandbeverages
Textilerawmaterials
Metalores
Mineralfuels
Otherrawmaterials

Oils&fats
Chemicals&

+17
-13
+14
+O.1
o

+14

phamarcenticals-7

Machinery+13

Miscellaneousarlicles

-2

-O.3

+l

+2
+7

+10
+57
+57
-18
+l6

+41
+81

of1934-36
114

211

l48

+25
+22

133

200

134

84

-8

164

ll2

202

228

126

121

220

40

+39
+36
+93

Source: Ministry of Finance.

When we compare the import volume of 1956 with that of 193436, the former is 1140/o of the latter. Commodity groups whose import volumes exceed prewar standard in l956 are chemicals andpharmaecuticals, mineral fuels, metal ores, machinery, oils and fats,

and food and beverages. Especially remarkable are the increases in
the import volume of chemicals and pharmaceuticals, and of mineral
fuels, both of which are twice as large as prewar figures.

3. Secondly, let us make an inquiry into the direction ofJapan's
trade development. During the period from 1953 to 1956, Japan's
export (in value) as a whole increased by 96%. It is significant tomention that the rate of increase of export to Asia stands below thispercentage. It is also noticeable that our export to Central America
declined by 27% during this period in spite of the general expansionof our export trade.

A NOTEON THE RECENT TRENDS OF JAPAN'S FOREIGN TRADE 63
Table 5. Year to year changes of Japan's Export inValue classified by area
(percentages of the previous year's figures)
1954

1955

1956

1953-1956

Asia

+ 22

{

+6
+ 34

+ 21

- ll

+ 56
+ 84

Area

Far East
South & South-East

Asia

Middle East
EuropeNorth America
U. S. & Canada
Central America
South America(

AfricaAustralia & Ocecania

Total

+ 37
+ 66
+ 28
+ I9
+ 23

-1

+l73

+5
+ 92
+ 28

-- 8

-6

t 36
+ 53
+ 66
- 26

+ 55

+9

+ O.5
+ l9
+ 22
+ 25

+ 37
+ 77
+lO<L

+ 83

+ 91
- 33

+122
+153
- 27
+l31
+211
+136

+ 23

+ 24

+ 96

-6
+ 55

+2
- 10

Source: Ministry of Finance, Customs Statistios.

Note: Far East includes South-Korea, China Mailand, Ryukyu, Taiwan, and Hong

Kong.
South and South East Asia includes Indo-china, Thailand, Frederation of
Malaya, Singapore, Philippines, British Borneo, Indonesia, Burma, India, Pakistan,

Ceylon & Portuguese Asia.
Middle East includes Iran, Iraq, Saudi-Arabia, Kweit, and other countries intheir neighbourhood.

In 1954, export to South America, Australia and Oceania, the Mid-dle East, South and South-east Asia increased remarkably. In 1955,
however, export to South America, the Middle East, Sou•th and Southeast Asia declined slightly, while export to Central America decreased asmuch as by 26%. On the other hand, export to Australia and Oceania,
United States and Canada, Africa, Europe and the Far East increased
with more rapid pace than the average. In 1956, export to Australia
and Oceania, which had kept increasing so considerably before, suddenly took a reverse turn declining sharply by 330/o. Our export
to South America continued to decline, while our sales to Africa
increased further by 910/o, following the previous year's increase of

64 FUKUO KAWATA
55%. This sharp increase of our export to Africa is due to theexport of vessels to Liberia. Export to the Far East also increased,

owing to the expansion of trade with China Mainland.
Although our export during this period continued to increase, it
is interesting to find that our sales to under-devel'

oped areas, except

Africa, suffered fluctuations, increasing in some years and decreasing
in others, while our export to industrial areas, such as United States

and Canada, and Europe has steadily increased. This means how
underdeveloped areas are tinstable as our export market.

As to our import in value, the general rate of growth for theperiod under review is 340/o. After a slight decline in 1954, ourimport increased by 3e/e in 1955, and in 1956 the rate of increase isso conspicuous as to reach 30e/e, Those areas from which we increased

our purchases above average are Africa, North America, Austra]ia &Oceania and the Far East. Particularly remarkable was the rate ofincrease of our import from Africa, which made a growth by 206%.
Table 6. Year to year Changes of Japan's Import in Valueclassified by area
(percentages of the psevious year's figures)

Area

i

1954

1+
i'
j"
+ l8I i'd1956

1953-1956

+ 31
+ 58
+ 17
+ 26
+ 12

/

FarEagtSouth&South-eastAsia
MiddleEast
Europe

'---

.--

2

15

+ l6

O.4

os

6

15

19

H sF

-

24,
11

-

+ 17
+ 40
+

North
America i -1 +1 +tro i +40(IIIIi,',",.C.allll,ES. ii Å}ig ;gtt,3i :,3;
+ 41 - 41 + 22 +1// - 30 +171 + 61 +206
Australia & Oceania - 32 + 49 + 41 •+ 42
South America

Africa' Total -O.6 +3 +30 +34
Source : Ministry of Finance, austorns Statistics.

In l954, our total import decreased by O.69o, but our purchases

A NOTE ON THE RECENT TRENDS OF JAPAN'S FOREIGN TRADE 65
from South America, the Middle East, and the United States andCanada increased. In 1955, our total import increased by 30/o. Ourpurchases from Africa, Australia and Oceania, the Far East, South andSouth-East Asia increased with the rate above average, but those fromSouth America, the Middle East, and Europe declined. In 1956, ourEast, import increased by 309/o in total, and almost all area, except theFar contributed to this rapid increase. Those areas from which ourpurchases increased more than the average rate are Africa, Australia

and Oceania, the Middle East, North America and Europe. However,
our import from the Far East declined by 60/o.

4. Next we make an investigation into the causes of the growthofJapan's export. It is generally believed that the overseas industrial

boom and the domestic defiationary policy are chiefly responsible forthe expansion ofJapan's trade. In addition to these factors, we shouldcount the rise of labour productivity, especially in those branches ofindustry in which Japan enjoys comparative advantages.
Besides, owing to the relatively stable consumer prices, the wage
rise has been slower than that of labour productivity. (Table 7)
Therefore, the competitive power of Japan's manufacturing industries
has largely increased.
Table 7. Productivity and Real Wage in Manufacturing Industries(1953=1oo)
Productivity

Real Wage

(B)

(A)

eward-

EMciency Ratio

(B)
(A)

1954

103.8

1OO.O

98.2

1955

114.6

106.2

92.6

1956

134.4

117.1

87.1

Source : Ministry of Labour, Labour Statistios.

On the other hand, the level of national cosumption lagging
behind the rise of industrial production may be one of the causesof Japan's export expansion, because increased products can hardly

be absorbed in domestic market and must find outlet in overseas

66 FUKUO KAWATA
countries. (Table 8)
Table 8. Production in Manufacturing Industries and Level of National Consumption(1953=1oo)
Aksorption.omestic(B)Ratio(A)-Production

Level of Consumption

(A)

(B)

1954

108.9

100.0(1)

91.7

1955

118.6

105.1(1)

88.6

1956

144.8

109.1*

75.6

Note: (1) fiscal years, * estimate

Source: Economic Planning Board, Monthly Repert.

Those pressures of export expansion are now diminishing in theirstrength, because prices and wages have been on the rising tendency
since the latter part of l956. Moreover, our imports are increasing
now due to the replenishment of inventories, particularly of raw materials, to the investment for breaking the bottle-neck of our industrial

production, and to the rise of import demand according to the generalexpansion of our economic activities. The following table (Table 9)shows us that the rate of increase of our export (in value) has been
declining, while that of our import rising since the latter part of 1956.
Teble 9. Changes from the previous year's same period(as percentages in the figures of the previous year's same period)

ImportExport

I

II

III

IV

lgs4I

1955j

lgs6l

+22
+13
+32
+11

+26
+22
+22
+23

+30
+31
+21

+l9

1957

lgs41

1955I 1956P 1957

+17

+56

-26
+10
+l8
+37

-4

-15
-26

+20
+17
+39
+37

Source: Ministry of Finance, Customs Statistics.

Owing to the rapid increase of imports especially since the begin-ning of 1957, our foreign exchange reserves which amounted to 1,435

million dollars at the end of December, 1956, fell down to 1,l85
million dollars at the end of March, 1957, decreasing by 250 million+54

A NOTE ON THE RECENT TRENDS OF JAPAN'S FOREIGN TRADE 67

dollars in three months. • 'Although it is very difficult to decide the adequacy of foreignexchange reserves for Japan, it is roughly estimated that this limit
may be 900 million dollars for the present situation.

If this estimate may be right, our reserves are coming nearer tothis limit, because out of the total of 1,185 million dollars, about 270

million dollars are frozen credits to Korea, Indonesia and Argentina.

The amount of our reserves is expected to continue to decline inview of the large sum of letters of credit opened for import. It isnecessary to take some import restricting measures, such as the raisingof the oMcial discount rate or other retrenchment policy, to preventthe heavy drain on our foreign exchange reserves.

By the following table, we can realize how large our imports andtrade deficits are in the first quarter of 1957 as compared with thoseof the same period of the preceding years. (Table 10)
Table 10. Export, Import and Balance of Trade in thefirst quarter of each year

(in millions of U. S. dollars)

1953 I

280

496

1954 I

342

776

1955 I

431

577

1956 I

559

692

1957 I

656

1066

-216
-434
-146
-133
-410

L
source : Ministry of Finance, customs statistiosI
5. It is true that Japan's trade expansion in recent years has
been considerable, but the size of Japan's trade is not so large ascompared with those of principal trading countries of the world. In

1956, Japan held the eighth position among the trading nations,following the United States, the United Kingdom, Western Germany,

Canada, France, Netherlands and Belgium-Luxembourg. (Table 11)
Before World War II, Japan ranked fifth, coming after the United

Kingdom, United States, Germany and France.

68

FUKUO KAWATA
Tahle 11.

Comparison of the Size of Trade of Principal aountries (in 1956)(in millions of U. S. dollars)

pmt ..-.I pe pe 1
1. United States

18,995

14,21333,208

2. United Kingdom

9,292

10,89020,182

3, West-Gerrnany

7,357

6,616

4. Canada

5,252

6,262

5. France

4,541

5,553

6. Netherlands

2P62

7. Belgium-Luxembourg

3,150

8. Japan

2PQI

13,973l

11,5141

9. Italy

1
i

I

i

E

3,712
3,261

t .7Lt.J-

l

e
1

6,574
6,411

3,230

l

5,731

2,158

S,170

l

5,328

1,94l

2,206

I

4,147

1

1

10. Sweden

10,094[1

Source: IMF, International Financial Statistics.

Before the War, Japan took up about 40/o of the world trade, but
to-day Japan's share declined to about 2.5e/o. It is, therefore, desirable

to expand our foreign trade at least to the prewar level.

OF OVERSEASTHE DEVELOPMENT
IN JAPAN IN
BANKING SYSTEM
THE MEIJI

ERA

Masahiro FUJITA(I)
The banking history of Modern Japan, generally, is divided into
three periods. The first period which served as the experimental stage,

dates from the time of the Restoration (1868) to 1882--the age ofnational banks. The second period saw the foundation of the presentbanking system (1882-l900) the era of the central bank. The
third period stretches from 1900 to the present time, witnesses theperfection of the financial machinary marking the ascendancy of theordinary banks the reign of the ordinary banks.
With the formation and development of the capitalist mode of
production, the banking system in Japan followed right after the
Restoration the openning of the country.
However, the feature of Japan's capitalism consists in the strengthof the government-given and oMcial protective growth. Still, therapid and extraordinary development of her economy absolutely resulted in the necessity of getting the colonial territory as natural69

70 MASAHIRO FUJITA
tendency of the expanding poHcy. We can see these facts as one
chapter of banking history in the Meiji era, but it also is the historyof development of colonial bank and overseas investment or capital
export backed by the state power, The first plan of the advancementof Japan's capitalism to Manchuria and Mongoria and other Sourtheastern area was the establishment of a branch of the Daiichi Bank in

Korea in 1878. So the operation of this bank in Korea had to beemphasized beyond the simple genera! banking business, that is, hadmany political colours. This attempt had been connected with theAmalgamation of Korea and establishment of the Bank of Chosen. The
extension of the Northern area of Japan's capitalism had beenpromoted by these banks or banking institutions, but the expanding
plan of the Southern area also had been accomplished by the similarbanks. These banks were the Japanese colonial banks in those days.
In this paper, we intend to examine the activities of these colonialbanks in the Meiji era. These colonial banks came into being after
the time of Prince Matsukata and were, in view of territorial expansionof Japan, aimed at the colonial development, These banks can beclassified in two categories the first, possessing every characteristic ofa central bank, and second, of an agriculatural and industrial bank.

They were established in order to provide long-term loans to theagriculture and industry in the colonies. To the first belong the Bankof Taiwan and the Bank of Chosen, established in 1899 and 1909
respectively, To the second belong the Chosen Industrial Bank. Besides
these two groups of banks there existed also a semi-oMcial institution

known as the Formosa Development Company and the Oriental Development Company, whose activities were confined within their respective spheres, the first in Formosa and the latter in Manchuria andKorea.
All the colonial banks, Iike the oflicial banks, were subject to strict

government control, and consequently receive on special occasions
effective financial aid from both the government and the Bank ofJapan.

JAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI 71
Now, we want to make clear the character of activities of the
Bank of Chosen, the Bank of Taiwan, the Yokohana Specie Bank, inthe following analysis.

(II)(1) The Bank of Chosen
In June 1878, as the first Japanese bank in Korea the First
National Bank (the Daiichi Ginko) established a branch oMice inFusan. This was the first branch bank established overseas by any
Japanese bank. In other words, it was also the first bank using western

system (or business method) in Korea. The bank had made usefu1
contribution to the formation and progress of the money market inthis state, by handling the customs accounts of Chosen and by assistingin government finances. On account of the services thus rendered it
was later allowed to issue bank notes. But since the success or failureof such notes issued by a Japanese bank would involve the power ofJapan, the Imperial Government decided to supervise the issue inaccordance with the Iaw of Japan.. In 1905, when the bank assumed
the handling of the Treasury account of Korea, the notes of the bankwere granted, by the Korean Government, the power of obligatory
circulation.

In 1906 a treaty was signed between Japan and Korea by which
the Residency General was instituted. Since then the scope of thegovenment's activity was extented in economics and finance, and generalsituation of trade very much improved. Then, it was felt necessary
to establish a central bank, to issue convertible notes, to render fiinancial

assistance to the government, and to regulate the money market. An

agreement was thus concluded between the Daiichi Bank and Korean
government on June 18, 1909, with respect to the transfer of the noteissuing privilege, assets and liabilities to the new bank called the Bankof Korea. According to the Bank of Korea Act promulgated in thesame month, the Bank of Korea was established(i) with a paid-up
capital of IO million yen, 3 million yen of which was subscribed by

72 MASAHIRO FUJITA
the government (this bank is a joint stock company with an authorized

capital of 10 million yen). The directorate of this bank also has amore or less similar composition to that of the Bank of Japan.

On its establishment the Bank of Korea took over the outstandingbalance of the Daiichi Bank as on October 20. 'The latter bank alsotransferred all its branches, except the Keijo and Fusan othces, to theformer.

The convertible Daiichi Bank notes outstanding then amounted to
11,830,OOO yen. It was provided that out of this, 3,940,OOO yen was
to be taken over by the new bank, the balance of 7,880,OOO yen to be
reimbursed by instalments during a period of twenty years.

To stimulate public confidence in the bank the government undertook to guarantee a 5 per cent dividend on the bank's paid-up capitalfor the first five years, and also granted a loan of 1,200,OOO yen, re-payable by instalments during ten years, to be used as an operatingfund,

On August 29, 1910, the annexation of Korea was proclaimed,which took effect on October 1 of the same year. The Bank of Chosen

Act was then promulgated in February 1{1l, and the Bank of Chosen
was established in August succeeding to the right and obligations for-

merly belonging to the Bank of Korea. The Bank of Korea was thustransformed into the Bank of Chosen. Besides its head oMce in Keijo(Seoul), Korea, it has twenty-nine branches chiefly located in its
principal spheres of activities, that is, Korean Peninsula, Marchuria,

Northern China and Siberia.
The principal business of the bank was as follows:(1) To discount bills of exchange and other commercial papers,(2) to deal in bills of exchange and documentary bills, (3) to collectbills for the companies and merchants having business connections with

the Bank. (4) to make loans on securities of reliable nature. (5) toreceive deposits of money and to make advances on current account,(6) to recive valuables such as gold, silver and other precious metals

and documents for safe deposit, (7) to buy or sell gold and silver

JAPAN'S OVERSEAS BANKING SYSTEM IN maIJI 73
bullion or foreign coins, (8) to engage in the secured debentures trust
business, (9) to engage in the secured debentures trust business, (9) topurchase national or local loan bonds and other prime negotiable papers

designated by the Gevernor General of Chosen, (10) to make unsecuredloans to public corporations, or to act agents for other banks with theapproval of the Governor General of Chosen.
The Bank had the privilege of issuing notes against gold coins,gold and silver bullion and Bank of Japan notes in reserve. In addition

the Bank is authorized to issue the notes up to 50 million yen on the
security of government bonds, other bonds and prime commercial bills.
In case of necessity, the bank is further authorized to issue the notes

beyond this limit, though subject to a minimum tax of 5 per cent.

per annum.
Therfore, the system of issue is based on the flexible method thatthe notes issued by the Bank of Chosen are convertible into gold or
the Bank of Japan notes, The specie reserve may be in gold or silverbullion, or Bank of Japan notes, but the silver must not exceed one-quarter of the whole amount of reserve. In 1910, the Bank of Korea
was authorized to issue fiduciary note up to the limit of 20 million yen

on the security of eligible bonds and bills, but in 1911 when the Bankof Chosen was organized in its place the fiduciary issue was increased

to 30 million yen, again increased in 1918 to 50 million yen. The tax
on the issue in excess of this limit was fixed at not less than 3 percent from April l, 1935, 4 per cent, being the rate in effect, which,however, was lowered to 3 per cent. in May 1936, This is a good
contrast with the Bank of Japan which is obliged to contribute a
certain amount of its profits to the government as excess tax, but, theBank of Taiwan is exempted from this obligation,

But the Bank of Chosen was obligated in the following manner,
After the deduction (1) of not lees than 8 per cent. as a reserve formaking good any account, (2) of not less than 2 per cent, as a reservefor equalising dividends, (3) of not less than 10 per cent. as bonuses
for the directors, auditors and staff, if the dividend still exceeds 12 per

74 MASAHIRO FUJITA
cent. of the paid-up capital, one half had to be paid to the government.

Apart from the privilege of note issue the Bank of Chosen functions as

an exchange bank as well as an ordinary commercial bank. Not only
does bank transact an extensive business in the peninsula of Korea, it

also links up with the monopolistic capital in Japan and the colonial

capitals. With the growth of Japanese influence in Manchuria, thebusiness operations of the bank have been extended to this' new sphere,

haveing established there twelve branches and three sub-branches.

Consequently the Bank of Chosen notes found their way into Manchuria, into Kwantung leased territory and into the South Manchurian

Railway zone. Then, with the establishment of the central bank ofManchukuo, an agreement was concluded between the central bank of
Chosen with a view to providing a uniform currency in Manchukuo.
As a result of this agreement the Bank of Chosen notes were withdrawn from Manchukuo in December 1935. Moreover as Japanese influence has extended to North China, the Bank of Chosen commenced
to penetrate into this new field. Two branches have been opened, one
in Tsingtao and other in Tientsin, With its branch in Shanghai andanother in New York the Bank of Chosen maintained altogether twenty-

eight branches and eleven sub-branches. Then, through the revisionof the Bank of Chosen Act in 1924 the right of control and supervisionof the bank has been transferred from Governor-General of Korea tothe Minister of Finance in Tokyo.

The capital of the Bank of Chosen since its establishment has
undergone the following changes :\10,OOO,OOO Oct. 1909
2o,ooo,ooo Feb, lg17
4o,ooo,ooo sept. igls
so,ooo,ooo Fec. Ig2o4o,ooo,ooo Aug. lg2s
The bank increased its capital stok on account of the positive policy

adopted at the time of the boom period during the War of 1914-18.

75

JAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI
However, the war and post-war prosperity ended all too

soon, andreaction entailed a severe loss to the bank.
Table 1. Principal Accounts of the Bank of Chosen(in thousand yen)
l'Loans:invest'[siiverment1

Note

years

issuedDeposits

BorrowinglGoldandBullionandCoin
'

1909

2,500

l910

2,500

l911

5,OOO

1912

7,500

13,439

7,631

3
16

20,16325,O05

5,960
6,978

Jr7
134

25,550l4,169500

19,622 i

I50

229

22,192

1,865

1 1,6

5,549

2,377

5,342

1,786

7,149

10,323

10,OOO

240
378
518

46,62733,03315,coO

1,683

67,36488,413

1918

25,OOO

2,333

115,523

218,960

31,895
2,ooO
3,OOO 32,505
37,5324,2oo
37,075
6,152
42,862
4,200
58,386
4,200
119,926
4,200
241,515
4,2oo

1919

25,OOO

4,820

163,600

194,3oo

88,716

390,920

1920

Jro,ooo

7,650

114,034

171,734

71,570298,475

27,57970,168

1921

50,OOO

9,410

136,360

162,947

92,777374,574

40,914

54,O18

1922

50,OOO

10,540100,540

160,557

105,485

322,472

54,27540,9631923

so,ooo l

11,04011O,750

l63,l48

181,442

383,332

60,15443,289

1924

50,OOO

11,422

129,564

204,623

140,876

396,152

72,647

49,827

1925

25,OOO873

120,540

132,736

188,498

345,71162,34548,804

1913

7,500

1914

1O,OOO

1915

1O,OOO

1916
1917

!

25,69320,8012l,85017,59834,387

18,588

7,383

8,837

7,591

12,961

10,07818,86915,53730,73916,72057,49821,91175,864'(2) The Chosen Industrial Bank
In the old regime there was industry worth mentioning in the
Chosen peninsula, but after the annexation to Japan, the colonial policyof Japan aimed at the exploitation of natural resources and industrial

development in Korea.
In March 1906 the Agricultural and Industrial Bank of Chosen Act
was promulgated. For the purpose of diffrusion banking facilities
throughout Chosen, the banks established in conformity with the above
Act were allowed to transact ordinary banking business as well.
The first bank of this kind was established in Keijo in June 1906,
followed by eleven other banks with their forty branches. But, after-

76 MASAHIRO FUJITA
there, by gradual annexation, the number of such banks decreased, foreach of these banks were very small in its scope, the amount of thetotal autholized capital being no more than 2.6 million yen. It wasthought appropriate to amalgamate them into a still larger and more'powerfu1 institution, and with the promulgation of the Law of theIndustrial Bank of Chosen in October l916 the Chosen Industrial Bank
made its appearance with a paid-up capital of 10 million yen.
Meanwhile, this bank became the only institution in this peninsula
for mortgage financing, and as a side line conducted ordinary banking
business, There are, in fact, many points of resemblance in the scopeof this institution and that of the Hokkaido Colonisation Bank.

As above mentioned the Bank of Chosen played large function in
exploitation of rich natural resources in Korea, also the advancementof Japan's capitalism in Manchuria and Mongoria and fu1filed a re-markable part, After the.victory of Russo-Japanese War, our advancement to Manchuria was very large in scale, and the most prominent vanguard in this movement was the Yokohama Specie Bank.
In contrast, the Bank of Chosen had only one branch in Anton.
But with the extension of Manchurian trade the branches and agentswere located all over Manchuria and the bank had got obligatory
circulation of the bank note on the whole area. At last in 1917, theBank of Chosen had taken the lead of our advancement to Manchria
and Mongoria in place of the Yokohama Specie Bank, 1917.

(3) The Bank of Taiwan
As a result of the Sino-Japanese War, Formosa came into thepossession of Japan in April 1895.

At that time, there existed only a few financial institutions ofprimitive type in this island, apart from the agents of foreign bankers.

After the establishment of the oMce of Governor-General in June 1895

one Osaka bank opened a branch, and in the following year the Bank
ofJapan also established an oflice to handle the Treasury accounts
and the clearing notes and silver. However, the inhabitants of theisland, who had been accustomed to the silver coined money in circu-

JAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI 77
lation, did not like the paper money issued by the Bank of Japan.

Under the circumstances, and also in view of the urgent need toassure(2) the financial independence of the island as well as to con•solidate the currency system of Taiwan for the promotion of agriculture

and industry, for the development of natural resources, and for theincrease of foreign trade with China and the South Sea countries, thegovernment promulgated the Bank of Taiwan Act in March 1897, andthe Supplementary Act of Bank of Taiwan in March 1899. In accordance with these two measures, the Bank of Taiwan was createdin June 1899 with a capital of 5 million yen, of which 1 million yen

was subscribed by the government. The bank began business in September of the same year. It issued bank notes, the legal circulation ofwhich was limited to within the island, and took over in October thefunction of the government fiscal agency. The head oMce of this bank

was in Taipeh, Formosa, and its three branches were located chiefly
in its principle spheres of activities, that was, Formosa, Sourthern China,

Java and India. As in the case of other special banks with theirheadoMce outside of the capital city its Tokyo oMce, though merelya branch in name, was actually its business center on account of thecity's vast importance as the nations financial center.

The principal business of the Bank was as follows:-(1) To discount bills of exchange and other commercial papers,(2) to deal in bills of exchange and documentary bills, (3) to collectbills for companies and merchants having business connection with thebank, (4) to make loans on securities of a• reliable nature, (5) toreceive deposits of money and to make advances on current accounts,(6) to receive valuables, such as gold, silver and other precious metals

and documents for safe deposit, (7) to buy or sell gold and silver
buHion or foreign coins, (8) to act as agents for other banks, (9) toengage in the secured debentures trust business, (10) to make unsecuredloans to communities, cooperative societies or stock breeding associations,(}l) to subscribe for, to underwrite the issue of, or to purchase nationalor local loan bonds, Hypothec Bank of Japan Debentures, Agricultural

78 MASAHIRO FUJITA
and Industrial Bank Debentures, Industrial Bank ofJapan Debenturesand other securities approved by the Minister concerned, (12) to takecharge of the instalment payment of the subscribers for the nationalor local loan bonds, bonds and shares of corporations, or of the paymentof their principal, interest and dividends.

The Bank had the privilege of issuing its banks in denominationsof one yen and upward and convertible into the gold yen. In addition
to the notes issued against gold and silver coins and bullion in reserve,

the Bank is authorized to issue the notes up to 20 million yen on the
security of government bonds and Treasury certificates of indebtedness,

Bank ofJapan notes and other prime securities and commercial papers.
Notes issued beyond this limit were subject to a minimum tax of five

per cent. per annum,
Turning points of our analysis, the note-issuiog of the Bank of
Taiwan was of the flexible system, under which the bank was required
to hold gold and silver coin and bullion as specie reserves, its fiduclary

issue being limited to 5 million yen. Any issue in excess of this limit
was also allowed, but was subject to a tax of not less than 5 per cent.

Although the Bank of Taiwan was permitted to hold its specie reserve
either in gold or silver, its notes were made convertible into silver so

as to conform to the age-old habit of the inhabitants of the island.

For this purpose, the bank borrowed 2 million yen worth of silvercoin from the government, and at the same time adopted measures forthe encouragement of the circulation of the silver notes. But notes
could not remain unaffected by the constant fluctuations in the valueof silver metal in China across the sea, so speculations ensued whichinterfered greatly with the business transactions between the island andthe mainland of Japan, the former having the silver and the latter thegold standard. To meet this emergency the government authorized
the Bank of Taiwan to issue notes convertible into gold, and the issueof silver notes was then stopped. Moreover, the loan from the government of 2 million yen of silver coin which fell due at that time wasrenewed till September 1907; after that year and for a period of fiveJAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI 79
years the bank was to make an annual reimbursement of 400,OOO yen
with 2 per cent. interest. The bank was also to redeem gradually all
the silver notes in circulation. This redemption was completed in 1909.

Since then the currency system of Formosa has conformed to the gold
standard (of the capital).

Following the development of finance and industry in Formosathe limit of the fiduciary issue was raised to IO million yen in 1910
and to 20 million yen in 1918; this limit stood until 1945 (the end ofWorld War II) in spite of the desire of the bank to increase it to 50

million. The tax on the issue over the legal limit was lowered to"over 3 per cent." (instead of over 5 per cent.) in March 1921, theactual rate being 3 per cent.
Besides being an issuing institution, the Bank of Taiwan functions

as an ordinary commercial bank as well as a colonial and exchangebank. The bank, as above-mentioned, had its head oMice in Formosaand branches in Japan proper and in foreign countries.

The total number of branches was thirty-two, and they were
distributed as follows; 15 in Formosa, 4 in Japan proper (Tokyo,
Yokohama, Osaka, Kobe), 13 abroad (6 in China, 4 South Seas, 1 eachin India, Europe and U. S. A.). The amount of its capital at firstwas 5 million yen, but was raised to iO million yen in l912, 20 million

yen in l915, 30 million yen in 1918, 60 million yen in 1919.

Owing to its reckless business expansion during the War of 191418 the bank found itself with an enormous amount of frozen debts,
and when the financial panic took place in l920 the bank was compelled to reduce its capital from 60 to 45 million yen in order to write

off bad debts. Again, following the didiculties experienced in thecrisis of 1927, the bank had to write off its capital another 15 million.

Since then it has made constant endeavours to restore itself, and thedanger has been dispelled by the eMcient help of the Bank of Japan.
Thus, several decades of calm money and financial situation followed,
and the circle of banking corporation in Formosa met the new changed

epoch by the independence from Japan territory in August. 15, 1945.

FUJITAMASAHIROeo

The Amount of Convertible

Table 2.

Gold note

Silver note

de

Year

issued circulated
I

1899

1,831

867

1901

3,199

2,678

1903

4,623

4,OOO

1905

l,031

660

6,783

1907

23

22

10,615l909

19,927

19,92713,O07
19,381L:s

Silver and goldnote tota1

abissued circulated

1911

of Taiwan

Note of the Bank

864

l

2,678

4,ooO
L

7,O14

E
/

6,651

9,617

9,640

t

l1,207

11,207:

18,194l

18,194L

Andthe Bank of Taiwan was dissolved and disappeared.
The Bank of Taiwan aimed at the adjustment of currency systemand the developmental loan of Taiwan industry depended chiefly upon
our government support, so the government loan by the Taiwan indusTable 3. Deposit and Laan of the Bankof Taiwan(Unit Thousand Yen)
Loan

DepositYear

inislanddepositinlandoverseadepositdeposit

total

inisland1oan

inlandloan

oversea
loan

tota1

1899

794

171

2,604

um

770

3,374

4,493

439

-39

965

1900

4,973

6,834

19

1901

4,151

287

110

4,548

6,425

158

818
445

7,029

1902

4,396

1,576

633

6,606

8,065

493

1,537

10,096

1903

2,247

994

357'

5,599

5,477

1,149

2,880

9,507

1904

4,804

937

281

6,023

6,474

941

2,880

IO,299

7,671

5,131

1,492

211

6,835

5,241

553

4,860

IO,655

1906

6,695

3,073

362

IO,131

5,101

770

8,505

14,380

1907

6,565

4,695

674

11,935

8,668

915

8,728

18,373

1908

6,584

3,607

l,187

11,38010,987

1,298

7,488

19,774

1909

14,350

2,203

1,O18

l7,572

17,5287,760

26,341

1910

14,526

3,644

774

18,945

19,158

1,071

7,847

28,077

1911

16,251

4,574

3,159

23,98522,0452,286

11,14135,47344,606

1905
'

1912

18,266

11,1294,213

33,60926,5233,862

l4,2201913

20,727

15,981

6,578

43,28633,395

IO,316

13,342

57,054l914

24,365

22,5997,221

54,18735,723

8,791

17,48662,oo2'ij

JAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI 81
try bond law financed the fund of construction of railways and repair"of harbours
and investigation of the soil. However, beyond the government loan, the general Ioan of the Bank of Taiwan contributed to thecolonial finance after 1905, then the spheres of the loan of this bankranged over the business fund for sugar, rice, camphor, gold and coal.

Indeed, the fund for rice, in this case, was' the commercial fund forrice merchant, also the cultivating fund for agriculture surpassed thefund of the Nippon Kangyo Bank (the Kangyo Shikin) and thisfund financed the reclaimed project and the fruitgrowing etc.
''

Table 4. Government Loan and General Loan of the Bank of Taiwan(Unit Thousand Yen)Year

Government loan

Debt by the Taiwan
industry bond Iaw

General loan

1899

2,500

3,200

1901

5,200

5,300

104
359

l903

3,978

3,349

l,499

1905

l,609

800

3,631

1907

8,668

1909

5,064

3,404

12,464

l911

4,749

3,289

17,295

1913

5,339

6,419

28,055

1914

5,767

8,269

29,956Moreover, the important function of the Bank of Taiwan was
promotion of the advancement to the Sourthern area of'Japan's capi-

talism by means of various measures: (1) internal exchange free ofcharge (for the purpose of promotion bet"reen inland and Formosa
trade), (2) the establishment of many branches and agents (in orderto promote intermediate trade between the inland and the South Seasor direct trade between Formosa and the South Seas or the Sourh
China), (3) this bank transatacted with main bank in these areas, (4)this bank loaned to the 7aPan-China j'oint management enterprise.

The most important event, by means of the sPeec'al credit to China,
this bank strengthened Japan's powerful position in'China (so to speak,supported the advancement of Japan's monoPolisticfinance caPitat). The

82 MASAHIRO FUJITA
first credit for China was the loan to Fujen local government in
1905. By 1918, independent credit amounted to 12 million yen, 3
million silver dollar, O,7 million ryo, the joint credit among the Bankof Chosen, the Industrial Bank of Japan and other banks counted up
to 182 million yen (total amount), of which the quotas of this bankwas 49 million yen. 'With regard to the import of foreign capital, the Bank of Taiwan
received the credit (2 million yen) from the Purse Bank l910.

Though the Bank of Taiwan had developed in favourable circumstances from its established period to the first half of 1910s performing
the established object, after-there this bank generally advanced to inland

Japan money market and this fact implied the overstepping of theinitial plan.

(4) The Yokohama Speeie BankThe Yokohama Specie Bank, organized(3) in accordance with the
Yokohama Specie Bank Act was a joint stock company with an authorized capital of 10 million yen, fully paid up in 1880. Its president
and vice-president were appointed by the government. With its nomi-

nal head oMce in Yokohama and actual one in Tokyo (though it wascalled a branch), its activities covered the world through its thirty•-ninebranches, three sub-branches and several agents. According to the
Yokohama Specie Bank Act Article 22, Branch offices shall be maintained in the following places, and in such other places as may be
decided upon at a general meeting of shareholders:

InlandKobe, Tokyo Nagasaki, Osaka, Nagoya, Moji

Overseas
London (England), Rio de Janeiro (Brazil), San Francisco (U. S. A.), Calcutta (India),

Honolulu (Territory of Hawaii), Rangoon (Burma), Shanghai (Republic of China),
Singapore (Straits Settlements), Bombay (India), Batavia (Java), Hongkong, Sourabya(Java), Tientsin (Republic of China), Sydney (Australia), Peiping (Republic of China),

Dairen (Kwantung Leared Territory), Hankow (Republic of China), Hamburg (Germany), New York (U..S. A.), Paris (France), Seattle (U. S. A.).

JAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI 83
As above-mentioned, there were many powerfu1 branches all over theworld. The bank's principal busines was following:(1) To deal in domestic and foreign exchnges, (2) to make loans,(3) to receive deposits of money and accept the valuables for safe
deposit, (4) to discount and to collect bills of exchange, promissory
notes and other sucurities, (5) to exchange monies.

In addition to the above, the Bank was autholized to buy or sellpublic Ioan bonds, gold and silver buliion and foreign coins, it its
business condition so requires. It entrusted with matters relative to

foreign borrowing and with the handling of public money for international account.

The most important character of the Yokohama Specie Bank was
the sole controlling institution of the movement of specie and faciliating

foreign trade (this bank was created in 1880 in accordance with thepolicy of Marquis Ohkuma for the propose to accomplish such object).
For, at that time the Bank of Japan had not come into being.
Above all this bank was the only special foreign exchange bank inJapan. However, in the bank's career various obstacles due to lackof experience presented themselves in the beginning, but the bank's
oMcials were not discouraged, nor was the government. Every where
the business of the bank increased year after year and the bank gradu-

ally commenced to manage foreign exchange, Branch odices werethen opened in Lyons (1882), in London (1884) and San Francisco(1886). In 1887 the institution showed some eMciency, resulting ina rapid increase of the bank's business which called for an augmentationof its capital. An Imperial Ordinance was then promulgate regulating

the business of the bank after the model of the chartered banks ofEurope and America and the capital of the bank was accordingly
raised for the first time in l887 to 6 million yen.

As a result of the ultimate victory of the Sino-Japanese War(l894-5), the scope of activity of the bank naturally widened. In
1896 the bank was further strengthened by an increase of capital to
12 million yen. The bank was entrusted with the duty of collecting

84 MASAHIRO FUJITA
from the Chinese government the war indemnity. The bank, in order
to cope with the industrial and commercial development after the war,
contributed a great service to the introduction of a large amount offoreign capital and also did its utmost in promoting trade with China.

Thus the business of the bank was constantly enlarged, and in 1899
the capital was increased for the third time to 24 million yen. During

the period of the Russo-Japanese War (1904-5) the bank was entrusted with the work of floating of government loans in foreign mar-kets. In l911 the capital was increased for the fourth time to 48
million yen, and again in 1919 to 100 million yen.

Now, our emphasizing points of the function of this bank are as
follows :---

(1) Especially, we have to mention the fundamental function of
the only one foreign exchange special bank(`) in Japan. (2) furthermore, the remarkable external activity in expanding the stages forJapan's capitalism.

As the short explanation of the external activities, there were

besides colonial banking measures, but the Yokohama Specie Bank
could not be classified or defined as a simple colonial bank. Not onlythat this bank acquired and promoted its confidence and power inforeign countries, but it also deposited the overseas fund of the Bankof Japan and Japanese government and took charge of the settlementof external credit and debit balance alone. So, in the Russo-JapaneseWar, this bank contributed to the state finance by overstepping its own
posltlon.

Thus, the Yokohama Specie Bank was important to be rather oneof the colonial banks in Japan than the foreign exchange bank, but
its most important function in these days were found the activities tobe vanguard of the advancement to Manchuria and Mongoria area.
This movement began in 1900 by the establishment of a branch in
Niu Chuang and took the initiative in developing policy in Manchuria.

. According to the Imperial Ordinance (issued on Oct. 15, 1906),
the Yokohama Specie Bank acquired the prerogative qualification as

85JAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI
Table 5. The Business situation of the Yokohama Specie Bank

(Unit Thousand Yen)
Year
tt-t

•-

T-.-

Authorjsed

Paid-up

capitalcapitalReserve

Deposit

Loan

Amountofbank-noteissued

1893

6,OOO

4,500

3,688

7,531

8,311

1894

6,ooO

4,500

3,820

1O,903

7,803

1895

6,ooO

4,500

4,020

12,982

8,681

ny

1896

12,OOO

6,OOO

5,760

10,114

14,7301897

l2,OOO

9,Ooo

6,360

36,065

14,22533,395H

1898

12,OOO

1O,5003,960

40,545

1899

24,ooO

12,OOO

7,500

73,49133,90519oo

24,OOO18,ooO

8,l30

52,97844,812

1901

24,OOO

18,OOO

8,510

46,5iO

34,518

1902

24,OOO

18,OOO

8,910

58,461

39,998

1903

24,OOO•18,ooO

9,210

72,87149,884

1904

24,ooO

18,Ooo

9,520

70,54553,839

ny

ny

H-H

1905

24,Ooo18,ooO

9,940

110,295

74,556

1906

24,OOO

21,OOO10,7oo121,707

82,981

7,285

l907

24,Ooo24,OOO

11,550124,090

99,379

6,070

1908

24,OOO

24,OOO

12,600118,24481186'

4,930

1909

24,Ooo24,OOO13,4oo146,052

69,032

3,569

1910

24,ooO

24,Ooo14,1oo121,986

89,677

4,341

1911

48,OOO

30,OOO

14,650141,223

116,599

7,901

1912

48,ooO

30,Ooo15,350167,183

152,683

6,833

1913

48,ooO

30,OOO

16,050191,101

158,070

8,131

1914

48,OOO

30,Ooo16,750181,939

140,591

6,282

a central bank all over Manchuria (included Kwantung district). As
our semi-colonial territory.

But, this measure was as follows :1) Supervision of the bank note issue ih Kwantung district andChina as our semi-colonial territory under the authority of the Foreign

Minister and Finance Minister. 2) this bank note was convertible forsilver. 3) the reserve of this bank note needed the same amount of
issuing. 4) this bank note, in above-mentioned area, had to circulate
unrestrainedly in oMcial or private transaction.

Without establishment of special bank in Manchuria, government

86 MASAHIRO FUJITA 'appointed chiefly the Yokohama Specie Bank as the only colonial bankin these areas. For the purpose of the extension of Japanese-Manchuria

trade and promotion of development in Manchuria and Mongoria, ourgovernment in May, 1910 ordered the extension and increasing of the
low-interest development fund it was the mortgage loan (on real
est4te). So, this bank was financed 3 million yen (in pound-sterling)from Japanese government.
Thus, the Yokohama Specie Bank issued the silver note, but 1913

issued the gold note as the new bank note in this case, the reserve was the note of the Bank of Japan and gold-coin. In those days,
the character of this bank existed in the foreign exchange bank, theissued bank of gold and silver note, the mortgage hypothec bank, but

as the progamme(5) of the establishment of the special bank in Manchuria, our government took unification policy of the function of thespecial bank in Manchuria and Mongoria. As a result, the YokohamaSpecie Bank in these fields was divided to several institutions, thecolonial banking business transferred to Toyo Takushoku Co., Ltd(Oriental colonization Co., Ltd), the issue banking business transferredto the Chosen Bank, and this bank changed from monopolistic colonialbank to proper foreign exchange bank.

Besides, the Yokohama Specie Bank was the promoter of advancement for China in this period. After the Russo-Japanese War, thedirector of this bank was resident at Peiping to study over•-sea invest-

ment. The actual Japanese investment in China, Manchuria, stood at
130 to 140 million and yields only 20 million yen per annum.

The British commercial investment in Malaya, Siam, and Dutch
East India amounted to more than 1,OOO million yen, whereas Japanese
investment in these areas was estimated at 100 million yen only. This

could be increased enormously, considering the wealth of mercantile
community in this country. The reason for this insignificant figure
was simply due to the lack of experience of the Japanese people inthis sort of investment and the apathy towards this kind of enterprise.

JAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI

tt
Table 6. The Amount of Bank-note issued in BranchYear

Tientsin

1906

546,274(ryo)1907

558,501

Shanghai
1,037,l37(ryo)963,642Peiping

Dairen-4,905,573

rm

4,486,093(silver)

25,450{452,992(dotlar)

810,964-

2,856,630

1909

825,875{425,250(dollar)

666,668

147,036

7,198,176

1910

27I,140{927,112(dollar)

1,327,209

520,053

3,439,255

1908

1911

{148,445779,754(dollar)

1,526,459

4,049,181(III)
In short, our analysis can be summarized as follows:(1) The Daiich Bank in Korea engaged in facilities of loan andforeign exchange, documentary bill and exchange for Korean currency,
but afterward established the branch in Fusan, Genzan, Seoul (Keijo).,the business of this bank advanced toward more political character thancommercial and monetary facilities. By the conclusion of the treatyof the treaty of the customs duties 1884, this bank occupied the positionof the customs duties dealing Bank for twenty years, since l908 thereceipts and disbursements bank of Korea. And 1884 this bank loaned

240 million Mexican silver dollars to the Korean government andestablished the financial control on Korean government. Furthermore,with the disorder of Korean currency 1880-1890, the Daiichi Bank
was appointed to the business of adjustment of monetary disorder, as
if this bank were the central Bank of Korea. Consequently, the Bank-

note of the Daiichi Bank came to be issued in Korea as a measureof the controlling policy of financial crisis. Therfore, the Daiichi Bankacquired a very powerfu1 position in Korea. Such conditions of thisbank continued till the establishment of the Bank of Chosen.

(2) The Bank of Chosen as the successor of the Daiichi Bank
was the central Bank of Korea and industrial bank, foreign exchangebank, had issuing business and financial business and ordinary business.

87

88 MASAHIRO FUJITA
Above all, this bank was the financial support of the advancement toto the Northern areas of Japan's capitalism.

( 3) Since the possessing of Formosa, Japaness government planned the modernization of land property, driving away of foreign capitaland importing Japanese or indigenous capitals for the construction ofrailways and harbours, these attempts focused upon the developmentof Formosa. So, the monopolistic enormous capitals (Mitsui, Mitsubishi, Fujiyama ,Zaibatsu etc.) entered the Formosa industries. The Bankof Taiwan, in accordance with government policy, supported directly or

indirectly the advancement of these Japan's Zaibatsu caPitals. On theother hand, by these Zaibatsu caPitals and consequently economic develop-

ment of Formosa, the Bank of Taiwan accomplished remarkable growth,financial centre of Japan's advancement for the Southern areas.

( 4 ) The Yokohama Specie Bank was not simple foreign exchangebank, but the vanguard of Japan's advancement to Manchuria andMongoria. And this bank gave the joint-credit with the Mitsui Bankand Japan Industrial Bank.(6)Besides, we want to watch that these colonial banks were jointcredit financial institutions each other, for exanple, the Big four credit.
footnote( 1 ) The establishment of Bank of Korea was assigned to the committee of establishment

of Bank of Korea. Korean government entrusted the establishment business toJapanese government, June 1909.
So, our government appointed the following member of committee.

Chairman Governnor of the Bank of Japan Shinzen Matsuo

Vice-minister of Korea Kentaro AraL
other members 31.
Standing committee 5 Reijiro Wakatsuki

Kentaro Arai
Kazue Katsuda
Hideo Kodama
iMorihiro Ichihara
Later, floating stock, general meeting of establishment

September 1909, nominated as follows

the Bank of Korea Governor Morihiro lchihara

JAPAN'S OVERSEAS BANKING SYSTEM IN MEIJI 89
Director 3t :;,.M.'Z:.,k,fi.li:L

KYuhzi Kimura
Inspector 2 ll:Lcohj;'::elmtoo. n Hamaguchi(2)

With the Bank of Taiwan Act 1897, government appointed the members of establishment committee :Masaki Nomura, Juichi Soeda, Takesada Kawaguchi, Eiichi iShibusawa, Rokuro
Hara, Korekiyo Takahashi, Kihachiro Okura; Zenjiro Yasuda, Sadao Tsuruhara,Kenzo Ikeda, Kotetsu Hamamura, Shintaro Nishimura, Kahei Otani, Chubei'
KiharaSo, 1899 this bank was opened.

President Juichi Soeda
Vice-President Kazuyoshi Yagyu.

(3)

February 1879, Finance Minister Shigenobu Ohkuma proposed the establishmentof the Mexican dollar exchange, later in Nov. 1879, Michita Nakamura and 24
others were about to start the Yokohama Specie Bank, which with paid up capitalof 3 million yen silver coin applied to the National Bank Act. The first foreignexchange bank in Japan was this bank. '(4)

Before 1880, the situations of foreign exchange banking was as follows. The medium

of exchange which bulked largest was paper money in the shape of government
notes; but the bank deposit had already revealed their significance and had cometo constitute another form of medium of exchange.
First, as the course of prices became sensive to the international movement ofspecie and manifested signs of being determined by that movement; second, as bankdoposits and government notes were not the medium of exchange most sensive to
specie movement, the necessity arose for the government to control the bank deposits.

At that time, prior to the establishment of the Yokohama Specie Bank, no nativebanks played any significant part in foreign trade, nor did their bank deposits. many branches of foreign banks
attain any degree of importance. But the existed
chiefly engaged in foreign exchange. The government was not in the position, but
to control all these banks. Then, as stabi!izing element with the ultimate aim ofcontrolling specie movements and of proving a source of supply of funds to which
other organizations could turn for cash, the Yokohama Specie Bank was started.
Another reason was that in 1880 there came a great depreciation of currency andviolent fluctuation of the exchange rates, which gravely threatened the economic

well-being of the entire nation. By this time some knowledge had been acquiredby certain Japanese through cooperating with the foreign banks; so the government

90

MASAHIRO FUJITA
at once decided upon the creation of an institution specially for the purpose ofcontrolling specie movements and manipulating foreign exchange in order to bring

the work under oMcial surveillance. The Yokohama Specie Bank being chiefly
engaged in international trade might accumulate specie holdings which would
fluctuate with the conditions of international payments the foreign influx or
the foreign drain,
So, the bank, within the extent of its specie reserve, might make it easy for otherexchange banks to maintain or replenish their cash. In the absence of central
institution the bank might use its rate of discount in bill accomodation as a meansof regulating loans, so as to control thereby bank deposits and command of cash.
Moreover, its discount rate would serve to regulate the general discount market.

The establishment of the Yokohama Specie Bank would supply the missing link

and thereupon the connection would closed between the inflow and outfiow of
specie, the bank discount rates, the expansion or restriction of loans and deposits,

the temper and spirit of the business community and the trend towards rising or
falling prices.

(5)

March 1909, Proposal to "the establishment of banking institution in Manchuria "declared on the 25th Imperial Diet. This implied that the Yokohama Specie Bank
was a simple commercial bank, not a full colonial bank in Manchuria as new colony.

(6)

The Japan Industrial Bank was a special bank of import of foreign capital in thisperiod. Of the amount of import of foreign capital through the Japan Industrial

Bank from 1902 to 1912, the fund of capital expcrt was about 44%, which was
the debenture of South Manchurian Railway Co., Ltd, and advance loan to Korean
government.

MORE ON THE STRUCTURE
OF NATIONAL INCOME
DISTRIBUTION IN JAPAN

Nobuko NOSEINTRODUCTION
It is ambitious but interesting to examine the changing processof national dividend by deducing many re-distributive effects, i. e,

adjustment by public finance and unproductive sectors from actual
measures,

But this is our object, and we will this try to follow up thechanges of surplus-value rate as the index of the way by which thisredistribution goes on.

Previously, we tried to study the above subject.(i) Then we foundthat there is a Iarge percentage of peti-producers' income (that isnational income earned under the pre-capitalistic system). Here we meeta diMculty in the research of the Japanese national income structure.
In the previous study, we divided this peti-producers' income into thewages of the proprietor's labor and his profit from the enterprise andthen added up to the wage and profit. But this way of treatment
has a grave fault that it, in the first place, does not actually show thestructure of national income earned under the capitalistie system, and in91

92 . NOBUKO NOSE
the second place, it introduces unreal elements into our income analysis.

Thus, we were obliged to modify our previous method. Our new
method is devoted to analyse the structure of national income distribution as far as produced under the pure capitalistic mode. We try firstto subtruct the peti-producers income and redistribution effect by publicfinance on them from the national income aggregates and the effectof public finance on all economy. Again we endeaver to estimate
without hypothetical factor, as exact as possible, and to study the dual

phases the distribution side of national income and its utilization

side.(2) We think that these points are new devices which improve
the previous work.
The procedures of our analysis are as follows:( I ) Theoretical model of national income distribution from theview•-point of Marxian economics.

(II) The memorandum about some procedures in application of
the model.
(III) Data.
(IV) The analysis ofJapanese national income according to data.

(V) Summary and conclusion,Note. ( 1 ) N. Nos6, "On the Structure of National Income Distribution in Japan",

Kobe Economic & Business Review No. 2 1954. '))(2) As for this point, my previous article was not so clear.

gl. THE THEORETICAL MODEL OF NATIONAL INCOME
DISTRIBUTION FROM THE VIEW•-POINT OFMARXIAN ECONOMICS.
The original national income is the total sum of the new value
created by productive labour in a year.

First, we suppose the pure capitalistic economy. The original
national income in that economy is divided into the value of Iabour-

power and the surplus-value. Thus, the dividing structure of theoriginal national income r* is composed of wages of productive
laborers in productive sectors(i) Mi' and capitalists' profit R' (sub-THE STRUCTURE OF NATIONAL INCOME DISTRIBUTION 93'

stantially corresponds to the value of labor-power and to the surplusvalue respectively),(1. 1) w* +R* .,. :•A*
. R*

and, original surplus-value rate is w*•

Such original structure of income distribution is subjected totransforming effects as follows,

A. The aggregate profit is redistributed by the introduction of
unproductive circulating sectors,(2) i. e. the wages of laborers and the

profit of capitalist in this sector come in for a share of R' for theircirculating service to capitalists in productive sectors. We denote Wi,

va2 and W2i as the wages of productive laborers, of unproductive laborers and of laborers in the circulating sectors and Ri, R2 and R2i as
the profit of capitalist in productive sectors, of capitalist in unproductive sectors(3) and in circulating sectors respectively. Then,(1. 2) W,+W,,+R,+R2r-r,
B. Next, we must notice the presence of unproductive laborers as
clerical staffs in productive sectors, which come in for a share of the
profit of productive sector, rendering clerical service. By denoting Wi2

as their wages,(1. 3) W,+W,2+W,,+R,+R,,=T,
The surplus-value rate in terms of money can be transformed into

W,,+W,,,,IR,+R2i (3=-=-1,,;)The surplus-value rate in productive sector, therefore, are varied toMiii}i/IRi , being Iessened by Mi2tr+,R2i compared with originalrate.

C. By the entrance of consumption-cost sector, the original national
income would be expanded. This sector is the so-called service sector
and is composed of the service by private enterprise sector and by public
service sector,(4) and this sector's income is a derivative one.

(1. 4) Ml,+M,T,+R,+R,==T
D. Now, we take the structure of gross national expenditure. As

94 NOBUKO NOSE
we mentioned, original structure of national expenditure being subjected

to transformation effect by entrance of unproductive sector by thesame manner as original national income, the structure of national
expenditure D --state of utilization of national products---, is(2. I) D=XC.,+XK,+.E'I, (i=1, 2)
Cm, K and I are sum of tte
consumption fund of labourers, of capitalists,
and the investment fund by capitalists respectively. We presume thatthe aggregate wage is equal to consumption of all labourers' household.

On the other hand, the profits are expended on capitalists' consumption and investment (accumulation). Then,(2. 2) C.---C,.,+Cm,= Wl+ W2

(2. 3) R,+R, =K,+I,+K,+I,(If we denote, Cmt,, Cm,, Ki, K2, Ii and I2 as productive laborers

consumption fund, unproductive laborers', productive capitalisti unproductive capitalists', and productive investment(6) and unproductive

investment respectively). Now, we must take Cm2+c"X

mlil+XI which

W,+2R to w, . This ratio means the ratio of
substantially correspond` aggregate expenditure by all persons except productive laborers in asociety ' to ` aggregate consumption of productive laborers' household '(the latter substantially correspond to reproduction-cost of the
productive labour-power). By the entrance of consumption-cost sector,

the surplus-value rate as the index of income distribution is notchanged. But, since the entrance of this, we cannot find in thesurplus-value rate the state of utilization of national products by
poductive labourers and all other persons in a society of which therate originally shows. Therefore, we must try to follow up the two
rates surplus-value rate and utilization rate of national products,

W,+XR
Wi '

E. The public finance (both sides of public revenue and public
expenditure including local government's finance) adjusts the national

THE STRUCTURE OF NATIONAL INCOME DISTRIBUTION 95
dividend and national expenditure finally. The public revenue F.
collects the value Frm,, Frm',, FrR, (==FrKi +Frh), and FrR2 (--FrK2 +F.J, ) from Mli, We, Ri (==Ki+Ii), R2(==K2+I2) respectively.

(3. 1) Fr =Frm',+Frm'2+JFrRi+FrR2
The contents of F. are direct tax, indirect tax, transfer payment,
etc. On the other side, public expediture l7, gives the allowance"Feif',, Feif',, FrR, (=jFrKi+Frli), and FrR2 (=FrK,tFrl2) frOM va1, W2,

R,(== K, +-I,), R,(=K2+I,) respectively.

(3. 2) Fe=Fev',+Feif',+]FleRi+ReR2
The`net effect of public finance', F, that is estimated by deductionof the payment to government (effect of public revenue) from thereceipt from government (effect of public expenditurg), is the valueof effective finacial adjustment to national dividend.

(3• 3) F==Fe lt'Fr(3. 4) F=Fif',-Fff',,+FR,-TFrR,(If we denote, Fm-,, Fifr,,•••••• =net effect of public finance on PVi,
M'I2,''''''=Feif'i-Frif'i, Ferr'e'Frv'2}"''''''''''.)

By this effect, on the one hand, the structure of national dividend isvaried to Mii+Fm-,, W2+Fif',, Ri+FRi, and R2+FR,. So, the surplusvalue rate of economy as a whole is varied to
W]2 -F Fth'i, + W2 i + Fv',i + Ri + FRi + R2 i + FR,,and that of productive

Wi + Fm',
sector is varied to Ri+FRw';+ll;in2,+FM'L. (If we denote Fif",,, Fm',,,

FR,, are net effect on Wi2, M'T2i and R2i by public finance respectively.)On the other hand, the structure of national expenditure is varied to
2'Cmij + 2'Furii, .XK+ 2"FK, Ii +17J,, and IJ + Fi,. So, the utilization rate ofnational products are varied to CM'2+FM2+c.2Y,K++ .F.f+EI+Fi
F"

W,+Fm,+2'R+EF.
equivalent to thevalUe Of. Thisw,+Fm,
rate shows
thefinaistateof(eXPe!

ld,2tp",r.edRgtia.ikP,e.r,StO"ifepX,C.edPi,eir.9,d"iC./rX,e,i,a,?OrerS)in the nation. Undoutedly, the real value represents the final one,which is adjusted by the above mentioned factors. Therefore, we can96 NOBUKO NOSE
represent the real value as the real measure in the following form,
W]2'.+W2iSJ;,Ri'+R2i' , Wi2M',,:,Ril , W2'jil;,FR' ; (bydenoting fgr

example as X+Fx=X'.)
Next, we must analyse the more complex economy which includes

much of peti-producers' firm klein Betrieb- . For such society,above model should be modified as follows. (If we denote, E isproprietors' income.)'(l. l)' l4,r*+R*+E*=T* .

a 2)t m,r,+ml,,+,,w+R,+R,,+E,+E,,==T, (j.:-:ml:22)(If we denote, Ei, E2 are productive proprietor and unproductive
propietor respectively.)(1. 4)' Ml,+M,I,+R,+R,+E,+E,==T(2. 1)' D==Cm'+K+CE+Ii+I2+IE(If we denote, CE and IJr are proprietors' consumption andinvestment respectively)(3. 1)' Fr -- Fr m, +Fr m2 +FrRi +FrR2 + FrE(3. 2)' Fe==Femi+Fem2+FeRt+FeRg+JFeE(3. 4)' F=Fm,+jFm,-VFRi"FFR2+FE
When we seek for the surp!us-value rate, the utilization rate ofnational product by labour and capital and their changing process inthe complex economy, we need to use the last model and subtruct E andFE from the aggregate volume of r and F respectively. The Japanese

economy is the best example to do so. .
Note This model is founded on Marxian Economics.
Cf. Karl Marx, `Capital', Vol. 1 and 3, and `Theorien uber den Mehrwert',( 1 ) The whole sectors concerning to production of material resources. In this sector
th surplus-value is created.
Concretely speaking, collecting industories, agricure, manufacturing industries,

construction and a part of transportation and communication industries socalled `eine vierte Sphare der materiellen Produktion ' belong to this section.
(2) Taking the service for circulating process of wares or supplying the fund to thecapitalists in productive sector, the circulating sector comming in for a share ofR*. (Strictly speaking, division of R* by introduction of this sector, composed
rvi2 and Ri2 and the value of depreciation of fixed asset in this sector.) This

THE STRUCTURE OF NATIONAL INCOME DISTRIBUTION 97
sector is composed of commercial sector (wholesale and retail trade) and of
financial intermediary, and these are one of unproductive sector respectively.
( 3 ) The whole sector not concerned with production of material resources. Concretely
speaking, circulation sector, and consumption-cost sectors belong to this.
(4) Of cause, the latter is distinguished from the former in its origin. This sector's

income is generated and financed by government's current expenditure, i. e.
purchase of service. So, this income is one of the re-distribution effect of publicfinance in wide sense by nature. Nevertheless, the public service sector is quite
resemble to the service sector, because theses sectors belong to unproductive con-sumption cost sector, We define that Wee and R22 are wages and profit in this
sector respectively. Then, Wr2== VVi2+Wzi+va2•z, R2=R2.i+Reei(5) This means that the labourers' propensity to consume is unity.
(6) Stric•tly speaking, even in productive sector, we must notice the presence of
unproductive investment, i. e. oMce, accounting machine, etc.

SIL THE MEMORANDUM ON SOME PROCEDURESIN THE APPLICATION OF THE MODEL.
In order to arrive at the original flow of national income,supported by the above model, we must take some complicatedprocedures and reasonable assumptions for the calculation, as we have
many defects in the present Japanese national income statistical works.

From the view-point of Marxian national income theory, the present
national income statistics being very inadequate, we must first takesome necessary adjustment to actual measures to construct the data incorrespondence with the above model, these would be as follows;
A. We must first divide the national income into two categories, i.
e. national income produced by capitalistic mode and by precapitalistic mode (i. e. peti-production), second, divide each categories
into the income of productive labour and ofunproductive one respectively.

Then, peti-producer's income corresponds to `proprietors' income' inJapanese national income statistics.(') About all the industries, we must

divide Japanese national income into productive and unproductive
sectors, following to the classical standard by Marx. As for ` eine vierte

Sphare der materiellen Produktion ' --- transporting and communicat-

98 NoBUKO NoSE
ing industory ,we are obliged to include all of them in the productive sector, being diMcult to divide it.

B. Before estimating wages and profit, we must adjust `earningincome', which includes the directorates' salaries and social insurance

funds contributed by employers, etc. Moreover, we must estimate thewages of unproductive staffs in the productive sector.

By above procedures, we can get. Mi), W2, Ri, RL) in all theindustories.

C. We must divide national expenditure D into Iabourer's consumption
Cifr, capitalists' consumption K, capitalists' investment (accumulation)I, peti-producers' investment and consumption. Then, the aggregate
expenditure H in Japanese income statistics are unsuitable to this object,because (a) it shows only aggregate expenditure and (b) our national

expenditure model (cf. (2. 1)) can correspond to actual national
expenditure only after the consideration to some redistribution effectby public finance.(2) And that, the public effect which needs to beconsidered at this step is not all the effect of public finance, but
except the taxation effect of indirect tax and the eflrect of subsidies.(3)Then, we take following assumptions, (i) the available wages-- Cm• laborers' propensity to consume is unity(4) as a whole ,(ii) the amount equivalent to proprietor's available wages==CE. By
using the index of wages in small firms and the numbers of thefamily workers, we get the proprietor's wages.(5) Extracting the
proprietor's burdens from this figure, we get the amount, which isequivalent to proprietor's available wages and CE.

Thus, by aggregate consumption C minus (CE+Cif-) we get capitalists' consumption K.

D. The changing effects by public finance have to be investigatedfrom each side of public revenue and expenditure.

The contents of F. are direct tax -- personal income tax (sumof t(W+K+Eta-) and corporation tax (sum of t'(R,+R2) , indirecttax (sum of t(Cm+K+CE)), transfer payment---social insurance

funds contributed by employees (sum of T(W,+W2)) and by em-

THE STRUCTURE OF NATIONAL INCOME DISTRIBUTION 99
ployers (sum of T(Ri+R2)), and surplus earned by public enterprises.

The contents of F. are subsidies, transfer expenditure paymentof national debt interest (sum of r(Ri+R2) and expenditure of social

insurance funds to Iaborers (sum of g(Wi+W2)), government's consumption (current goods and services) and government's saving.
As for the governmental consumptions, we only take account of
the government's purchase to goods, considering that the purchase ofservice corresponds to the income of public service and the Iatter isalready added to W2 and R2.(6) Above all, about F., we must maketroublesom effort to divide subsidies ; because the present Japanese subsidies include the prices control compensation and the Ioss compensation

to productive enterprises, and the annual use of the latter is notconstant.

As for the loss compensation to `Special Account for FoodControl,' belonging to the latter, we must divide it into the subsidies
for agricultural capitalist and for farmers.

Above procedures are necessary to annalyse the Japanese national.

mcome structure.
Note. (1) This categorie is used in `Japanese Economy and NationalIncome'andother national income statistical works published by Council Board in Japan.

(2) So, the model (2. 1) changes to (2. 1).

D==C+Jr+K++I+. C+if', K+, I+ are laborers consumption fund before
tax, capitalists' consumption fund before tax, and capitalists' investment

fund before tax respectively.

(3) As we know, the national expenditure in terms of market price (factor
cost plus the amount of indirect tax minus •subsidies) in comparison withnational income in terms of factor cost.

(4,) We assume that the propensity to Åëonsume of available income.

(5) When we research the proprietors' income, we must not forget that thisincome is composed of the wages of the proprietor and of his family
workers and of his profit. This income is a mixture, so we must treat it

carefully.

(6) See above gIand Data.

NOBUKO NOSE

1oo

gM. DATA.
incomeDistribution of Natioma1

I. Actusl

million Yen

1949
-----

------

E

Rl

653,240 86,730

8,578

2,611

o

97,919751,159

Mining

7,795

47,132

5,237 139,963

o51,652

69,447

Construction

47,844

37,1069,276

o53,812

1Ol,656473,261

708,532

Forestry & Fishery?

8.

Manufacturing

235,271 277,815

56,902 138,544

ge

7,789

132,480

39,572 22,024

9•

ff2

p

S poe

es
C n8
g gg

sg

s gV'
rp -.

oo
9 n?

o

'

Total

e

194,076 201,865

o951,939 581,263 119,565 179,892

Sub Total

%

ge

7,4SO

Transportation,
Communigajion,etc:

9

5.

Wl

g

9

Total

W2

Agricalture,

w
8

Sub

RL)

880,720 1,832,659

52

Commerce

234,332o60,639o72,228Finance & Real

4,350

o

36,323o31,705

Estate48

1OO

l32,867

367,I99

68,02872,378F

Service

144,883

Public Serviceoo174,247o40,590 214,837

359,720o

1 oo,766

o4,999

105,765

105,765oi371,975o149,522521,497

90,5062

57.5

1OO

r
1

9

Sub Total

383,565

%

42.5

a

l

1,335,504 581,263 491,540 179,892 149,522 1,402,267 2,727,721

Total

%

t

49

1

51

1oo

t

Cf. Eq. (1.4), (1.5)* & (1.5)'.

`Total'does not involve the net income from abroad.
As for the method of estimation in details, see Appendix.

Source : ` The Japanese Economy & National Income ' (Nippon-Keizai toku), Published by Economic Council Boarcl,Japan.

Kokumin-ShotoDISTRIBUTION
OF NATIONAL
INCOMETHESTRUCTURE

101

1950
--------

s

E--L---.---L-----

Agricaltur, Forestry& Fishery
E,

g

s

w, 1

L

Wl

Rl

R2

Sub
Total

1

Total

773,483 92,215

9,120

4,626

o

105,961

879,444

89,424

98,522

72,878130.225

Mining9,098

61,s36

6,871

20,717oConstruction

57,37747,785

11,946 13,147

o
'

g'

Manufacturing

163,112 351,245 7l,942 268,525

o69l,712854,824

ff

Transportation,

10,60747,053 35,888

o240,466

251,073l,O13,677 7lO,606 i46,932 342,903oCommunication etc.

g

Sub Total

%
:

N

54.2

1OO

gg)

318,046ol32,727o90,250222,977 541,023o
H es Finance & Real Estate

3,807

o

54,980o60,l77

115,157 118,964

175,505o156,367o23,954

180,321 356,826

oo

125,942o

6,335

132,277 132,277

o470,O16o180,716

650,732 1,149,090

g gg
g R 2 LService
9.

1,200,441 2,214,118

45.8

g
g Commerce
9s
B.

c:

I57,525

ge

g Public Serviceo 9
ge 9 g'

1

9
9

t

I

Sub Total

497,358

%

43.8

1

56.2

1oo

1,511,035 71O,606 616,948 342,903 180,716 1,851,173 3,363,208

Total

%
Source :

45

55

100

'

ibid.

1951
Agriculture,L971,665 1 OO,622 ll,180,

Forestry & Fishery
}J

&
g

2-•

o

Mining 'Construction

Manufacturing'

Communication, etc.

:n"

Sub Total

en

o

%

P

11,249o123,051 1,094,716

22,711

74,828

10,204 36,407

o

121,439 144,150

63,96658,17014,543 14,728

o87,441 151,ca7

159,159 441,928

97,O09 444,051

o982,988 1,142,147

204,314 61,029 30,806o296,149 309,l20

1,230,472 879,862 193,965 537,241o

1,611,068 2,841,540/

Transportation,eo112,971

43.2

56.8
L

1OO
.
contl.

102NOSENOBUKO

x-:"o
- :,
an
ge 2

c
v
vH
o

o tr

ei
o

-.-x 11

F

E

.. .x

.Lx
x--s.L
Commerce

407,473:

Finance & RealEstate,

W2 1

Wl

R2

o

139,937 329,744 737,267

o'77,793 419,270 154,145

213,125!

o

28,346 241,471 447,803

166,428

o

7,814

lt
189,807ooi

71,477I

4,785

Sub i'

Rl

Total

Total 1lInya: en Service

206,332ge• g'•

n< sgi"oott-

oo "9W Public Service

m
o
o
o
r--

Sub Total'
ttt
618,590%41.1

640,837'oo174,2421 174,242

ll
253,890 894,727 1,513,457

B

Total

1oo

58.9

1,849,062 879,862 834,802 537,241 253,890• 2,so5,795 4,354,997

%i

42,4

i

F

57.6

100

Sub

Total

Source : ibid.
1952

E

Wl

1,101,77.9

W2

Rl

R2

124,482

14,171o152,484 1,235,263

29,509 107,444• ,22,oo7

34,805o169,256

68,720, 122,907.t sTrtAgriculture,

Forestry&Fishery
Mining

wn

1

g:n

pt.
<o

ge9o

91,298

19,623o111,250 202,548

Manufacturing

189,615 501,753 141,570 325,236

o968,559 1,158,l74

Transpertation,

17,047 26s,6731 78,785

36,216o

380,674

1,428,248 1,068,072 279,1oo 435,05iocvv

SubTotal%---.--.--...-....-.......--

ges
garOiHlFiance&RealEstate

487,565

1oo

55.3
g

o

-

o

557,174 791,661

879,226

84,l54ol17,258

207,288234,4875,876

E

397,721

1,782,223 3,192,471

44.7
7...

Commerce:'

198,765

Construction

Communication,etc.
n

Total

201,412H

gc9

en Service

geg,gelco-n:-- 98SeVg

263,740o277,714o87,236 364,950 578,690oo214,084o

9,657

757,181o

810,439o'Publicthrvice

223,741

223,741

,

sg)
9oB

%
Total

771,325 1,581,764 1,888,945
1oo

59.9

40.1

2,185,429 1,068,072 ,1,089,539 435,051 771,325 3,363,987 5,081,436
f

'

%

43

1oo

57
,

National Ineome in Pre-war Japanll. Actual Distribution of

1934

Å~

E

Productive Sector

W2

Wl
2,218

2,811

J

Rl

554

l

'
t

2,22b

R2

Sub Total

o

4,998

7,8e9

64

1OO

L

1

Total

/

%
C
=
g) Y
9g
9 E
g'

Circulating Sector

981

724

' I
1,593

2,317

3,298

Clomsumption-Cost Sector

297

1,279

475

1,754

2,051

1,278

2,oo3

2,068

4,07l

5,349

75

1OO

9,069

l3,15869

1oo

Sub Total

25

.e..-

Total

4,089

%
Cf. Eq.

x

{

36

2,226

2,068

31
(1.4),(1.5) &

(1.5),.

the method of Calculation in details, see Appendix.
Source: C The Japanese Economy & National. Income.' ibid.
As forllI. The

Structure of National Expenditure

CE

C"'1

C"•2

Kl

1949

1,058,810

525,059447,272

128,7631950

1,141,837

648,757

552,661

1951

1,346,880

81O,148768,770l952

1 630 096

953,031991,931

)e

2,557

2,218

K2

ll

l2

IE

384,193

A 1 oo,080

347,375

212,329

4oo,885434,851

245,448

406,OIO

l47,301
286,860

296,736

387,751598,212

377,062

471,035

493,095

285,O14

1,O08,608

420,781

K2*

Kc

IOI,171

283,02265,93433,96638,8oo18,25912,40822,060Note. K2* isCÅí Eq. (2.1)' and g IL
As for the method of estimation,see. Appendix.
Source : ` The Japanese Economy & National Income ',ibid.

IKI.( = k2+Kc )consumption of unproductive capitalist, and

:
m
ca
H
pa
c

n
e
a
pu
m
o
ut
z
>
H
o
Z
>
r
-2
O
o
K
m
vas
H
pa
es

a
H
o
z

KG is government's expenditure to current goocls. So,
K7 is capitalist's consumption fund in unproductive se-

- in
ctor

wide sence. I2 contains the government's inves-tment fund in the same manner as Ko.

-oocIV. a. Redistribution Effect by

Public Finance

1949
JVI

M2

Personal Income Tax

73,059b2,361

17,788Indirect Tax

112s498

97,824

26,900

Corporation Tax Surplus earned by

o

o

o

o

o

13,197

Public Revenue

Kl*/fu.*lt-i*)iR2(=K2*+I2*)

K2*

I2*

o

13,977o

22,O!2

o
o

52,M2

o

41,361o63,867oo11,242

o

o

o

o

o

o

o

l6,489o12,956l98,754

171,427",688

1329,98

35,98954,317

o'

o

o

o

283,022oSl,237

26,610

o

176

o

1,3ee

o
o

o
o

o

194,792

Government Saving

o

o

o
o

366,580

TotalsSl,237

26,610ol 94,968

1on,968

283,022376,219659,241

A 167,517

A 144,817

A 44,688

61,97017,282

247,033

321,902568,935

Public Enterprises

Il*

Social Insurance Fu-

nd contributed by

Employees

}

H
o
p

Social Insurance Fu-

nd contributod byEmployers'Totals

177,686

90,306

Public Expenditure

amCetGood
servlce

Transfer
Expenditure
SubsidiesCf. Eq. (3.1), (3.2)& (3.4). g

As for the method o f estimation

as

9,500

IL
in details, see

Appendix. Sourcc:` The Japanese Economy& Naiiona!

Z
o
w
c
x
o
z
o
an

lncomc ', ibid.

l950

PublicRevenue

wi

W2

K]*

PersonalIncomeTax
IndirectTax

87,81675,3989,367

108,836{2,93910,O06(lorporationTax

oo16,851ooo14,354o

Ii*

Rl(=Kl*+Il*)

Ko*"

4,826

oo71,90323,260o24,870

I2*

Rz)

(=K?*+r•2*):moo37,Mloo12,812

6,299

oooo

oo
el

oooo

SurplusearnedbyxÅënSocialInsuranceFu-Åë

Pub!icEnterprisesb-l

ndco'ntributedby'Employees

SocialInsuranceFu-

ndcontributedby
Employers
Total

213,503

182,691

19,373120,033

139,406

11,12549,85360978'-

Public•Expenditure
CurrentGoods.servlces.
o43,867oo

o37,368oo

400,zz5

oooo

Transfer'

o1,ooO2,360214,943

oooExpeiditure'

Surkidies

GovermenntSaving
Total

43,867

A169,636
Source: ibld.

37,368'A145,323oA19,37364,1l2

M,ll2

A55,921 A75,294

4oo,885

217,403618,288389,760

167,550

557,310

xpt
o
ur
Z
>
H
M
o
Z
>
r
-z
o
o
K
ta
v
-ca
H
X
es
c

H
H
o
Z

p
o
en

8

1951

Kl*

90,15386,4735,oo4

o133,537

128,554

6,722

o

o

o

o

132,491ooo41,43017,731

17,035ooWlPersonalIncomeTax
IndirectTax
CorprationTax

Surplusearnedby
PublicEnterprises

Rl

W2

PublicRevenue

I]*

I2,355
I3,243oo62,348

o
o

/

o

o

o

32,868241,421232,062

11,726

206,789

Employers
TotalsR2( =K2*+I2*)/

SocialInsuranceFu-

ndcontributedby

io
,o
:o
'5,598oSocialInsuranceFu-

udscontributedby
Employees

l2*(=Kl*+Il*)

218,565

15,{t67l
77,81583,413'ttttt/m

PublicExpenditure
CurrentGoods'servlces

Transfer
Expenditure

o

o

o

`Kl,830

46,915

o

188

o

o

Subsidiesooo38,744GovernmentSaving

o

o

o

o

Totalstl8,830

46,915o38,932----.

1

38,932.-4192,591

A185,147

Source: ibid.

lo
Io
iO

A11,726 A167,857 A179,583

i'1387,751
i

89
3,612

442,686
446,387

834,138

368,572

750,725'll382,153

z
o
ee
c
x
o
Z
o
m
as

1952

Public Revenue

W2

Wl

Kl*

l]*

Pers(mal Income Tax

85,02088,562

1,275

Indirect Tax

157,366

169,471

2,240

o
o

Corporation Tax
Surplus earned by

o

o

o

o

o

21,274oPublic Enterprises

Rl(=Ki*+I,*)

K2*

I2*

2,267

o
o

88,687

3,813
o157,665o26,524oo22,143

e

o

o

o

o

o

21,640o

38,472

R2( = K2*+I2*)

:
m
ca
H
pa
a
o
ri
Åë

Social Insurance Fu-

nd contuibuted by

Employees
Soci.al Insurance Fu-

nd contributed by

Employers
Tota1

)-

263,660

280,176

3,515

o

o

o

68,52571,322

o

o

202

o
o

447,929

30,699471,035

453,109924,144

A 109,667

4M,955

256,472

721,927

136,851

140,366

6,080

196,137

202,217

PublicExpenditure
CurrentGoods&.

servtces

Transfer
Expcnditure

Z
ra
o
"
z
e
H
o
Z
>
v
-Z
n
o
K
m
vas

SubsidiesoooGovernmentSaving

o

o

o

Total

68,52571,322o

A 195,135

A 208,854

Source :ibid.

A 3,515

471,035

o14030,585o'30,699

A 106,152

o

4,978

el

w
es
a
H
H
o
Z

R

NOBUKO NOSE

108

in Redistribution Effect by Public Finence in Detail

(1)
'

1951

1949

FrMis

41,142

FeMis

6,3es

43,481l8,893
A34,588l

A34,7ss

F"7is

1952

54,07071,725

10,931

18,258

A43,139

A 53,467(2)-x-1Fr va"t s

FeMsi

Fmsi

x

ll lgsO'

1949

1952

33,428

1 58,461

72,40382,372

5,189

11,958

14,637

20,es9A 28,239

A 46,503

A57,766

A 61,403

'

i

1951

I

(3)
l950

19tl9

FrKsi

25,OOO

1951

l952

9,245

4,810

5,312

FeKgl

o

o

o

o

FKst

A25,OOO

A9,245

A4,810A5,312

Frlst

37,75041,37866,921

171,-24

Felsi

9,600

2,447

3,690

5,156

FIsi

A28,150

A38,931

A63,231

A166,268

FRsl

A53,150

A48,176

A68,ou1

A.171,580

As for the method 6f estimation,soe, Appendix.
Source : ibid.

1oo
THE STRUCTURE OF NATIONAL INCOME DISTRIBUTION

V. The Changing Proeess of National Income Distribution.

(Conclusion I)
1949s------x-.

x

x

Real Structure
Effectby Public Finance

Actua! Measure

Wl

VV2

Ri

R2

413,746

346,723

197,174

718,457

A 167,517

A 144,817

17,282568,935

581,263491,540l79,892

149,522,( onsumption-Cost Sector

275,023

45,589Circulating Sector

96,962103,933

UnproductiveLabourer in

ll9,565

Productive Sector
Original Structure

581,2os

5oo,352

1950

x•

x-Å~

Rea1 Structure

Effect by Public Finance

Atual Measure

Wl

W2

540,970
A 169,636
71O,606

471,625
A 145,323
616,948
282,309

Consumption-Cost Sector

Unproductive Labourer

146,932

SectorOriginal Structure

71O,606

R2

b67,609738,026

A 75,294

557,31O

342,903

180,716

30,289187,707

Circulating Secctor
in Productive

Ri

150,427

A 179,583
827,969!95 1

Wl
Real Structure
Effcct by Public Finance

Actual Measure

687,271
A 192,591
879,862

Consumption-Cost Sector
Circulating Sector

Unproductve IAbourer inR2

M9,655

357,658

1 O04 615

A 185,147
834,802379,553
261,284

A179,583

750,725537,241

253,890879,862i

7)

36,160'217,730

193,965

Productive Sector
Original Structure

Ri

Wo.

1,210,220

NOBUKO NOSE

110
1952
L" li---.-.s.fi-L.......-----x

Wl

W2

872,937xT.-s-.

R2

880,685

325,384

1,493,252

A195,135

A208,854

A109,667

721,927

1,068,072

1,089,539

435,051

771,325

RealStructure
EffectbyPublicFinance''Ri

ActualMeasure
Consumption-CostSector

491,798

674,432

CirculatingSector

3r8,641

es,893'UnproductiveLabourer

279,1oo

iriProductiveSector
1,068,072

OrigirialStructure

These are derived fromVL

1,707,224

tbe above all tahle, `Table I, II, III, &IV.'

Changing Proeess ef Nstional Expenditure.
(Conclusion rt)

1949

W2

wi
Consulnp'tlon

R2

Rl.Consump- Investment

Consump-.tlon

Use of Fund

Consump-.tlon

Investment

tiOll'

Fund

581,263491,540'147,150

32,742

114,549

34,9733

Actual Expenditure
ture

525,059

tl47,272

128,763

A1oo,080

384,193

347,3753

Real Purchase412,561

349,339'1O1,863

94,712362,281356,875

wl

W2

t/

-

1950
ut.....T.

t--tt-

UseofFund

R2

Rl

Consump- aonsump- ConsumP-Investmcnt
tion

tion

tion

Consump-Investment
tion

Fund

710,606

616,948

75,760267,143

49,170131,546

ActualExpenditure

648,775

552,948

65,934l47,301

434,851

296,736

RealPurchase539,939459,72255,92863,919428,552

299,0961951

x-x.x--N..-.-'-x.x

UseofFund

Rl
R2
Wl
W2
Consump- Consump- ConsumP-Investment Consump-Investment•

tion

tion

tion

tion

Fund

879,862

834,80243,780493,461

20,638233,252

ActualExpenditure810,148768,770

38,8oo,286,860

406,OIO

598,212

RealPurchase676,611640,2l6

32,078

325,604

402,767

601,824

l952
'XL..

W2

Wl

x..x•-...x.....L....•-.-

UseofFunds

Consump- Consump- Consump-Investment[(}OnsUMP" Investment
tion

tion

Fund

1,068,072

1,089,539

23,Soo411,751

24,327

746,998

ActualExpenditure953,031991,931

12,408285,O14493,095

1,O08,608

RealPurchase795,665

822,460

1O,168215,599489,282

1,O13,586

from Table III &Table IV.

These are derived

tion

1tion

VII. The Clunges of Surplus-Value rate and Utilization
rate of Nstional Products by Capital artd Labour.

(Contlusion M)
Year

Ra:+u!u;:u!=-:LuR2+VV2+JV2

Wl-Rmu+M2%

tuatW2'
Ml'

Ri+R2 1'+ W12'+ rv2 1'

Wl

Wl'

%

%

%

VV2+ER2W2'+ER2'

vv,

w]'

310

%

%

1934

230

1949

es

51.6

103.

68

141

306

l950

118

69

115

70.2

158

245

1951

136

83.2

125.2

73

185

291

1952

l60

67

150.2

63.5

213

309

125.5

H
:
N
ua
6
pa
c
fi
6
c
x
m
o
v
z
>
so
Z
>
r
zH
o
o
K
m
v
-c,)

el

These are derived

from abave alltables.

a
oo
a
H
H
o
Z

--

(1)

Appertdix

of gIIL SuppleinetLtary Data.

Structure of

Wage ineeme in Productive Sector.

-N

1949

x---------

Å~Å~-"-..-..M

Aggregate Wage -iryGgi-i;i-wnc;;L(O.gfl;7i]:,,?.rs%)
IncomeNo. of Stuffs-ite6i-8W3ilEig'(oofworkers%)

w;

W12

Agriculture, Forestry & Fishery

95,3089(}.59.5

86•,730

8,578

Mining52,36989.5

10.5

47,l32

5,237

Construction

46,382

82.6

l7.4

37,106

9,276' Manufacturing Industries

334,717eo20.

277,815

56,902

Transportation & other Prod-

172,05277

23

132,480

39,572581,263

I19,565

uctive Industries

7oo,828

TotalsCf. Eq.

(1.3)

z
o
w
Åë
x
o
Z
o
ca
pt

1950

AggregateWage No. of Laborers

'

..

t.t.

-'

x--x

IncomeNo. of Workers

No. of Stuffs(%)%) No. of Workers

w;

W;2

Agriculture,Forestry&Fishery

101,335

90.5

9.5

92,215-

9,120

Mining68,707oo

59,731

83

61,83647,785

6,871

Construction

11,946

ManufacturingIndustries

423,187

eo

IO
17
20

351,24571,9`l2

Transportation&otherProd-ro4,57877

23

157,525

47,053

71O,606

146,932

uctiveIndustries
Totals857,538

113

DISTRIBUTIONINCOMEOF NATIONAL
THESTRUCTURE
1951..

No. ofLaborers
N/Ci.iiiii::-:(of %y (%)

Workers

Workers

No. ofStuffsNo. ofLxÅ~-

Aggregate's

Agriculture,Å~

Wage Income

Forestry & Fishery

MiningConstruction'

111,802

Wl

Wi2
11,18090

10

1oo,62288

1274,828

10,20482

1858,l7014,5438020441,928

97,O0977

13204,31461,029879,862

193,965

vvri

W12

l

t

85,032l

72,7131i1,Manufacturing:`eIndustries

1

Transportation &other Productive

538,9371
1

265,343

Sectors
1,073,827

Totals

1952
'K

Å~Å~

x.

Aggregate-'

Agriculture,X-

No. ofLaborers

No. ofStuffsWorkers

Workers

Wage IncomeNo. of (% No. of (%)Å~

138,313

90

Mining129,451

Construction

91,627

Manufacturing

Forestry & Fishery

Industries

Transpertation &other Productive

10

124,482

13,831

83.3

16.7

107,444

22,oo778,4

21.6

68,72022,907643,273

76.3

23.7

501,753

141,570

344,45877

23

265,674

78,785

Sectors
TotalsNote.

1,347,172

1068,072

27g,roo

No. of Stuffs
No. of Laborers
in Agriculture, Forestory & Fishery derived&
No. of Workers
No. of Workers
from Mr. Uesugi & others' ` National Income Statistics in Postwar Japan', Seriesof Nippon-Shihonshugi-Koza, Vol. X, Appendix. Other rates except Transportation,
derived from ` Annual Report of Labor Statistics ' (Rodotokei-Nenp6sho) publishedby the Bureau of Labor Statistic oMce in Japan. The rate in Transportation

is derived•from ` Establishment Census of 1951' published by the Bureau of
Statistics OMce of the Prime Minister, Japan. We are obliged to use the 1951's

rate of tansportation thorough all years in question, because we cannot get
possible figure in these years. And as for the other rates of which we cannot
obtain by missing etc., we are obliged to use the rate of precedent year.

NOBUKO NOSE

114(12) Structure of Propietors Income.
Proprietor's

IncomeIncomeby

Side-Works

Aggregate
Proprietor's

Income1949

680,579

3,275

1,335,504

1,130,ooO

205,504

1950

736,432

2,281

1,511,035

1,267,300

243,735

1,472,OOO
l76soooI•)e1

377,062l951

876,249

2,427

1,849,062

1952

1,083,122

3,071

2,l85,429
1

This table is derived by the following procedures.

(D Aggregate proprietors' income is the sum of proprietors' income and income fromside-work. (In this Åëonnection, the aggregate proprietors' income in each industory

as Table I, is derived from the proprietors' income in each industory plus income

from side-work in each sector which is income from side work multiplied by'::g:-'i:l9.ttOi,S,-iil.".C,O.M.e,ineachindustg.r.y-..).

@ Em is derived from the average wages of laborers employed in small firm (which
is derived from the index of wages by scale of establishments and average w. age)and proprietors' volum of labor (which is derived from the numbers of proprietors
and his famiiy workers muitiply by l:ll9t; [l.l:: gf PeromPprlii;gi; and bylabour time of famiyl workers
respectively).
Iabour time of emptoyers@ Ep is derived from aggregate proprietors' minus Em. In this connection, investmentby proprietors', IE, is derived from Ep+`Loss Compensation for Proprietors' inAgriculture. (Cf. Supplementary Table (4.4)).

417,429

(3) Structure of Consumption Expertditure.

Å~LC

K(=C-(Cva

1-"

Cm(=W(1-u))

Em

1-"

CE(=Em(!-v))

1,073,213

so.6

972,331

1,130,OOO

93.7

1,058,81O

2,261,075

229,934

1,327,554

90.6

1,201,436

1,267,3oo

90.1

1,141,837

2,443,173

99,900

H
:pt

1951

1,714,664

91.5

1,ss8,918

1,472,OOO

91.5

l,346,880

2,972,857

57,059ca

1952

2,157,561

90.1

1,943,962

1,768,OOO

92.2

l,630,096

3,608,526

34,tl68

1949
1950

Å~

Cm

CMi

Cms

K

Kl

K2

19tl6

972,331525,059447,272

229,934

128,763

101,171

1950

1,201,436

648,775

552,661

99,90065,93433,966

1911

1,ss8,918

810,148768,770

57,05938,8oo18,2591952

1,943,962

953,031991,93134,tN58

12,40822,060Note.

i.uis !Ilgt!}r!iMi!li!ei:Xl:il}Sll:lli:iEi:-9:-!AiEsfiniivingEXaPgeenXtcUreeieTaxes,andvisNOn'itXl:,EHXPoeeettg\ieiiftceo•mTeaXeS.

These are derived from ` Family Income and Expenditure in Postwar Japan,' Published by Beaureauof Statistios Office, of the Prime Ministcr, Japan.

2. Cm,, Cmg are derived from Cm by tiW , Cm by ptJv2respectively.

3. Ki, K2 are derived from K multipry by R

x
a
fi
rl
Åë
pa

Sec. g II, before.

-Xx-

+cm))

Ri and by RR2 respectively.

N
o
ur
Z
>
H
-o
z
>
v
zN
o
o
K
N
v
5
"
s
a
H
N
o
z

p
-or

Data of Public

(4.1)

-

Finance.

paPublic RevenueÅ~/Personal Income

Tax

1949

Indirect Taxl327,985lSurplus earned

Corporation '1 Tax

by Public Enterprises

489,91294,oo363,867

288,907

1951

325,416 i

498,271

194,839

41,4301952

340,124605,254

2tl6,352

26,524

407,627

Source :PublicSocial Insurance
Funds contributedby Employees

by Employers

1

1950

[

Social Insurance
Funds contributed

23,260108,944`Japanese Economyand National

l
1
L
E

24,43929,44531,20537,682

34,76648,33543,417l60,l12

Z
o
tu
C
x
o
z
o
ca

Income , ibid.
,

Expenditure
Current Goods & Services
Purchase of
Public bervice

Purchase of
Current

Consumption
Goods

Transfer Expenditure
National

Debt

Interest

Subsidies

Expenditure ofSocial Insurance

Fund

as

Loss Compen
Price thntrol-satlon toCompensation` Special

Government
SavingAccounts '1949

I05,765

283,022315

57,847179,284

31,838366,5801950

132,277

4oo,885293

81,23560,1627,830

2!4,943

1951

174,242

387,751277

95,74535,384

6,972

442,686

1952

223,741

471,035316

l39,847

30,4718,444

447,929

Source :ibid.

(42) Structure

From

Xt
Personal lncome Tax Xi
Indirect Tax

X2

Corperation Tax

X3

Surplus earned by

X4

Public Enterpriees

WlXi(1-a)2wW+:of Public Revenue.

2i(1 - a)EwW+2E

KíK

2Evv+Ill]li}+cE2l2fi,m-!krrfi;w+Åík+c.

i(1-es)EwK+iÅí

K

-e

K2
W+2K

](1-a)

K,

]

l
i.a

CE
2EVV+EK+CE

K2 •2W+2K+CE 2EW+2K+CE

23-{,S}rk

,-,

S4-X

'

4
sslWw

cS ..i;ibl.?aliabnyCeEXSnl.dsy.,,xs;oc,ll 'i
G ERi

rl
cSo
oc.i ta ibl upi71irabnyceEFmUpnldoSyersx6

6ERi

ote. a is Personal Income Tax assesed by Taxpayers' Report

MPersonallncomeax.
43) Strueture of Public Expenditure.

i

o

l

2

l

2

urrentGoods&ServicesZi

ransferExpenditureZ2l2

emarksl*
Z2-Z2*)Erv•W

J*=Zj-Yc'2,Z2*ER

2Z2*ER

3*+(2j+Z2+Z3.B)iiZ4i

ubsidiesZ3

3.(1-B)

Z4

ovt.SavingZ4
4.4)

tructure of Subsidies.

3
rice Control

3*
ompensation
ossCompensationto`SpecialA

ccountforCommunication'2i
ossCompensationtoShippingC

ol
1

l

3*
l

orporationZ2

2ccountforFoodControl'23

3(B)ossaompensationto`SpecialA

ossCompensationto`SpecialA

ccountforPostalSaving'Z4
ote. B is

2ncome in Agriculture, Produced by capitalistic Modencome in Agriculture3(l--•B)4

(4.6)

Composition of the Redigtribution
W12

Public Revenue

PublicFr

Expenditure Fe

rv12

Fr M2 '

W2
va12

(Z2--Z2")' VV(45)

Division ofLoss Compensation to `th-Special Account for
mmunciation 'W21
Fr ll'A .

va21

Effect by

Pubie Finanee in detail.

K21

I21

W21
(Z2-Z2*)
.

.,i

R2
o

va

(FrK2+Frl2)'-R

Frl2. R R2

R21

FrKa'

M2

R21(K21+I21)

4z,*.-tl:t, .R,IIIICtR- .++24 z2*.-

il:,!L.s-R2il9tiRza.

Aggregate Losg Compensation to ` Special Aecount '.
Loss Clompensation to`Special Account for Shipping Corperation

Loss Compensation to `Special Account forFood
Control'

Loss lk)mpensation to `Special Account for Posatl Saving'1949

15,258

7,080

9,500

1950

3,710

1,760

2,360

195I

RII211'

3,360

3,612
3,466

l952

4,978

CÅí Supplementary Data, (4.4).
We derivod this from `Budget' (Kuni-no-Yosan) Published by Ministry of Finance, Japan.
In`Budget', the figur is estimated by every fiscal year and we cannot get the figur in calendar year. So, Above date is' Loss Compensation in Fiscal year
Each

+24

H
:re
m
H
pa
cfi
H
cpa
m
o
v
z
>
H
-o
Z
>
v
-Z
fi
o
g
N
v
a
-pa
tH
c,

c
H
H
o
Z

estimated by the procedure-aggregate Loss CompensatiOn in Calendar Year Å~ Aggrcgate Loss aompensation in Fiscal year.
Source : ` Budget,' ibid.

`Japanese Economy and National Income,' ibid.

'opRates for Estimation.

(5. 1)

N
o

%
Wl

R:

R2

ER

2R

19.5

56

44

69.5

30.5

23.8

32

66

34

83.1

16.9

49

23.S

31.2

68

32

86

14

51

25.6

29.4

36

64

87.4

i2.6

JV2

Tw-

EVV

PV12
pV2

1949

54

46

24

1950

54

46

1951

51

1952

49

Å~

,

(5. 2)-W!!zl2

Ppt2

Ree-fREgL2

R2

R2

z
o
tu
a
T
o
z
o
ca

Rates for Esirnation.

%x<<<i,,a1scg l

49.1

-K

u

, K2

va2
Kl
K2
wi
W2
CE
E va+ EK+ CEEW+EEVV+E EVV+E
E JV+ EK+CE
E Wr+ EK+CE
EVV+2K+CE
2JV+EK+CE
KiE W+E

K

23

20

5.5

!

B

4.5

47

43.7

37.3

11

8

3.6

2.64

1950

38.6

26.7

22.8

2.7

1.3

tl6.5

49.5

42.5

5.3

2.7

l951

43.5

26.8

25.8

1.35

O.65

45.4

49

47

2.7

1.3

296

1952

47.9

26

28

O.37

O.63

45

48

50

O.7

1.3

3.2B

Note.

l. ec is derived from `Report of Tax Survey', published by Tax
Bureau, Ministry of Finanoe, Japan.
2. B is derived from `Japanese Economy & National Income', ibid.

ts

121
THE STRUCTURE OF NATIONAL INCOME DISTRIBUTION

9IV. THE ANALYSIS OF JAPAiNESE NATIONAL
INCOME ACCORDING DATA.
'
By the.aid of the above data, now we try to investigate theJapanese income structure, through l949.-v1952.

First, we look at the compesition of national income. We findthat national income produced by the capitalistic mode increases
gradually, and on the contrary the peti-producers' income falls either
in the aggregate or in each sector. Of course, the present income of thelatter is not so very low, and maintains above 400/e of national income.

Originally, the peti-producers' income has occupied a considerable
in amount Japanese national income, and was 31 O/o of l934th' national
income. In postwar Japan, the giant capital, i. e. ,ZrAIBA7rSU, was dis-solved and reduced to small scale, this tendency has been accentuated.

But, since comming back of some giant capital after Korean war boom,

we find the fact that the gradual decline of medium and small business, that is the returning tendency to prewar level. By the fact thatabout 900/o of national product in agriculture, fishery and forestry

by small firm, the peti-producers' income in productive sector isconsiderably high. But even this percent tends to fall and returns to
prewar level.

Second, Iet us investigate the structure of Japanese national
income produced by capitalistic mode and its changing process.
As Table`V'and`VI'show, by substruction of the effect of publicfinance (CÅí Table`IV') and of all unproductive sector from theactual measure of national income (Cf. Table`V'), we can reach at
the original structure of National Dividend produced by capitalisticmode in the years l949, 50, 51 and 52.
We find the close relationship of the advance of re-distibution to

the movement of surplus-value rate, as Table`VII'cleary shows,First, the original surplus-value rate ili'. being 860/o, 118o/e, 136e/o,

160a/o in the year 1494, 50, 51 and 52 respectively, we can recognize

122 NOBUKO NosE
its gradual rise year by year. Second, by the entrance of the circulating

sector, above figures are lessend to 51.6%, 69e/e, 83.29o and 670/o
respectively. Of course, these new figures annually rise, and in l951,

the year of boom in the Korean War, it shows the peak. In 1952,
the year of recession, it falls again. But we must notice that theoriginal surplus-value rate in that year shows the highest.

Third, we must investigate the effect of public finance on each' surplus-value rate. By this effect, the original surplus-value
years+R2,+ W,2+
P412,to 103 e/o, 1159o, 125.5e/o and 150.2e/oR,
were varied
rates

vai

respectively and surplus-value rates in productive sector varied to 68e/o,

70. 2e/o, 730/o and 63.3% respectively. Looking at this data, we canfind that distribution effects by public finance in each year are not so

uniform. For instance, we look at the public effect in 1949 of whichsurplus--value rate is the lowest. In this year, much subsidies were

given for productive sector, the rate is raised so much. In 1950,
according to Mr. Dodge's suggestion, subsidies for Japanese industries
were decreased and the re-distribution effect of all public expenditureis also diminished. Since 1951, not only this subsidies but also all otherpublic expenditures increases again gradually. On the other side, in

accordance with the recovery of Japanese economy, the surplus-value
rate goes up annually the effect of public revenue, i. e. taxation effect,

expanded and exceeded the ,effect of public expenditure. Consequently,

surplus-value rates after adjustment by public finance in 1951, 1952
diminished slightly, From the above consideration, we can guess thatthe function of public finance on income redistribution is to maintainthe surplus-value rate at a certain level and for this purpose .thegovernment makes much contribution to capitalist in the hard times,
and takes somewhat from capitalist in prosperity.
Fourth, we must take the consumption-cost secotr's income which iscomposed of service sector's income and public service sector's in Japan.

This sector's income tends to rise year by year, as Table `I' shows.
As the result of the increment of these derivative income, the rates

of national income produced by capitalistic mode XR+m,X,,W2 show

THE STRUCTURE OF NATIONAL INCOME DISTRIBUTION 123'
l41%,
l58%, 185%, 2139o in each year. ER

di,M'r2 is equivalent toCmg+2K+EI which is the most concrete rate of the utilization ofCmnational products in the sense that shows the ratio of the aggregate
expenditure of all others to the reproduction cost of the productive
laborers. This rate are also raise year, by year, but even after this, it is

not yet to reach the prewar level, 3109io. Considering that these dirivative incomes are subject to the distribution effect of public finance, i, e.

taxation, "XR ii},W2 is varied to XR'lil;,U2' and raised to 306o/6,
2450/a, 291O/o and 3090/o in 1949, 50, 51, and 52 respectively (Cf.`VII ').

This rates show the final state of utilization of national product bylabor and capital in Japan. Fifth, we must consider how the public
expenditure, especially the subsidies transforms the nation's investment
As for the effect to I2, apparently I2' is larger than •I2+, as table`VI,'shows. Of course, this phenomena is natural, considering that
it is the fundamental cffect of public finance. But, changes of Ii"
induced by public finance, is of more interest. First, we will research

the effect of public finance except for subsidies on Ii". Ii" istransformed to Ii, which is expenditure to capital goods by productive

capitalist. Of course, Ii is far below Ii", for example, I, in 1949
shows a large deficit. Then, if we consider the subsides, Ii fund is fairly

raised in l949, which turned to blackink and exceeded the original

investment fund I+, typically shows the truth of our contention.
Since 1950, where the surplus-value rate is so high, subsidies for Ii

have decrease. This means that when the surplus-value rate is sohigh, the public finance redistribute the Ii+ and makesfree thecapital goods for productive sector to the unproductive sector tostabilize the latter. .
At any rate, before 1953, both of the surplus-value rate andutilization rate were not so high as to reach the prewar level, as

Table`VII' shows, But, on the other side, we must notice the factthat the national income produced by capitalistic mode gradually124 NoBuKO NosE
expands annually, by the aid of the public finance and unproductive
sector which timely reinforce and adjust the surplus-value rate.

9V. CONCLUSIONS'

The above inquiry enables us to form some conclusions, which
are summarised as follows :i' (ACcf lull]rbAleeasVt;e)s of the structure of japanese nationai income

produced by capitalistic mode, and its original form would be madeII. (Cf. Table`VII')
Concerning with the movement of surplus-value rate, we can get
the changing structure of national income in Japan.

III. (Cf. Table`VI')
finai'

YtZg2tibeaetiOm"adOef2retA?PaiTPhrgd;CntaSlaonnde`reeCPgn"g,tinegraglyOCehSigiR

expecially this in 1952. •IV. Concerning with I, II and III (and Table V, VII, VI), it could

be argued that Japanese economy in four years shows the return tol>9r.PArseWfoarr tiheeVeeii ect of pubiic finan'ce,' we can understand that theJapanese government's policy to productive sector is considerably
flexible to maintain both of the surplus-value rate and the rate ofutilization of national products at a certain level. But, for the
unproductive sectors, its effect is always very expanding.

VI, Our inquiry have not yet touched to the `Special Accounts,' so

we could not analyse the surplus-value rate in each industory andits transformation by `Special Accounts.' Effort shall be made to
study this phase in details in the future.

RECONSTRUCTION
OF THETHEORY
OF PURCHASING
PARITY
POWER
HikojiKATANO1.
In my preceeding paper,(i) I showed the essential nature of an

exchange rate. The argument was divided into two parts; thedetermination of exchange rate under the gold standarcl and thedetermination under the suspension of the gold standard. In thispaper, the subject is concerned with the latter. So far, the exchange

rate under the suspension of the gold standard has been explained
theoretically by the theory of purchasing power parity. However, thistheory has some weakness in actual approximation owing to its
assumption. Especially, the weakness was remarkable after the recollapse of the gold standard closing on the heels of the crisis of1929. In such a case, what is the criterion to be taken up for thedetermination of an exchange rate? This is the subject in this paper.

2.
This paper is started from the confirmation of the weakness in( 1 ) Hikoji Katano, Econometric Determination of Foreign Exchange Rate of Japanfor 1926-1935, Kobe Economic & Business Review, 3. 1956.

125

126 HIKOJI KATANO
real approximation of the theory oC purchasing power parity apartfrom the estimation in my preceeding paper.
Before starting, I will examine the theoretical characteristics ofpurchasing power parity. Exchange rate (price of foreign money interms of home money or price of home money in terms of foreign
money) is determined by relative purchasing power of moneies indifferent countries. This is the first and most elementary ground of

the theory of purchasing power parity. Therefore, in this theory,
it is assumed that, if the purchasing power of money in different
countries changes in proportion to inflation or deflation, new exchange

rate is determined by the relative change. However, under the strong

influence of the quantity theory of money, this theory assumes thatany change in quantity of money determines the value or thepurchasing power of money, and is reflected on price level. For thisreason, any relative change in a purchasing power of money is reflectedon the relative change in price level.

For the construction of such a theory, the following assumptions

must be,fu1fi11ed. To the end that the new exchange rate is anequiliburim rate, any rate in base year must be of course an equili-

brium rate. Moreover, there must be an ceteris Paribzss assumption

except the change of quantity of money. This means that there is
not any change in relative price of commodities for the period inquestion, and that there is a proportional change in prices. If thisassumption is fu1filled and if only, relative change in quanitity ofmoney is represented by relative change in prices.(2)(2) Someone argues, as a crittque on the theory of purchasing power parity, that ofrelative prices of commodities are constant, when a terms of trade changes, newexchange rate diverges from the purchasing power parity. (Cf, J. M. Keynes, A
Tract on Monetary Reform, 1923; ditto, A Treatise on Money, 1930; C. BrescianiTurroni, The Economics of Inflation, l953). However, this argument is true onlyin the most specialized situation, and is beneath my notice. The reason is thefollowing. If international transaction is concerned only with consumption goods,
the above-mentioned argumcnt is true. In such a case, keeping relative price ofhome commodlities constant, there rnay be discussed the changes in terms of tradeand in the purchasing power parity in proportion to it. But if the international

RECONSTRUCTION OF THE THEORY OF PURCHASING POWER PARITY 127
However, in actual economy, this requirement is not almost
always fu1filled. Actually, relative prices of commodities change inalmost all moments. Moreover, some other elements make divergence of purchasing power parity from actual exchange rate remarkable; these elements consist of control on trade, expectation of future

values of money, exchange speculation etc.

Thep, in what degree does the purchasing power parity show
propriety in actual approximation? This subject is examined by theestimates based on some materials of Japan and the U. S. A. for 1921

-1936.
In this estimation, I use the gold parity of dollar to yen (\100==$49.845) as a baSe of the purchasing power parity, which passes
internationally at that time. For the price indexes to be used in thecalculation of the purchasing power parity, I use the wholesale priceindex for principal commodities in Tokyo by the Bank of Japan(Table 1) and the wholesale price index by groups of commodity
by the U. S. Department of Labor (Table 2) respectively.

During the period of 1926-l936, 1930 and 1931 were the year ofa return to the gold standard from a stand point of Japan,(3) andI take the year 1930 as a base year for calculation of the purchasing

prower. parlty.
transaction contains production goods, changes in terms of trade makes relative
prices of home commodities change immediately. Therefore, keeping the relative
prices of home commodities constant, it is impossible to dis(uss the effect basedon some changes in terms of trade, and, as an internationai transaction almost
always contains production goods, the argument of Keynes and Breseiani-Turroni
is not true in that condition. Nevertheless, Ican not completely deny the effectpointed out by them, because there may also be contained consumption goods ininternational transaction. In what degree the effect has influence dÅëpends on aratio of consumption goods to all internationally traded goods and a ratio of(3)international transaction to all transaction of the country.
The first prohibition of gold export in Japan carried out on thpt. 12, 1917. This

prohibition was removed on Jan. 11, 1930, and it was prohibited again from,
Dec. 13, I931, to this time. For the U. S. A. the first prohibition carried out on

Sept. 7, 1917, and was removed on July 13, 1919, and it was prohibited again
from April 19, 1933, to the present.

128

HIKOJI KATANO
Table 1
Indexes of Wholesale Prices for Principal Commodities in Tokyo, l921-1936.

(1930:IOO)]Allom-

Rice

Wheat

Sitk

(A)

(B)

(c)

(D)

146.6

g3.9

l36.0

modities

192l

l922
1923

l43.2

f

Steel

Cbal

(F)

(G)

183.8

176.6l198.7

l22.5

120.0

229.2

177.5

l20.9

253.9

179.7

187.4

120.1

230.1 .

161.2

128.9

222.2

153.6

115.9

l45.6

128.8

117.1

l33.3

'

217.5

165.3

i

229.2

1924

]

151.0

152.1

1925

l

I47.5

l64.1

l

l48.4

T 144.1

188.3

1S8.6

:

l59.1

1926

l
l

130.8

l

l
1

(E)i

167,3l

E
L

159,5

IS2.5

150.2

126.2

:

152.7

160.7

l35.0

i

152.0

157.6

137.5

1iL2

1oo.O

1oo.O

100.0

85.0

81.2

91.5

96.0

101.2

85,8

84.6

126.8

152.4

100.0

101.7

59.1

133.6

156.2

108.9

117.7

80.0

128.1

ISI.3

110.9

144.7

85.5

128.7

IS6.2

108.!

130.3

1927

124.1

1928

125.0

121.8

127.5

l929

121.5

114A

125.2

1930

1oo.O

1oo.O

1oo.O

1oo.O

1931

84.b

72.5

69.7

69.1

1932

89.1

83.2

93.8

78.1

1933

99.2

84.7

105.8

1934

98.2

102.7

1935

I02.5

116.6

1936

109.2

120.5

l

otton

yarn

!

11L2
119.3

[

t
l

}

100.0

Source: Statistics of Bank of Japan. (from The Eleventh Annual

Bulletin of the

Financial and Economic Statistics of Nippon, The Institutefor Commercial

Research, The Kobe University of Commerce, 1938.)
Note: Original data are based on 1900.

Calculation of the purchasing pewer parity assumes that, basedon the gold parity of dollar to yen, relative change in price level inJapan and the U.S. A. changes the basic rate of exchange. The
result of this calculation is shown in Table 3 (E). In contrast with

this, an actual rate of exchange (Yokohama-New York T. T. SellingRate) for the same period is shown in Table3 (F). Comparing
these two series as a whole in each other, I examine the proprietyof the purchasing power parity. Correlation between these two series is-O.0620. This means that these two series have not any connection with

RECONSTRUCTION OF THE THEORY OF PURCHASING POWER PARITY 1ee

Table2 •Indexes of Wholesale Prices by Group of Commodities, 1921-1936.

(1930:1OO)
cottiilt)ills/odi-I/prFodarumct,:Foods(A)l(B)

Cherriicais

Mi:t,ai.1&1BuildingProducts(E)1

TextileProducts

Materials&Allied

(c)

(D)

(F)

(G)

loo.1

117.7

l27.6

108.3

1 29.6

Products

1921

113.0

l

1oo.1

1922

1!1.9.

i

106.2

96.8

124.8

11L7

108.2

113.1

1923

1l6.4

l1L7

10Z4

138.6

1l8.7

l20.1

1l4.0

l924

ll3.5

l13.3

1oo.6

132.9

115.4

l13.8

l11.5

1925

1l9,8

124.3

110.7

134.9

112.1

113.1

114.8

1926

115.7

11S.3

110.5

124.5

108.6

111.2

112.7

l927

l10.4

112.6

106.9

119.1

I04.6

105.3

108.3

1928

111.9

ll9.9

1lL6

118.9

105.3

104.7

107.1

1929

1IO.3

118.8

110.4

112.6

I09.1

106.I

106.0

l930

1oo.O

1oo.O

1oo.O

1oo.O

100.0

1oo.O

lOO.O

1931

84.5

72.8

82,4

82.6

91.7

88.1

89.4

!932

75.0

54.6

67.4

68.4

87.1

79.4

81.3

1933

76.3

58,2

66.9

80.7

86.6

85.7

84.9

1934

86.7

74,O

77.9

90,8

94.5

95,9

89.1

1935

92,6

89.2

92.5

88.3

93.8

94.9

88.7

1936

93.5

91.6

90.7

89,O

94.5

96.4

93.1

j

Source : Statistics of DepartmenC of Labor, Bureau of Labor Statistics.

(from Statistical Abstract of the United States.)

Note: Original data are based on 1926.

each other. However, partly examining, these two series have rather
high correlation of O.9277 for the period of 1925-l929, This correlation

coeMcient is very high compared with one as a whole. The situation
concerned with this is more clearly shown in Figure 1.

What caused this situation to happen? Is this caused by theassumption of "constant relative prices," which is the fundamental

assumption of the theory of purchasing power parity as is shown
above? To answer this question, I examined some changes in relative
prices of principal commodities in Japan and the U. S. A,

130

HIKOJI KATANO
Table 3
Estimation of the Purchasing Poweroesae

loesae

Price

Price

Inde'xin

Indexin

theU.S.A.

Japan.
(B)(A)

Parity.

oldParity

of$to\.

(A)(\1oo=$'(B)

ooama-(C).(D)

NewYork

T,T.Selling
Rate.

?)(D)

(c)

(E)

(F)

1921

113.0

l46.6

O,771

38.4'

30

48.050

1922

1ll.9

143.2

O.781

38.92847.918

1923.116.4

145.6

O.799

39.82648.816

l924

l13.5

151,O

O.752

1925

l19.8

147.5

1926

115,7

1927

110.4

1928

I

37.48341.97840.47440.801l30,8

EO.885 !

44.11246.856

124.1

O.890

44.36247.425

111.9

125.0

O.895

44.61l46.457

1929

110.3

12L5.

O.907

45.20946.069

1930

1oo.O

1oo.O

1.000

49.84549.367

1931

84.5

84.6

O.999

49.79548.871

1932

75.0

89.1

O,842

41.96928.099

1933

76.3

99,2

O.769

38.33125.220

1934

86.7

98.2

O.883

44.01329.511

l935

92.6

102.5

O.903

45.01028.570

1936

93.5

I09.2

O,856

42.66728.gsg

O.812

t

I

!

49.845

Source:(A); Table 2 (A).

(B); Tablel(A). '(F) ; The Eleventh Annual Bulletin of the Financial and Economic Statistics

of Nippon, The Institute for Commercial Research, The Kobe University of (lommerce, 1938.

'
For Japan, I took six commodities, rice, wheat, silk, cotton yarn,steel, and coal, and for the U.S. A., six commodity groups, farm
products, foods, textile products, metal and metal products, building

materials, and chemicals and allied products. These commodities andcommodity groups have great 'weights in the price changes in respective

countries (Table l and 2), and I took index of the change of relative

price in a form of a ratio of separate index to indexes of all com-modities, which must be taken for the same year. This index means

RECONSTRUCTION OF THE THEORY OF PURCHASING POWER PARITY 131
Figure 1. Relation of Purchasing Power Parity to

Actual Exchange Rate.

F
50

ee

30

21

27 29

31

2e 2s

za

45

24'

40

as

35

30

36 zz
32

25

.fscs

zz

E

25 30 35 40 45 50
that, in any country, Pg/Pg stands for an index of all commodities

and PS/P7 for separate i-thi,,o/pth;m-od- ix/pgroups, the defined indexis

pg/p: - pelpg ' •this is an index of relative prices. Therefore, if a relative price atperiod t is not changed compared with one in the base year, thedefined index values always unit. And actually, if the six indexes
scatter in the neighbourhood of unit, I regard the year having almost
constant relative prices compared with the base year, and vice versa,

132

HIKOJI KATANOThen I calculate
resultthe index

is shown in Table 4

the values in Table 1 and.
uslng
and 5. And this result is figured

2. Theout onFigure 2 and 3.
Table 4
Changes in Relative

Prices.

(Japan)AllCom-

Rice

Wheat

Silk

(A)

(B)

(c)

D)

1921

1.000

O,641

O,928

l922

1.0oo

O.964

1923

1.0oo

1924

1.ooO

1925

1,OOO

l926
1927

'otton

Steel

Coal

(E)

(F)

(G)

1.254

1.205

1.355

O.835

O.837

1.601

1.168

1.239

O.844

O.885

O.804

1.743

1,234

1.287

O.824

1.oo7

O.883

1.440

1.523

1.067

O.853

Ll12

1.l21

1.553

1.506

1.041

O.786

1.0oo

1.134

LIOI

1.439

1.219

1.021

O.850

1.0oo

Ll16

1.050

1.282

1.210

1.012

O.961

1928

1,Ooo

O.974

1.020

1.22I

1.286

I.080

O.8oo

1929

1.000

O.941

1.030

1.251

l.297

1.131

O.915

1930

1.ooO

l.ooO

1.000

1.ooO

1.0oo

1.000

1.000

l931

1.0oo

O.856

O.824

O.817

1.oo4

O.959

1.081

1932

1.000-

O.933

1.052

O.876

1.077

1.135

O.963

1933

1.ooO

O.853

1.066

O.852

1.278

1.536

1.010

1934

1.000

1.045

l.035

O.601

1.360

1.590

1.108

1935

1.0oo

1.136

1.147

O.780

1.248

1.280

1.081

1936

l.OOO

1.102

l.324

O.782

1.177

1.246

O.989

modities

(x)-

Yarn

1

(B, C, D, E ,F, G)(A) inin Table 1
Table 1

From these calculated index, I see that there is not any large
divergence in relative prices for I926-1929 compared with one of1930. This mainly causes high correlation the purchasing power
parity and the actual rate of exchange for the same year. In contrast
with this, there is a remarkable change in relative prices for the periodof 1932-l936, and, for the same period, there is a remarkabledivergence between the purchasing power parity and the actual rateof exchange.

PARITY 133
RECONSTRUCTIONTHE
OF THEORY OF PURCHASING POWER
Table 5
Changes in Relative Prices,(the U. S. A.)
All
Commodi-.

Itles

Farm

Foods

(B)

(C)

Products

i(A)

1922

1.000

1923

1.000

O.959

1924

l.OOO

O.998

1925

1.000

1.037

O.924

O.8eo

i'1,1911L171

io.s7gO.886

1.126

1926

l.OOO

O.979

lO.955

l.076

1927

1.000

1.019

lO.968iO.997

1.082

1928

11.ooo

1.071

1929

l1.am

1.077

1.000

l.OOO

Building
Materials

Cemicals&Allied(F)(G)

Products

1.129

O.958

1.147

O.998

O.967

l.Oll

l.O19

1.031

O.979

l.O17

1.oo2

O.982

O.935

O.944

O.958

O.961

O.974

O.953

O.981

FO.9471O.941

1,062

O.936

O.957

1.021

O.989

O.962

O.961

I1.000

1.000

1.000

1.000
1.058

l.oo1

i

1930

Metal
boducts(E)1(D)

lo.ss6 i1.Ml
O.949 lO.es5 jLl15

li.ooo1921

eta

Textile/lO.861

l931

1.000

!932

1.000

1933

1.000

Io.727lO.762

1934

1.0oo

O.853

l935

!.ooo

Oss3

1936

1.000

O,975

O,977

1.085

1.042

O.898

O.912

1.161

1.058

1.084

O.877

1.057

1.134

1.123

1.112

O,898

1.047

1.089

1.106

1.027

O,999

o.gs311.02!'

1.024

O.958

1.010

1.031

O,970[
!

L

1

O.996
q

(x)- (B• C• ?il?,,F.• G.),,i,n, l!]abie 2''This is caused by the fundamental nature of the theory ofpurchasing power parity, and shows the weakness in actual approximation of it for such a bad period.

Now, what is it to be effective in the actual approximation forsuch a period?

3.
'
In order to correspond with such a requirement, in what way
shall I take the theoretical expression of exchange rate and themethod of calculation. I return to the starting part of this paper.

134

HIKOJI KATANO
Figure 2. Changes in Relative Prices in Japan.

1,7

1.6

L5
1.4

1.3

1,2

1.1
.

1.0

O,9

O.8

O.7

O,6

'

19as19co1935
There I showed that the first and most elmentary ground in the ideathat the exchange rate (the purchasing power parity) is determinedby a relative purchasing pewer of moneies in different countries.
This is a right ground. However, in the theory of purchasing power

RECONSTRUCTION OF THE THEORY OF PURCHASING POWER PARITY 135
Figure 3. Changes of Relative Prices in the USA.

1.2

1.1

1.0

O.9

O,8

1925 1930 ' 1935'

parity, it was wrong to combine a change in purchasing power ofmoney immediately with a change in price level, though it was
through a change in quantity of money. For that, I abolished sucha method, and devise the other method to measure a change inpurchasing
power. .
Value of money is expressed by the quanitity of gold representing
a unit of money. So that,'a change in quanitity of money changes

136 HIKOJI KATANO
the quantity of gold to represent a unit of money and its purchasing

power. Therefore it is possible to express a change of purchasing
power of money by a change of money price for a constant unit'ofgold. In this case, I should not assume that a relative price ofdifferent commodities are all constant, and may escape from almost
all other conditions. There is, in part, an attempt to calculate theexchange rate accoding to such an idea.(4)Actually this method shows more effectiveness in actual approximation compared with the purchasing power parity.
Obstructed by a shortage of original materials about the price ofgold, I investigate only the period from I932 to 1936.

Purchasing price by government of gold, which is the only
available one in Japan, and the gold price in the U.S. A, for thecorresponding period is shown in Table 6. According to these original
materials, I can calculate the exchange rate by gold price for theperiod in question, This result is shown in Table 7.
Table 7 is arranged for each year of the•period. This is Table 8.

In this calculation,I use the counting by month. Relation between
this result and the actual exchange rate (Table 8 (B)) is shown in
Figure 4.
In view of such a result, I can calculate the correlation coefficient

between the exchange rate determined by gold price and the actual
exchange rate; its value is O.8482. Nevertheless, I can not say that
this method is well effective to fulfi11 the actual approximation, why?

I can fundamentally accept the attempt to calculate a change inpurchasing power of money according to a change of price ofconstant quantity of gold, But, in this case, there must be kept the gold
standard in the economy, and the value of gold have to exactly reflect

the value of money. For the period in question in this paper,
the gold standard was stopped. There was a situation in which the( 4 ) See, W. Kimura, Kokumin no tachiba yori suru Kawasereto no Kettei, (Determinationof the exchange rate from the stand point of the people), Keizai Hyoron, Vol• 4,

No. 4, (April 1949).

OFTHETHEORY OF
PURCHASING
PARITY137
RECONSTRUCTION
POWER
Table

6

Price ofGold

theU.S.A.

Japan
PurchasingPrice

WholesalePrice

PurchasingPricebyGovernment

byGovernment

byGovenment(A)l(\ per gr.)

(B)

(C)
ounce)(\ pre gr.')($ per1932. 3

1.933

20.67

12

2.517

20.67

1

2.488

:

20.67

3

2.466

L

20.67

1933.

ll

1934. 1

2.650

20.67

2.650

35.oo

4

2.950

35.00

1935. 1

3.090

35.oo

1936. 5

3.5oo

35.oo

1937. 5

3.770

35.oo

I938.

5

3.850

35.oo

1946. 117.00017.2701947. 775.ooO

76.12535.oo

9150.0oo152.250

35.oo

1948. 8326.000

S28.ooO

35.oo

l949. 7385.000

389.ooO

35.oo1950. 3401.000

409.000

35.oo

1953. 2405.000

515.000

35.oo

570.ooO

35.oo

580.0oo

35.oo

8
10

35.oo

Source: (A), (B) Diamond-sha ed, TOkei Yoran, 1956.
(C) Histoical Statistics of the U. S.

Series N. 166-i71 (foot-note). p. 276.

value of money was not ex,actly reflected by the value of gold. Theremay be divergence of market price of gold from oMcial price. This
market price of gold reflects the value of money better than the oMcial

price. For this reason, some people say that the gold price asa
calculating standard is not the oMcial price but the market price.
However this idea is true, but there may be some diMculties. The
market price of gold is not available as an original material, This

138

HIKOJI KATANO'''
Table 7
Gold Price.

Calculation of Exchange Rate according to the
ol

in
-...

Prlce

Japan

(\per

gr.)

.prlce3

1.933

60.I23

20.67

12

2.517

78.28820.67

1923. 1

2.488

77.3863

2.466

76.701

11

2,650

1

2.650

4
1

I932.

Exchange

Exc ange

prlce

in theU.S.A.]ounce)i
inJapan(\ perounce) ($per

rate

rate'

(\ per$)($34.380

2,909
l

per\)

3.787

26.4033.743

26.71020.67'

3.71l

26.94982,424

20.67

3.987

25.07882.424

35.oo

2.355

42.4632.950

91.755

35.oo

2.621

38.1453.090

96.11O

35.oo

2.741

36.417

1936. 53,5oo

I08.862

35.oo

3.110

32.I51!937. 53.770

117.260

3s.ool

3.350

i

4

1934.

1935.

'

l

'

29.8481

Note: 1 troy ounce==31.IOS5 gr.

Table 8Gold Price. (arranged)

Calculation of Exchange Rate according to thet

Yo ohama-N. Y.

(\ per $ 1)

(S per \ loo)

T. T. Selling Rate($ per \ 1oo)

(B),

(A)
1932

2.997

33.36628.099

1933

3.739

26.74525.220

1934

2.715

36.83229.5111935

2.7tl636.41728.570

1936

2.987

33.47828.959is inevitable according to its nature. However it can be available
under the prohibition of the gold standard and in the situation that
there is divergence b(}tween the market price of gold and the oMicial
price, gold is not the standard commodity but only a general one. If
a change of gold price level presented in such a situation can be an,index of a change of' money value, a change of price level of any

other commodities can be the'index, But the changing way'ofcommodity is irregular of all commodities. Therefore, the change inOF THE THEORY OF PURCHASING POWER PARITY 139
RECONSTRUCTION
Figure 4.

Relation of Exchange Rate caluculated by (ibld Priceto Actual Exchange Rate.

B
50

45

40

35

30

pt

ss
32

es

25

ea

tt

A

25 30 35 40 45 50
money value expressed by the change of market price of gold expresses

only the change in money value for a commodity gold, and not for
all other commodities. However, even under the prohibition of the/ 'tgold standard,
there still be actually the gold standard without gold

circulation, in which situation there is stopped gold circulatlon athome but gold still be a standard commodity for a settlement ofinternational interaction. In such a situation, I think, it may bepossible that the market price of gold reflects better the value of

140

HIKOJI KATANO

money than any other prices of commodities. However, here I am
compelled to give up the investigation of such a situation, because
the material of the market price of gold is not available.

4.
Now again, I have to design an index exactlly reflecting a changeof purchasing power of money from the new point.(5)Let us now understand(aib ...) ai.) i=1) ...) n
stands for an average method of production in industry i, in which
only one kind of commodity is produced. In this condition, a ratioof an added value to lalor,oi -- Pi --SaiJPJ , i=1, ..., nTi

is called an average income rate, where aij stands for the quantity of
production goods j' required for the production of a unit of commodity
i, Ti for the direct labor' for the same production, pi for the price ofcommodity i.
Change in an average income rate reflects the purchasing powerof money, if an average method of production is constant.
Total sum of the added value in different sectors of production
is called the net national product. Ratio of the net national productto the total labor is equal to an average income rate,ifaverage income
rates in different sectors of production are equaLpi * -.Satj Pi *

jo=

Ti

-... E(pt * -Ea,j pj *) - r

Ti ulV'
i=1, •••, n
In a situation that the average income rates is different sectors are
all equal, the price system fuIfi11s the relation(5' )Foi discussion in thissectlon, see

Kokumin-Keizai Zasshi(Journal of

94, No. 4, Oct. I956.

N. Okishio,

National Income and Labor,
Economics & Business Administration).

The

VoL

RECONSTRUCTION OF THE THEORY OF PURCHASING POWER PARITY 141• Pi "= Eaii Pi"+ pTi, i=' I, •••, nAnd, under the same average method of production, an average laborhour expended for a unit of production in different sectors fulfills
the relationti =.Xaii ti +Ti, i--'--1, ••., n.

Fron these relatlons, I have

Pi * =joti ,and there forepi* - tip,.. t"'In short, I see that the price ratio to make an average income rate
in different sectors equal must be equal to the corresponding ratioof ap average labor hour expended. This situation is called that priceis according to value.

Therefore, if prices is according to value, so for as the method of
production in different sectors are constant (productivity of iabor isconstant) and the value of money commodity (gold) is constant, p
is determined as follows. When a specie and a convertible note arecirculated, p is an inverse of a constant quanitity of money commodity

called the price standard. When a inconvertible note is circulated
and prices are expressed by the inconvertible note, p is the ratio of aprice of standard commodity expressed by the inconvertible note to
the value of it. Therefore, when a specie and a convertible note arecirculated, if a productivity of labor and a value of money are
constant, p is constant. And when an inconvertible note is circulated,even if a value of money is constant, p is variable, because the priceof money commodity expressed by an inconvertible note is variableaccording to any change of quantity of money. Such a change inp reflects naturally a change in the purchasing power of money.
In the capitalist economy, that prices are according to the value
are rather exception. The causes are (1) the tendency of the profit

to approximate the average and (2) the monopoly. The tendency
profit to approximate the arerage makes the price of a commodityof the with higher organic composition of capital higher than the142 HIKQ I KATANO
value-price (price according to value), and vice versa.(6) Prices ofcommodities in the monopolistic sectors are higher than the production
price. And, generally speaking, it is natural that there is a monopoly

in the sector with higher organic composition of capital. Therefore,
prices in monopolistic sectors is, in many case, higher than the value

prices.(7) Demand-supply relations causes temporarily a divegence
between the price and the value price.
If prices are not according to values, the average income rate indifferent sectors is not equal. Therefore the relation betwcen the net
national product and the total labor is

PT==.7V,- 2i'/oiTi-P- 2i"Ti 'P is called a social income rate. This rate is a weighted average ofthe average income rate in different sectors. The weight is Iabor-timein each sector.

Social income rate depends on an average income rate in different
sections and an allocation of labor into each sector. Average income

rate depends on the amount of bias of price from value-price, thevalue of money commodity and the price of it expressed by a note.
Therefore social income rate is determined by (1) divergence of pricesof value price, (2) value of money commodity expressed by the note
unit, and (3) allocation of labor into different sectors. The dependence

is as follows. When prices are not according to value and prices arehigher than value-price, the more the labor are allocated to the sectors

with higher average income rate, the higher the social income rate.
And the lower the purchasing power of monery, the higher the social

mcome rate,
I intend to show the change in purchasing power of money by
the change in social income rate, However, as above-mentioned, this.

social income rate represents exactly the change in purchasing power(6) N. Okishio, Value and Price, Keizaigaku-Kenkyu Nempd, I. Kobe University.
(7) ditto, Monoply and the Rate of Profit, Kobe University Econonic Review, 1,

Table 9
Estimation of Rate of Exchange

tPrivate
production'1ncome(inSmil.)theGainfulworkers(inl,oooaccording to thc Sooial

U.S.A.

Japan
'

Net

(A)

(c)

national(B)(c)t30product

persons)

Workers(in1,oooin\mil.)Goldparity

(E)
(F)

(G)
(G)t30

(D)i,
(H)

(F)

(G)

(H)

(I)

persons)eRate of Income.
(I).(J)

atl930(Sper\1oo)
(J)

(K)

Yok=N.Y.

8g.T.ft11ing

ts

Retc(Sper
\1oo)

g

(L)

(A)

(B)

(c)

(D)

1921

48,76342,445

1.149

O.909

27,497

O.4zz

1.152

O.789

39.32748.0501922

49,Ose42,966

1.141

O.903

27,733

O.437

1.150

O.785

39.12847.918(E)

1923

57,213

43,760

1.307

1.034

12,117

27,969i

O.433

!.140

O.907

45.20748.816l924

58,l7844,549

1.306

1.033

13,702

28,20si

O.486

l.279

O.8oa

40.274

4I.978

1925

60;94945,O09

1.354

1.071

14,30al28,441

O.503

1.323

O.810

40.37440.801

1926

63,85745,962

1.389

1.099

13,344

28,676

O.465

1.224

O.898

44.76146.856

1927

63,942

46,939

1.362

1.e77

13,051

28,912

O.451

1.187

O.907

45.20947.425

1928

65,653

47,914

1.370

1.084

13,464

29,148

O.tl62

1.215

O.892

44.46146.457

1929

58,872

48,354

1.217

O.963

13,941

29,384

O.474

1.247

O.772

38.48046.os91930

61,96849,O06

1.264

1.000

1l,24529,620

O.380

l.OOO

1.000

49.84549.367

1931

so,06649,597

1.009

O.798

lO,67828,990

O.368

O.968

O.824

41.07248.871

1932

37,132tsc),132

O.741

O.586

11,591

29,176

O.397

1.ou5

O.561

27.96328.099

1933

35,07450,691

O.692

O.547

12,96329,777

O.435

l.145

O.478

23.82525.220

1934

40,20551,267

O.778

O.615

l3,67030,794

O.444

1,169

O.526

26.21829.511

1935

4tl,037

51,769

O.851

O.673

14,952

31,400

O.476

1.253

O.537

26.76728.5701936

49,852

52,237

O.954

O.755

16,64530,859

O.539

1.418

O.532

26.51728.959Source :'I(A) ; Historical Statistics of the United States, Series A. I54.
(B) ; Historical Statistics of the United States, Series D. 62.
(E) ; Y. Yamada ed., Nippon Kokumin-shotoku Suikei Shiryo, Table 18-2.
(F) ; Y. Yamada ed., Nippon Kokumin-shotoku Suikei Shiryo, Supplementary table 1.

49.845

:o

g
:H

:

i
w
e
x
o
:
>
ca
-Z
o
vo
E
m
pa
v>
x
H
H
K

-co
pt

144

HIKOJI KATANO

of money, if and only if prices are according to value and the
productivity of labor is constant. But, in the capitalist economy,
that prices are equal to value-prices is very rare, And, for a Iongtime, constant productivity of labor is not common. Then I will
examine how much effectiveness the index has in actual approximationaccording to the actual estimates.

In order to compare the result with the effectiveness by thepurchasing power parity, here I take the same period, 1921-l936.
Data for the U.S. A. are the estimates of realized private production
Figure 5. Relation of Exchange Rate calculated by Social Income Rateto Actual Exchang Rate.

L
roO

as
st

ur

30

`pt

Sl2

28 26
ee

45
24

40

as

35
32

30

34 36
ss

25

zz

K
25

30

35

40

45

50

Table IO

of Exchange according to the

Estimation of Rate

Workers(in1,ooonational

product

persons)(in$miL)(A)Rate of Income.

iGold

Japan

theU. S.A.
Net

Social

(A)

(c)

(B)

(c).30

(B)

(c)

(D)

Net
national
product(in\miL)

Workers(in1,Ooo
Persons)(I).(J)-parlty(E)(G)(D)Lr--(F)(G)'30

(H)

(H)

(I)

1

1.000

1.000

]49.845

(E)

(F)

(G)
O.375

at1930I•l(J)

($per
\1oo)

(\per
S1)

(K)

(L)

49.845

2.006

1930

82,56445,480

l.815

1.000

IO,992

29,341

I946

197,580

55,25U

3.576

1.970

360,9oo

30,34511.89331.7!4

O.0621

3.095

32.31077.449O.02671.331

75.131

1947

218,11058,027

3.759

2071

33,32929.044

1948

240,831

59,378

4.056

2.235

1,961,6oo

34,6oo56.694l51.180

O.O147

O.733

136.426

1949

238,870

58,71O

4.069

2.242

2,737,300

36,06075.910202.422

O.OllO

O.548

182.482l950'

264,551

59,957

4.412

2.431

3,361,OOO

35,72094.092250.906

Oroo96O.478

209.205'I951

304,763

61,oo5

4.996

2.753

4,353,2co36,220120.188320.493

O.oo85l'

O.424

235.849

5.246

2.890

5,027,2oo

37,290134.814359.495

O.oo80O.399

250.627

5.416

2.984

5,718,3oo

39,250145.689

388,494

O.oo76i•1

O.379

263.852

6,080,4oo

39,580153.623409.651O.359

278.552

6,623,500

4l,120161.077429.528O.359

278.552

1952
1953

61,293321555'

336,732

62,213

1954

33i,894

61,238

5.420

2.986

1955

359,522

63,193

5.689

S.134

Source :968,OOO

O.oo72lI•(A) ; Survey of the Current Business.
(B) ; Statistical Abstragt of the United States.

(E) ; Keizai Tokei, Institute of Economics of Hitotubashi University

Kokumin-shotoku Hakusho, Economic Planning Board ed., (for(F) ; Keizai Tokei, Institute of Economics of Hitotubashi Universityed., A-2. (for19tl6-1950).
ed., B-3.

1930)

"
m
o
o
z
m
.
xc
o
H
N
o
Z
o
vri
:
N
.
:
m
o
pa

K
o
T
w
a
7
o
:
>
9
Z
o
vo
E
m
T
v>
x
-.
K

-

"N'

en

1as HIKOJI KATANO
income (estimates by the National Industrial Conference Board) as the

net national product and the gainfuI workers (estimates by the same
Board) as the labor, Data for Japan the net national product and theworkers in Nippon Kokumin-shotoku Suikei Shiryo (the Estimates of
National Income in Japan) edited by Prof. Y. Yamada.
Using these data, I calculated the time series of social income

rate in both countries. (Table9 (C) and (G)), and made themindexes based on 1930. (Table 9 (D) and (H)). These indexes play

Table ll •Estimates of Purchasing Power' Parity.
holesale,prlceindexin Japan1934.v36

I=ioo

I(A)
l930

88.5

1930=1oo

Wholesale.prlceD(B)indexin theU.S.A.
1en7•w49

=1oo

(E.Å~
49.845

($per
\1oo)

1930=1oo

(B)

(c)

(D)

(E)

(F)

1.000

56.1

1.000

l.OOO

49.845

(\per
$1)
(H)

2.006

1946

1,627.1

18.37

78.7

1,40

O.076

3.788

26.399l947

4,815.2

54.36

96.4

1.72

O.031

1.545

64.725

1948

12,792.6

144.43

IOtl.4

1.86

O.O!3

O.648

154.3211949

20,876.4

235.69

99,2

l.77

O.oo8

O.399

250.626l950

24,680.7

278•65

103.l

1.84

O.oo7

O.349

286.533

l951

34,253.1

386.72

114.8

2.04

O.oo5

O.249

401.606

1952

34,921.5

394.26

111.6

1.99

O.oo5

O.249

401.606l953

35,157.3

396.92

llO.1

1.96

O.oo5

O.249

401.606l954l

34,920.839tl•25

l10.3

1.97

O.oo5

O.249

401.606

1955

34,293.1

387.17

110.7

1.97

O.oo5

O.249

401.606

Source: (A); Statistics of the Bank of Japan.
(C) ; Statistics of the U. S. Dept. of Labor.

the same role as the price indexes in the case of the purchasing pewer

parity So that, I can estimate the exchange rate by a change insocial income rate (Table 9 (K)). Correlation shows O.9404 between
the estimates and the actual exchange rate (Table 9 (L)). This coe-

Mcient is much higher than that of the purchasing power parity.
Relation of the actual exchange rate to the estimates is shown on
Figure 5.

This result is better than the one in the exchange rate by th&

RECONSTRUCTION OF THE THEORY OF PURCHASING POWER PARITY 147
gold price.

This means that a change in social income rate reflects substantiallya change in value of money in the period in question, even if prices
are not according to value and the productivity of labor is not constant.

5.
So for, I compared and examined some k'inds ofcalculation ofthe

Table l2.
Estimates of Exchange Rate according to the Gold Price.

,(A)
Japan

the

Wholesale priceby

PUrchasingpricegovernment

bygovernment(\perounce)(\pergr.)($perounce)

U.S.A.

\per$ 1

$per
\1OO
6.516

1946.117.270537.157

35.00

15.347

1947.776.l252,367.754

35.oo

67.6471.478

9l52.250

4,735.508

35.00

135.293O.739

l948.8
1949.7l950.3l953.2328.ooO

10,201.948

35.oo

291.470

O.343

389.000

12,099.262

3s.oe

345.676

O.289

409.000

12,721.332

35.00

363.448O.275

515.000

16,O18.303

35.00

457.643O.219

8570.000

17,728.995

35.00

506.517O.197

10580.000

18,040,030

35.00

515.404

O.194

(B)

\per$1

$ per

\1OO

l946

15.347

1947

64.047

1.56l

1948

142.254

O.703

6.561

1949

314.055

O•318

1950

360.486

O,277

1951

363.448

O.275

1952

363.448

O.275

l953

467.560

O.214

1954

515.404

O.194

1955

515.404

O,l94

148 HIKOJI KATANO
exchange rate for the period from 1921--1936. In this result, acceptingthat the exchange rate is determined by the relative changes inpurchasing power of money in different countries, I showed that themethod of a social income rate has actually the propriety.

Lastly, according to this method, I will estimate the exchange
rate for the period of l946-1955.

Fundamental materials are as follows: for the U.S. A., the net
nationl product (the U. S. Dept. of Commerce) and the workers (theU. S. Dept. of Labor) are used; for Japan, the net national product(the Economic Planning Board) and the workers (Prime Minister'sOMce, Statistics Bureau) are used. The result is shown in Table 10(K). However, Iam afraid that there may not be as good result
as for the period of 1921-l936, because the period in question is far

from 1930, which is the basic year in this calculation. But I thinkthat this is better, to a certain degree, than the purchasing power

parity (Table 11) and the exchange rate by the gold price (Table12), which are calculated for reference,

TRAMP SHIPPING FREIGHTS AND
INTERNATIONAL TRADE

Ginjiro SHIBATA

The basic standard of the freight rate of commodities for sea
carriage is determined by the cost of transportation just as the price ofcommodities is determined on the basis of their cost of production. The

actual price of commodities in a free market fluctuates by the balanceof demand and supply. Similarly the freight rate for sea carriage
fluctuates with the demand for the tonnage of the available ships,
provided that foreign trade is carried on freely and that there is no
artificial restriction placed on marine transportation. This is theoreticalas it ought to be. As to the amount of tonnage, ship building is the
most' time-consuming industry of all the manufacturing industries, andwhile the tonnage cannot be increased on short notice it also does notdecrease abruply except in the case ofwar. And its fluctuation is very

gradual and slow. In consequence, under free economy, the cause of
the short term fluctuation of the freight rate for marine transportation is

the movement of foreign trade. Consequently, the tendency of thefluctuation of the freight rate for marine transportation may bemostly predicted by looking at the prosperity or sluggishness of foreign
trade. Conversely, it would be theoretically possible to think of such a149

150 - GINJIRO SHIBATA
process in which the fluctuation of the freight rate for marine transporta-tion increases or decreases foreign trade. But actually, the price of com-modities has a much heavier weight as the cause that governs thevolume of the forcign trade. Compared with the price, the freightrate exerts a far smaller influence on the volume of the foreign trade,because the freight rate, excepting such goods as coal or ore which are of

low value relative to weight, constitutes but a small portion of thevalue of the trqnsported goods. Consequently, its fluctuation exerts
but a small influence on the whole.
The question is whether there is perfectly free competition in marine transportation and foreign trade. Speaking of marine transportation, the greatest factor that restricts free competition is the existenceof the "conference" and other international cartels. But these restrictions on marine transportation are almost limited to the liners,

which however do not completely do away with competition, anda certain amount ofcompetition exists even within the conference so that
cornpetition against the ships outside the conferences is inevitable. As tothe trampers, on the other hand, their owners have no common groundinternationally or domestically as so to make it diMcult to conclude a

conference, and even when a conference is concluded it is almost impossible to exert a restraining power. Thus the means of restraint on
free competition in this field is believed not to be effective. The actual

occurence of really free competition is possible of appearing among
the trampers. But even with the trampers, they do not always operate
under perfect freedom. For instance, under a war condition or interna-

tional animosity and other abnormal conditions, one country may besubjected to discriminative treatment in navigation or in loading, or

free navigation may be restricted. But in peace time under normal
conditions trampers may operate and compete freely.

Trade, in contradistinction with marine transportation, enjoyed nosuch perfect freedom since early days. As it means to bring into the coun-try foreign produced goods, it may exert a derogatory influence against
the state policy of protecting domestic production. Besides, it may be

TRAMP SHIPPING FREIGHTS AND INTERNAT!ONAL TRADE 151
related to the problem of international payments. In any case, it isdirectly conneCted with the Iivelihood of the people. For these reasons,

every country since early days placed restrictions on the freedom of
trade more or less. Of the means of this restriction the most primitive or elementary is the custom tariff, So long as the tariff is notprohibitive or extremely protective, it leaves room for the commodities

to compete in the market with tariff woven into the price. It is not

impossible to break through the tariff wall, if the cost of produc-tion is reducible. Especially as each country since early days isquite sensitive about the level of the tariff imposed by othercountries, international relations will not permit any one country toraise the wall arbitrarily. Thus we may say that the protective tariff
so far as it is not excessive does not restrict free competition. Custom

tariff, therefore, may be said to be the normal means of protection.
But since the year of the worldwide panic (1930) it has become something like a worldwide vogue to restrict directly the imports and control

the money exchange. These two measures obstruct trade incomparablystronger than any tariff wall. So long as and wherever these two
measures continue to exist it may be said that the freedom of trade
is completely obstructed. The direct restriction of imports may beunderstood only as a temporary measure, because some countries to-day

under the provision of GATT have abolished or mitigated the rigor
ofthe measure. But as to the control ofmoney exchange, the measurehas been made almost permanent and continues to restrict trade. The
restriction of trade is not the primary object of the money exchange
control. Its primary object is to improve the state of international
account so as to facilitate the import of the necessary goods. It is

possible, therefore, by changing and adapting the measure from time
to time to the economic conditions to increase the international ac-

counts and maintain the balance, that is to increase the volume oftrade and to balance international payments alike. Actually, a}1
countries ate aiming at this goal, But at times the control of money

exchange may obstruct the trade considerably and may lead to the152 GINjlRO SHIBATA
shrinkage of international trade. In any case, the quota system on
imports and money exchange control are both potent measures originally meant to restrict the freedom of trade. In this sense the two
measures are not different at all as trade obstructions.

It may be said that marine transportation and international trade
both enjoyed great freedom in the two periods, (1) about 1890 to theoutbreak of World War I and (2) from the end of World War I to theoutbreak of the world crisis in 1930. Theoretically speaking the amountof the foreign trade and the freight rate for sea carriage, for these two

periods, should correlate closely. Consequently, provided that there
are no errors in the statistical data, the quotient obtained by dividing

the amount of world trade by world tonnage, that is, the fiuctuation of

the freight amount carried per ton of space should correlate with thefluctuation of the actual freight rate. Under free competition, therelative amount of freight carried per ton of space is the determining

factor of the shipping freight rate, The former may be called "theoretical freight."

In treating the freight rates of the trampers statistically, the dataof actual freight rates are almost infinitely numerous. But the indicesof the trampers' freight rates compiled by the Chamber of Shippingof the United Kingdom are not only the most highly renowned in
the world but the various freight rates used as the basis ofcompilationof these indices are also taken as the standard freight rates of theworld. The trampers' freight rates of all countries are more or lessaffected by these figures and determined accordingly.

As to world tonnage, Lloyd's statistics are most reliable. Somepeople insist that the factor that actually affects the freight rate forsea carriage is the active tonnage. But even the idle tonnage standingby waiting to fall into action on demand must be added to the tonnage to express the entire capacity of supply. Furthermore, the ton-nage used in comparison with the foreign trade should be limited toforeign trade ships. But in practice it is diMcult to extract thesefrom Lloyd's statistics.

TRAMP SHIPPING FREIGH'r8 AND INTERNATIONAL TRADE 153
To compare statistically with the shipping activity, the figures

for world trade may be considered theoretically as the. physicalvolume of world trade. It is not only quite diMcult, however, to seek
precision and correctness in the statistics expressing the world total
showing the fluctuation in physical volume of the foreign trade for the
past long series, but, as will be stated later, the result of an examination into a correlation between the actual freight index and theoreticalfreight index which was computed by the United Nations' quantum
index of world exports since l947 is quite insuMcient as comparedwith those computed by the U. S. $ value index of world exports.
Therefore, for the computation ofa theoretical freight index, the value-

in-gold for pre-war times and the value in U, S, $ for post-war times
are used.

Fig. 1 compares the fluctuations of the index number of tramp
shipping freights compiled by the Chamber of Shipping of the UnitedFigure IA•••Actual Freight
B•••Theoretical Freight

140

A

130
120
110

'

.

s.

100
90

.s

.. ..

B----

---.

--

-- --

-- --

-- --

80

70
60
50

A

1890 91 92 93 94 95 96 97 98 99 1900

---dP

B

154 GINJIRO SHIBATA
Kingdom for the years 1890-l900 and those of the quotients obtainedby dividing the index number of the total value of world exports (ingold German Mark, compiled by the Statistisches Reichsamt.) by
the index number of world tonnage, that is, the theoretical freights

index numbers, as have been above described. Fig. II also shows asimilar comparison obtained by treating the similar data by the same

method for the years 1901-1913, The index nUmber is calculated
by taking the 11 years average as 100 for the former, and that of the
Iatter with the 13 years average as 100.

''

Figure II' A•••Actual Freight'

B•••Theoretical Freight

zoro

A

140
1sc
120

'

110

'

A

- --

100
--

90'

80

---•

--

B

-----

-t---

lt

----

ss
ss'.

tt

----

--

p..-•

.

A

70
60

19el 02 03 04 05 06 07 08 09 10 1'1 .12 13

Looking at these two figures, we learn that the actual freights
are 'fluctuating with the theoretical freights as the axis with thesame tendency. But we find that there is a prominent difference
between the two series: the actual freights always fluctuate withgreater amplitude than that of the theoretical freights. This tendency was especially great before 1900. This is explained by the fact

TRAMP SH!PPING FREIGHTS AND INTERNATIONAL TRADE 155
that when a war breaks out the actual freights rise suddenly implying a speculative factor, and when the war is over the sudden

decrease of cargoes and surplus of tonnage also implying a
speculative factor, tend to make freight go down lower than theactual situation justifies. The coethcient of correlation between theactual freight index number and the theoretical freight index number
is O.77 for the years 1890-1900 and is e.76 for the years l901-1913,

that is, mathematically speaking we may say that these two curves
are fairly closely correlated.

The above correlative relation can be seen during the post world

I War-years, l920-l938. Fig. III is the outcome of a similar treat-ment of the similar data as those for the two previous diagrams.
Looking at these diagrams we learn that the fluctuations of the actual
freights and that of thc theoretical freights come closer to coincidence,and the two series are found to be correlated closely. The coeMcientof correlation is calculated to be O.71, from which we may judge analmost same degree of correlation as that which existed between the twoseries of the Pre-World I War years. If we examine closely the
movement of the two curves in Fig. III we find that the two curves
for post-lst War years are rather more alike than those two curves forpre-lst War years.

From this we can conclude that in the years before World War
II, excepting the years during War I, the actual freights generally
fluctuated along the level of theoretical freights. In other words,
generally speaking we may say that the actual freights of trampers
were influenced strongly both by the volume of world trade and by
world tonnage.
This similar tendency is seen in the post World II War years,
which is shown in Fig. IV. Of the data used for Fig. IV the world
total of exports are expressed, differing from those used in Fig.'s I, II,
III, in'American dollars which have been furnished by the United

Nations and converted into the index number, calculated relatively tol948 as a common base. If we closely examine the two curvcs in156 GINJIRO SHIBATA
tt

Figure III
A•••Actual Freight
B•••Theoretical Freight

150
140
130

,

11it

:lt

120

A

110

tt

1-Il

,?o

..

-t

--p--

-----

,B
l,,,

100

90
80
70
60
50
40

.--

'

"B"

'

A

tlss

-llt

A

lIA

ts

Ss-t

'

--

tt

s,,

-- -

t--

-

B

-- --

19ee at 22 23 24 25 26 27 as•29 3e 31 32 33 M 35 ss 37 gg

this Fig., the curve of the actual freights (the basis of calculating theindex number of the tramp shipping freights compiled by the Chamberof Shipping of the United Kingdom has undergone alteration since1952, but here the old basis has been followed and the index number
for 1948 is taken as IOO) rises and falls almost with the same tendencywith the theoretical freights' curve as the axis. This is similar to the

movement before the Wars. In this sense, these two cgrves may besaid to be correlated in general, but in amplitude there is a large
difference ; whereas theamplitude in the theoretical freights is relatively

small and gradual, the amplitude in the actual freights is quite large

and extreme. The coeMcient of correlation for the two curves inFig. IV is O.66 which is somewhat Iower than that before the Wars
which was nearly O.75. This means that the correlativity between theactual freights and theoretical freights has been somewhat lessened.

The Statistical OMce of the United Nations is compiling and pub-

ss

157
TRAMP SHIPPING FREIGHTS AND INTERNATIONAL TRADE

Figure IV
A•••Actual Freight
B•••Theoretical Freight

180
170

A

160
150

140

130

ttl

120

90

ss
Ns
--

fttl.

110

100

.s

/l

-- -----

B

'

A,.•"

------i

B

t

dt

'

tlt

----'t--'

.

.B

80

A

70
1947

ng

49

A
50

orl

52

ss

or4

55

56

lishing the quantum index of world exports for the post-war period,

As demand for shipping tonnage would be shown by the physicalvolume of sea-borne trade, the theoretical freight index shall be madeby using the quantum index of exports in its calculation. Comparison

between the actual freight index and the theoretical freight index

which is computed by the quantum index of world exports compiledby the U. N. and the index of world tonnage is shown in Fig. V.
The coeMcient of correlation of these two indices is worked out to be

O.55 which means about 17e/o lower than that of the curves shown in
Fig. IV.
This tendency can be seen also by test in the series relating to
the pre-war period, using the index of physical volume of world exports

which is compiled in a tentative way, that is, dividing the index of

GINJIROSHIBATA

158

Figure V
A•••Actual Freight
B•••Theoretical Freight (computedby the U. N. quantum index of world trade)

180

B

170
:t

160

::

150

'lt

l-tl

;-e

140

-tl

.

it

130

---l

A

:Jt

k,

l20

A

110

i

ll-t

:t'

ttl

100

-p---

90

,.,.

s,.s

NstN,

,

p-----

80
70
1947

i-

s.....

B
as

49

.

50

51

52

53

M

ss

5}

the gold value of world exports which is used in Fig. I---III by theaverage of wholesale price index numbers of the principal countries.
And in this case the theoretical freight index correlates in a lower degree

by far with actual freight index than is shown in Fig. I-III.

This tendency means that an actual shipping freight rate isaffected not only by the variation in quantum of carriage btit also by
the price fluctuation of goods carried.

From these investigations we may say that there exists a fairly highgrade of correlativity between actual tramp shipping freights andtheoretical freights. Expressed in other words, the theoretical freightshows the degree of demand for tonnage. The demand for tonnage,TRAMP SHIPPING FREIGHTS AND INTERNATIONAL TRADE 159
according to the experience of the past, increases suddenly by the out-

break of a war and a numerous number of vessels are constructed. And
this amount of tonnage is retained even after the war is over and thedemand is suddenly decreased, and a surplus of tonnage is the result,This is the ordinary situation. There were two periods in the pastthat experienced a surplus of tonnage, the first is the period before

1912, and the 2nd 1930-l938. Against these two surplus periods,
a tonnage shortage was experienced in the periods of, excepting war
times, six years up to l929 and six years from l951 to 1956.
These facts viewed contrasted with the correlation between actual

freights and theoretical freights show that during the periods ofsurplus tonnage the curves of the two kinds of freights moved close
together, and in the periods of shortage the fluctuation of the actual

freight is far more violent in tendency than that of the theoreticalfreights. That is to say, in the latter case though the tendency may
be the same, the amplitude of fluctuation of the actual freights is quite

large in tendency. By these facts, as is se6n in Fig. IV, up to quite
a recent date since World War II, the actual freights fluctuated withtheoretical freights as an axis, but the amplitude which is quite great may

be said to be related to the remarkable shortage of tonnage. That is tosay, when tonnage is generally short, the shipping market loses elasticity and a little increase of cargoes gives rise to excessive tension to
the freights market and a more or less surplus of tonnage causes sudden
slackness in the freights rate.

Next, the fact that the coethcient of correlation is lower in the

post-war days than that for pre-war days makes us suspect that theindex number of the Chamber of Shipping of the United Kingdom issomewhat lower in its importance as an indicator of the tramp
ship freights of the world. Before the War the U. S. A. had enjoyed
150/o of the world trade which increased to 20e/o in post-war days.
In contrast, Great Britain's 17% of pre-war days decreased to 11e/o inpost-war days. As to the mercantile marine, the U. S. A. owned only

8.79/o of the whole tonnage of the world before the war, which160 GINJIRO SHIBATA
Figure VI
A•••World Tonnage
B•••World External Trade
lgoot
-j-

-'

7eo,

t--

'

.

' --

-i
' t--

A

gg
---

----

---

----

---

----

-t --

-- -B'

i----

. tt

g:
18oo 91 92 93 sc 95 ,ee 97 9B 99 19oo Ol 02 03 04 05 06 (rT Oe 09 10 11 12 13'

Figure VII
A•••World Tonnage
B•••World External Trade

200
'

B
loro
'

---

---

----

--

---

---

----

d----

----

---

A
r.

-----

.

---

A

.

100
90
80
70
60

B

50

19eo at 22 23 24 25 26 27 as 29 30 31 32 ss 34 35 ss 37 gg

increased to 22.69o in post-war days. Whereas Great Britain in 1938,

owned 22.8e/o, it decreased to 20.40/o in post-war days. This is tosay, both in the sphere of trade and in the sphere of marine transport,

the U. S. A. occupies first rank. Especially in the export of coal,
which is the most important item of tramp ship cargoes, Great Britain

exported 38,150 thousand tons in 1938 and stood second only toGermany in list of world coal export countries. This amount was
reduced by more than one half to 15,500 thousand tons. In contrast,
the U. S. A. exported 34 million tons in 1954 and came to the firstTRAMP SHIPPING FREIGHTS AND INTERNATIONAL TRADE 161
Figure VIII
A•••World Tonnage
B•••World External Trade

180
170

160
150

B

140
130
120
110

'

A.s..
-

100

90
80

-- --

-- --

''A

e-

' et

--

tt

-- --

tt

B
'

1947 •48 49 50 51 52 53 54 55 56,'

rank, and though she had hardly exported any of this item of export
before the war to Europe, she now exports about 309o to Europe and9o/o to the Far East. From this we must say that the position occupiedby the U. S. A. in the tramp ship market has become very high andhas come to surpass that of Great Britain. •Lastly, for the reason that the coeMcierit of correlation between
the actual and theoretical freights for tramp ships in post-war days

has become lower, we must indicate the advance of liners in taking
on board merchandise of trade. After the war, the tendency for all
the shipping countries to build excellent ships and use them as liners

has become strong and the tonnage of the tramp ships has relatively
decreased. As a consequence, the recent tendency is believed to bethat the importance of liners in carrying merchandise is remarkably162 GINJIRO SHIBATA.
increasing compared to what it was before the war. The data showing
the proportion of tramper tonnage to liner tonnage in the world can
not be obtained. But, speaking of pre-war Great Britain, the vessels
employed in the liner services, according to " the Shipping World andWorld Ship Building," was 72%e in 1939, but in post-war l951 it roseto 750/o, in 1954 to 760/e, and in 1955 to 77e/o showing a yearly
increase. But the passenger traMc by the Iiners, affected by thedevelopment of airlines, is clearly decreasing remarkably compared withwhat it was before the war. So it is certain that the ratio of increasein carrying cargoes by the liners is higher than the percentage of thetonnage employed in the liner services. Speaking ofJapan, the percentage of carrying cargoes by liners is guessed to have been less than
20e/e in pre-war days. According to the investigation of the Transport

Department of the Japanese Government, this percentage rose to34---40.

STATISTICAL DATAWorldExperts
Yearorlonnage(Lakevesselsincluded)

Average

inlBillion=1oo.O(A)

GoldMarks

1,OOOG.T.

Average=1oo.O

eoretical

ActualFreights

Freights-((-fili3-Å~1oo

Convertedto
average=1oo(B)fromorigina1

For Figure I

L

29.4

E

97.3 ii;lil•ii g`2ilI

!15.7

109.1

1891

29.3

97.0

106.2

97.1

1892

28.0

92.7'

98.3

9Z1

1893

27.4

90.7

24,237 96,5 1'

94.0

85.1

l894

27.1

89.8

65.4

28,2

93.4

24,548 97.8
25,086 99.9

91.8

1895

93.5

69.7

1896

29.7

98.4

88.4

l897

31.2

103.1

1oo.O

1oo.4

1898

33.1

109.6 L

I03.7

125.8

i899i1900f

35.6117.8

25,593 101.9
25,889 103.1
26,543 105.7
27,612 !1IO.O

96.6

107.1

123.3

37.7jl24.8

28,957

I08.2

139.0

1890

115.3

163

SHIPPINGFREIGHTS AND
INTERNATIONAL
TRADE
TRAMP
For Figure II
1901

38.1

73.3

30,480

78.8

93.0

109.5

1902

39.I

75.2

32,302

83.5

oo.o

92.5

1903

41.2

79,2

33,502

86.6

91.5

92.7

1904

42.8

82,3

34,784sg.gl1

91.5

93.7

1905

45.9

88.3

35,998g3.oi,

94.9

94.4

1906

50.6

97.3

37,55097.0ll

1oo.3

95.1

1907

53.6

103,1

39,436101.91

101.2

96.5

l9C)8

50.1

96,4

40,920

1909

53.i

102.1

41,448

107.1

95.3

1910

58.7

112.8

41,912

1911

62.0

119,2

1912

68.1

131.2

1913

72.3

139,O

83.2

43,14sl
44,6oil

87.2

104.2

89.8

11L5

106.9

103.0

115.3

113.8

139.2

i121.4l23.6
L

For Figure III

Worldxports

orldonnage

Imports*Year(Sea-goingvessels)

in1Billion

l913=

GoldMarks

(A)

100.0

1913=

1,ooOG.T.

1oo.O,

Teoretical

ActualFreights

Freights(A)

Convertedto,1913base

(B)

1920

290.1

181.1

5!,355

!24.5

145.5

1921

188.9

117.9

56,234

136.4

86.4

l922

201.0

125.5

58,740

1923

213.1

l33.0

59,680

1924

2390

149.1

58,844

1925

268.0

167.3

1926

257.7

1927

271.0

1928

1929
1930
1931

328'124111

142.4

88.1

144.7

91.9

142.7

104.5

103

59,743

144.8

115.5

101

160.8

59,985

145.4

l10.6

107

169,2

60,5I6

146.7

115.3

liO

278.9

174D

62,392

151.3

1l5.0

99

284.1

177,3

63,639

154,3

l14.9

97

228.8

142,8

65,253

158.2

90.3

79

164.1

102.4

65,971

160.0

64.0

74

l
i

103

1932

109.8

68.5

65,605

159.1

43.1

54

1933

99.7

62,2

63,831

l54.8

40.2

49

1934

95.8

59.8

61,522

149.2

40.l

46

1935

97.1

oo.6

60,895

147.7

41.0

44

1936

105.6

65.9

61,l62

148.3

44.4

51

1937

130.5

81.4

62,442

151.4

53.8

77

1938

114.2

71.2

64,081

155.4

45.5

58

*Figures of world

exports are not available for thisperiod at hand.

164

GINJIRO SHIBATAFor Figure IV

World Exports
Year

in U. S.$
1 Million

1947

46.9

orl Tonnage

eoretical

ctual(Sea-going vessels)

Freights

Freights

1948=

1948=
ioo.o

1,ooO G. T.

1oo.O

(B)

(A)
88.8

(A)
(B)

Å~ 1ooConverted tol948 basefrom original

82,044

l05.1

84.5

98.1

1948

52.8

1oo.O

78,e27

1oo.O

1oo.O

1oo.O

1949

53.7

IOI.7

80,315

102.9

98.8

82.3

1950

55.4

I04.9

82,294

105.5

99.4

84.0

1951

75.2

142.4

84,949

I08.8

130.9

173.7

l952

72.3

136.9

87,809

l12,5

121.7

99.4

1953
1gs4

73.3

138.8

90,933

116.5

l19.1

77.9

76.1

144.1

94,958

121.7

l18.4

86.6

l955

82.7

156.6

98,074

125.7

124.6

128.5

1956

93.1

176.3

100,OOO*

128.2

137.5

l57.9

'

1
i

*Estimated.
Source : World Exports ; for Fig. I-III, Statistishes Reichsamt, Statistischfor Fig. IV, U. N. Monthly Bulletin of Statistics.

World Tonnage ; Lloyd's Register of Shipping.

Actual Freights ; Weighted Index Number of Tramp
Shipping Freights, by Chamber of Shipping of the U. K.

es Jahrbuch 1939;

A LITTLE STUDY ON THE TRANSITIONFROM SAILING VESSEL TO STEAMER
IN JAPAN

seiji sAsAKI1) The modern Japanese shipping industry developed so quickly
since the Meiji-Restoration that two of the strongest trust-organizations

were early formed as the Nippon Yusen Kaisha and the Osaka Shosen
Kaisha in 1884-5, It must be recognized that such two steamshipcompanies or the earlier monopolistic firm, the Mitubishi Kaisha (theoriginal of the N. Y, K.), led always the expansion of the modern
steamship business and rendered a great service to the Japanese shipping

industry. They were, however, extraordinary, selected and privileged

companies to which the Japanese government gave a great aid orprotection for the p.urpose of dealing with an urgent un-economic
necessity. On the other hand, there was a general stagnation in themodern steamship business, especially in the cargo trathc. The Japanese cargo-steamers started originally in the right direction since about

1887--1892 as a development of "Shagaisen" (it had meant thesteamers outside of the vessels (" Shasen ") which were owned by the
N. Y. K. and the O. S. K.). Most owners of those' cargo-steamers had
165

166 SEIJI SASAKI
been the sea-carriers or shipowners from generation to generation andwere employing their sailing-vessels in various cargo traMcs ; for there

were still such trades in which the sailing vessels could successfullycompete with the steamers, especially in the carriage of low-grade
cargoes on the coasting voyages. We must first recognize them as thehistorically much stronger carriers who had suMcient experience andtheir own foundation in the goods trafic along the Japanese coasts.

Such o!der ,and more traditional shipowners, howeveri adhered to.
their infant sailing
vessels and could not easily adopt the moclern large
steamships before about 1890, when the other progressive but rather

amateurish steamship companies developed so rapidly by aid of thegovernmental protective policy that their activities were enlarged justfrom the Mail and passenger traMc to the cargo tradic. In the historyof the world's shipping industry, the steamers obtained first a practicalmonopoly of the carriage of mails, passengers and fine cargoes, andthe development of the cargo-stcamer or tramp steamer was muchlater than that of the mail-passenger steamer or liner services.
This was a general rule. But, in Europe, there were such many
great and older shipowners, as they could early perceive an advantage

of steamship and owned or operated spontaneously the new ships
and exchanged them for the old sailing vessels. On the other hand,most of the Japanese traditional shipowners hesitated to set about
the operation of the steamer in spite of the real development of someprivileged steamship companies, like the Nippon-koku Yubin Jokisen
Kaisha, Mitsubishi Kaisha, Nippon Yusen Kaisha and Osaka Shosen
Kaisha. What were the main reasons of those stagnation? And why
did the general shipowners begin altogether to own and operate thesteamer since about the 20th year of Meiji (1887) ?

2) In early Meiji era, an insuMcient growth of Japanese capitalistic economy considerably restricted a vast sea-transportation of thevarious industrial products, materials and fuels, but there was a gooddeal of coasting commerce carried to each port even in that days.

THE TRANSITION FROM SAILING VESSEL TO STEAMER 167
Rice, wine, salt, timber, fish, maures and other bulky goods werecarricd between the domestic ports. This demanded vast tonnage andgave an important stimulus to the development of the Japanese ship-ping since the Tokugawa era. The volume of the coasting traffic,
which, in those times of no railways and bad roads, was far more
important than it is to-day. The volume had not diminished in the
Meiji era. It rather became much greater with the growth of themodern industries and trades. Thus, in a theoretical view there wasa reasonable ground or possibility of development of the modern steamer

as cargo-boat. In fact, we can realize the great development of the

Mitsubishi Kaisha, the establishment of the Kyodo Unyu Kaisha(1882), or the remarkable increasing tendency of the sailing vessels

tonnage during 1877-1885.
Nevertheless, at Ieast, before 1886, we can hardly recognize a real

rise of the cargo-steamer. AIthough many shipowners had advanced
their ships from the infant Japanese-type sailing vessels to the moreprogressive European-type sailing vessels, they could not easily adopt

the steamer and replace their sailing vessels. Their business itself

remained still in the old co'ndition. What reasons did hinder theirprogress ?

First, it must be recognized that an invisible pressure of themonopolistic strength exerted by the above-said Mitsubishi, N. Y. K.
and O. S. K.. By aid of the special relation to the government and of
the resultant protective policy which gave a just dramatic support ofsubsidy to this single company, the Mitsubishi Kaisha governed not

only the shipping circles of those days and had the stage all tothemselves, but guarded oversensitively against the growth and development of other steamship companies, This had no-change also in
the N. Y. K. which started directly as a descendant of the Mitsubishi.

The Osaka Shosen Kaisha was likewise afraid of the competitive
steamship companies in the west coast which was their main controlling sphere, because this company was just a combined organization

which had been brought after the severe competition between many

168 SEIJI SASAKI
smaller passenger-steamer companies. Thus the oppressive policy of

those "big-two" against the new-comers, especially the so-called"Tsuke Fune" (fighting ships) system, restricted fairly the transition

to the steamer of the general shipowners. •S. Asano, an earliest steamship owner and the founder of the fa-

mous Toyo Kisen Kaisha established in 1896 and opened immediately a trans-pacific liner service , told us a vivid example in his life-

stories. We can imagine a diMcult condition of the early cargosteamer business as follows; As he had entered into the business ofcoal-sale and the production of cement, he had to use the ships inany case. At first he depended upon the steamers of the Mitsubishi
or N. Y. K. at such a high freight that he decided at last to buy andown a steamship. The Hinode-maru (1,136 G/T) which was his
first steamer, however, sufferd constantly from the severe competitionof the steamers of the N.Y.K. which attempted to make Asanosurrender. Another steamship firm, the Tokuyama Kyoeisha (established in 1884 as a native steamship company) challenged also sobravely against the O. S. K. in the west coasting routes, but the result

was defeat. It ended in 1897 and was united into the Tosa Yusen
Kaisha which was another new competitor against the O. S. K.
The secondary but most noticeable diMculty in the transition fromsail to steam was the problem, whether the cargoes to be carried
were able to bear such a heavy freight that increased necessarily inthe steamer than in the sailing vessel, or, even when that was possible,

there was a grave doubt whether many shipowners could own enoughcapital in order to set about the new steamship business which needed

as a matter of course so much fixed and running expenses. It was
obvious that those diMculties checked the transition to the steamer.
Although it is still insuMcient to describe the former problem, what
the cargo will bear, there are found some valuable materials on those

problems in the author's recent research. The author regrets thatspace prevents him from translating the whole passage in this shortarticle, but we will prove some important and characteristic items,

THE TRANSITION FROM SAILING VESSEL TO STEAMER 169
It will help us to understand a difference of the expenditures between
the steamer and the sailing vessel in the micklle age of Meiji.
''

3) The Mitsui. Bussan Kaisha (established in 1874)---the
Mitsui Steamship Company of to-day had originally started as adepartment of this firm since 1903----had presented to the government an estimation-letter for the purpose of borrowing the fund in
1879. This fund was necessary for them to purchase the ships and thestore-place of coal which the firm had taken up to carry for Shanghai
under the contract with the Japanese government. In this letter, thepurchasing cost of a steamer (1,OOO D/W) was estimated at 80,OOO yen

in comparison to 25,OOO yen of a sailing vessel which had the samecargo-capacity, and the various expenses, incomes or net-profits of bothwere calculated as follows.
steamermonthlysailingvessel

4,435yen

1,773yenannual totalexpenses

51,452"20,3oo"annua! freightincome

60,OOO,t26,250,,annual netprofit

8,548n5,950".operatlngcost

The sailing vessel engages in 15 round-voyages a year ancl gains
1.75 yen per ton of coal. On the other hand, the steamer can navigate
double round-voyages (30 rounds) and gains consequently 2 yen per ton.

By the way, it must be also remembered that both ships had to employ
the foreign captain or oMciers,Nand that the salalies of those captains

were estimated at 250 yen a month in the steamer and 200 yen in
the sailing vessel in comparison with 50 yen of Japa"nese first-matein the steamer.

With this data, we can roughly guess that the carriage of thegoods by steamer was, at Ieast in about 1880-1885, not only diMcult,but unprofitable. The Mitsui Bussan had distinctly an advantageous
position in such transportation, for they could always preserve a vast

volume of the entrusted codl for their ships to carry. The Shipping•170 ' ' 8EIJI SASAKI
business was not their only purpose, for they could complement theinsuMcient profit in the carrying trade by other business commerce,

The estimated annual net-profit of the steamer was, as we haveseen, only 8,500 yen• in comparison with 6,OOO yen of the sailing
vessel this proportion of increase was less than 50 percent--,
but the cost of purchasing the steamer was much more than threefold.
Such results might reflect this firm's character. The above calculation, especially that of the freight, however, reflected fairly a realcondition of the market. - Thus the cargo-steamer, even in such guaran-

teed route and load condition, was not yet enouth to attract thepeople. It would be safe to say that such insuthcient revenue hindered
the general shipowners to undertake the steamship business.
• Moreover, the purchasing expense and operating cost of the steamer

were far much more than those of the sailing vessel. The generalunprivileged shipowners could hardly bear such heavy investments.
Even the.a.bove-said Mitsui Bussan Kaisha, if their received aid had
been smaller than the vast subsidy for the Mitsubishi Kaisha, the' firm

would never be enabled to engage in the cargo-steamer service without

the governmental support. .
'4) The war of 1877 and the inflation after this war gave a great

impetus to the Japanese shipping industry. As we have seen, it gave
rise to a monopolistic development of the Mitsubishi Kaisha, or toa splendid growth of the small passenger steamers in the coasting
routes, and was also a cause of the transition from Japanese-type
sailing vessel to European-type sailing vessel. Then, the most modern
shipping business spread itself slowly but steadily and inevitably in thiscountry, though the above-said diMculties restricted considerably the
progress tQ the steamer. This period of about five years during 1881-1886 was the dawn'of the' Japanese steamship business. •• The development of the Mitsubishi Kaisha•or N. Y. K. and O; S, K,•
gave, good or bad, a great stimulation to the other shipowners. Some

successfu1 small steamship enterprises, that owned one or two small

THE TRANSITION FROM SAILING VESSEL TO STEAMER 171
steamers of less than 100 gross ton and carried on the transport of thepassenger in the short distance coasting route or in a bay, wereanother impetus. Many owners of such small-steamships began stepby step to grow all over this country, though most of them engaged
still in the little scale of the cargo traMc, as well as the carriage ofthe passenger. We must above all pay attention to a new andpowerfu1 tendency in the Hokuriku ports situated in the middle
coast of the Japan Sea.

The shipping of those Hokuriku ports had been well-known as"Kitamaesen" since Tokugawa era and were playing an importantpart even in the early Meiji period. Their fleet were still Iargely
composed of sailing vessels before the middle of Meiji, but even in theearliest decade of Meiji there were seen such noticeable movements
as some commercial navigations of the steamers which belonged to the

Maeda-clan or beginning of the steamship services along the JapanSea coast by the Mitsubishi Kaisha. Under such conditions, Kan
Maeda, a native shipowner of Mikuni-pert, bought two small steamersthe "Mikuni-maru" and another and operated the similar
regular service between Kanaiwa and Tsuruga as that of the Mitsubishi, This was perhaps an earliest native steamship enterprise in
Hokuriku provinces.
An overbearing arbitrariness of the Mitsubishi had already called

forth violent outcry of the public opinion and led at last to thecompetitive steamship company, Kyodo
Unyu Kaisha, in 1882. This company and its antecedent firms had
a very close connection with the Hokuriku shipping. Nozo Fujii whoestablishment of the strongest 'had been a man of distinction, at first tried to develop the steamshipbusiness in this part of the country by depending upon the Mitsubishi
Kaisha, became soon an oppenent against the Mitsubishi and establishedthe Tokyo Fuhansen Kaisha in 1880 together with T. Masuda, E.
Shibusawa, S. Moroto and S. Kagitomi. Although this company did
not succeed to develop their real business owing to the obstructive
tactics of the Mitsubishi, another company, the Etchu Fuhansen Kaisha,172 SEIJI SASAKI
which was found in 1881 .]by N. Fujii under the partnership with
S, Shiota, M. Washimi, etc., bought a comparatively large steamer"Sukune-maru" (i) (640 tons) and began to operate a round Japan
voyage,(2) as well as the carriage of passengers and cargoes between
Etchu ports by the sailing vessel " Kaetsu-maru " (92 tons). We must

pay attention to the fact that the Sukune-maru was a fairly large
steamer and engaged mainly in the cargo traMc, and that this company
carried on consequently the modern steamship services in spite of its
name " Fuhansen " which meant the sailing vessel in Japanese. These

two companies and the Hokkaido Unyu Kaisha united together andformed the Kyodo Unyu Kaisha, a most competitive steamship company
against the Mitsubishi.

Such a tendency was not only valuable as one of the distinct
characteristic features in the early development of Hokuriku steamship,business, but those pioneering enterprises exerted a great influence toother shipowners, whether in Hokuriku ports or all over the Japanese

ports, These companies, however, were soon combined to a new company, the Kyodo Unyu Kaisha, and in fact they did not yet prove muchsatisfactory in their modern businesses. A most direct and successfu1

impetus was given by the smaller steamship company, " the Hokuriku
Tsusen Kaisha" which was estdblished in January 1881 by N. Fujii,
K. Kuchiki and other supporters. An old book " Sanshu Senpaku Tsusen" gives an astonishingly clear and vivid picture of their successfu1
practice and important influence ;•••••• In those days, the Hokuriku Tsusen Kaisha was established in Fushiki, and carried many passengers and cargoes between

Fushiki and Naoetsu. Railway did not yet operate in theseprovinces. So many passengers and various goods had to dependon the service of this company. It had been said that a small
steamer less than 50 or 60 tons had gained the net-profit 1,OOO
Note ( 1 ) This was an English Steamer "Arzentine ".

(2) This round itinerary was from Fushiki to Hakodate, Otaru, Tokyo,
Yokohama, Osaka, Kobe, Shimonoseki and back to Fushiki`THE TRANSITION FROM SAILING VESSEL TO STEAMER 173'
yen in a single voyage between the above-said two ports. Suppose its great revenue ! Under such condition many new steam-ship companies sprang into existence, attempted to set about
each own navigation line along the Hokuriku coast, and com-

peted one another violently•••••• .
In addition to such short-haul coasting routes, they carriedalso the vast volume of rice or general goods to Hokkaido or
Osaka by their small steamers less than IOO tons.••••••

Including this company, most of the early small-steamer enterprises
disappeared during the further competitive process. They played, however, evidently a great part for the development to the modern shipping

industry. Especially, this Hokuriku Tsusen and the other successive
companies in Hokuriku gave just directly an impetus to the transition
from sailing vessel to steamer in this province, which had been a mostimportant ground in Japanese shipping circle. Such many owners andoperators of the steamers appeared in great members, like the Chuetsu

Kisen Kaisha (established in l886), the Fushiki Kisen Kaisha (1886)
changed its name to the Fushiki Koun Kaisha in 1888 and further
to the famous Etchu Shosen Kaisha in 1897---, or like most typical-------

shipowners in the earliest Japanese tramp business (so-called " Shagai-sen" ), H. Hiroumi, M. Baba, H. Oya, etc. They were on the whole
given a direct and strong influence by those small-steamship companies.

Then we must study in more detail the real actions of the Hokuriku
Tsusen Kaisha and look over a possibility of the growth of the cargosteam.er business.

5) The Hokuriku Tsusen Kaisha was, as we have seen, a native
enterprise under the joint stock system and its capital was prepared by

Fujii, Kuchiki and other rich men in the provinces. The main purposeof this company was to give facilities for the country people who wishedto travel or carry their goods. Thus the company bought tWo small

steamers--"Shitoku-maru" (50 tons) and "Akitsu-maru" (130tons?) and operated them mainly in a regular route between

174 SEIJI SASAKI
Fushiki and Naoetsu, calling at Iwase and Uotsu. It was one of theearliest liner services in the Hokuriku coast. The company carried on,

however, such other regular services as the lines between Udetsu andNanao, or between Tsuruga and Wajima. Furthermore, it placed
often the steamers even on a long route to Tokyo, calling at Niigata,

Sakata and Hakodate. This was perhaps a tramp navigation.
According to a report, which was printed in 1883 by the company
and are in a local library's keeping, the company depended first upon
the liner service between Fushiki and Naoetsu, but the importance ofthe long tramp route itself could not be ignored. The freight incomesfor each route in this year were calculated as follows;

FushikilNaoetsu route 14,567 yen

Noshu route 803 ii

Tsuruga/Wajima route 874 ii
Niigata/Hakodate/Tokyo route 7,298 ii
When we compare the income of the Fushiki / Naoetsu ruote withthat of the Niigata / Hakodate / Tokyo route ' both were the mostimportant revenue-sources of this company , we can find out anevident difference. The former is analyzed;
passenger

otherincomescargo

Shitoku-maru

8,365

3,O18

Akitsu-maru

2,375

683

total

10,7403,701(1oo%)(73.7%)(25.4%)ny-126(O.9%)

This was typical of such small-steamer business which carried on
the short-haul coasting trade, and their dependency on the passenger
traMc was very clear.
'passenger

cargo

total

259
670
929

6,369

(loo%)(12.7%)(87.3%)

Shitoku-maru
Akitsu-maru

I,5i5

4,854

THE TRANSITION FROM-SAILING VESSEL TO STEAMER 175
But there was quite a different condition in the Niigata / Tokyo
route. Its income is divided as follows;.

Almost all of the income was made up of the cargo traMc and thepassengers' fee or the carriage charges of the passengers had only
a secondary or additio•nal importance. AIthough it is not ciear to-day

what cargoes were carried in this route, this navigation depended
mainly on the transport of the various goods, just like the modern

tramp steamer of to-day. The fact must also be noted that thesmaller steamer " Shitoku-maru" was more advantageous in the shortand regular route between Fushiki and Naoetsu which aimed chiefly
at the carriage of the passengers and on the other hand the larger
steamer "Akitsu-maru" was superior to the other in the cargo traMc
between Niigata•and Tokyo. Moreover, we find practically that the
Yaetaerr. S,teair)ShiP had only operated in the navigation to Tokyo in thisFrom such single comparison of each freight income which thosecomparatively still small steamers gained in only one year we can nothastily decide either the cargo traMc or the passenger traMc was more
profitable for the steamer. It left no room for doubt, however, that suchan advantageous income of carrying goods in the Akitsu-maru gave, infact, an impetus to the old shipping business in Hokuriku provinces.

Many shipowners or rich merchants began to buy one after anotherthe steamship and follow in the wake of the Hokuriku Tsusen Kaisha.
In the next year the company itself decided to strengthen their cargo

traMc ; for the company aimed at the navigating between Miyako andTokyo during winter season, placing the ship 15 round voyages on thelong coasting trade from Tsuruga to Hakodate, and estimated the
net-profit 6,OOO yen in the allocation schedule of the Akitsu-maru.

These data proved, at least, a pessibility of the paying in thelong-haul cargo traMc. Though such an early steamer was still smaller

than "Shagaisen" or Japanese modern tramps and the later needed
naturally much more building, buying or operating costs, the steamer

became no longer unfamiliar for the general shipowners. Even a long176 SEIJI SASAKI
distance cargo traMc of steamer was gradually more profitable thanthat of the sailing vessel which were in a dilemma under the competition with such new ships. Thus the possibility of the business andthe demand for the steamship tonnage in the coasting trade gavea great stimulus to the Hokuriku shipping circle, and there were manyshipowners who had made their living by owning and running theships from generation to generation.

The Hokuriku shipewners who could now buy a single steamer
by their own efforts or in partnership with others, operated it at firstin the old and similiar routes which they had cultivated so long by
their sailing vessels, but step by step they began to march out toward

a new or unopened route and give necessarily a great impetus to every

shipowner all over this country, most of whom remained still as theowners of the sailing vessel, Here the Japanese tramps took, on thewhole, gradually the sailing vessel's place and began to start in theright direction,

ON THE REGULATING POLICY OF JAPANAGAINST THE SHIPPING CONFERENCEESPECIALLY IN RELATION TO THE REF'USAL

OF THE-ENTRY TO NEW COMERSHiromasa YAMAMOTO( 1 ) Japanese Shipping Policies relating to the Shipping Conference

before the World War II.
We could not find the regulating policies against shipping conferences before the war. Before the war monopolistic evils of shipping

conference did not play the part of impeding the development ofJapanese shipping and trade. Rather we may properly consider thata few Japanese shipping companies backed up by nationalistic policy
made use of the monopolistic power of the conference for the development of Japanese shipping and trade. Since prewar Japanese
shipping pelicies aimed to strengthen the Japanese shipping companies
in the conferences and to enlarge the qualifi'cation to use the ships ofJapanese shipping companies on the main trade routes. In thosecircumstances monopelistic evils of shipping conferences were notrealized in Japan before the war, and so there was neither experience177178 HIROMASA YAMAMOTO
of the inquiry into shipping cartels nor movement to enact the law
regulating conferences. Then it seems right to say that prewar Japan
had no policies for the control of shipping conferences. However, tomake clear the difference between the shipping policies of Japan
before and after the war, it is usefuI to get a glimpse of the prewar
shipping policies, especially the route subsidy policies intending to' companies' influence in the conferences, andextend Japanese shipping

its economic background. 'It is said that modern Japan began from the Meiji Revolution of

l865 and thereafter Japanese economy capitalized rapidly, while
European nations had already matured their capitalist economy andsought new markets for the raw materials and goods in the various
parts of the world. Accordingly when Japan came in the contact
with the world economy, British shipping had already dominated themain trade routes and there shipping conferences had been created.
For the purpose to operate the liner service on the foreign traderoutes, Japanese shipping had to compete with the advanced shipping
nations. Of cource Japanese shipping companies lacked suMcientcompeting power which was necessary to get admitted into conferences. In many cases underdeveloped countries adopted and also
adopt now nationalistic assistance policies to foster their domestic
industries, and prewar Japan was not an exception.
In 1875 Japanese government sold government-owned vessels tothe predecessor of Nihon Yusen Kaisha, and fostered it by means oflarge operating subsidies. In l896 the Navigation Encouragement
Act(i) and the Shipbuilding Promotion Act(2) were carried out with theintention to march Japanese vessels on the international trade routes.

Nihon Yusen Kaisha (N. Y. K.) succeeded for the first time tomaintain the liner service on the ocean route and to be a memberof the conference after the severe struggle which began in 1893 when

(1) Law No. 15 oÅí l896.

(2) Law No. 16 ot 1896.

ON THE SHIPPING POLICY OF JAPAN 179
N.Y.K. applied for the entry into the Bombay/Japan/Conference
and ended in 1896 with the admission of the entry of N. Y. K. The
success of N.Y.K. was.of course due partly to the suppert of theJapan Spinning Association that shipped cotton, main cargo of theroute, exclusively to N. Y. K., but we can not overlook the effect of
the strongly protective shipping policies of the Japanese government.

Moreover, in l910 Ocean Routes Assistance Act(3) was enforced.
Only liner services were fostered by this Act which prescribed to givevoyage subsidies to the shipping companies operating liner services on

the four trade routes from Japan to Europe, North America, SouthAmerica and Australia. The act also prescribed that the shipping
companies should acquire the sanction of the minister when theydecided the tariff and concluded the agreements. By means of thissystem Japanese government could keep the controlling power substantially over the tariff rates and other agreements of the conference
which included Japanese vessels. As a matter of fact Japanese govern-

ment gave route subsidies exclusively to two largest shipping compa-

nies, N. Y. K. and O. S. K. (Osaka Shosen Kaisha). This method
was of use to prevent the wastefu1 competition among Japanese shipplng companles,

In 1936 the government enforced the Route Control Law(4) forthe purpose to prevent the undue competition among Japanese lines
operating in foreign trade routes, and on the basis of this act the
government could advise and order to conclude the route agreement
or the tariff agreement among Japanese lines. At the same time theact had the effect to foster the Iimited and a few shipping companies
in its applications. By this act we can see the aim of prewar Japanese

government to support the existence of the conference and to strengthen its monopolistic power.
In short, the concentration of the subsidies to the limited, a few(3) Law No. 15 of l910.
(4) Law No, 35 of l936.

180 HIROMASA YAMAMOTO
and large shipping companies, and the existence of the governmental
supervision of such companies, these were the reasons why Japaneselines become the ringleader, at least to have the strong influence inthe conference.

(2) The Regulation against the Shipping Conference in post-war
Japan and the Relating Problems.
During the World War II Japanese shipping industry lost almost
all of its vessels, and the survivals were only 1.3 million gross tons

which were composed of the war-standard type vessels and worn-out
vessels, Moreover the occupation policy of the earlier period prohibitedJapanese vessels to engage in ocean voyage and the construction ofocean-going vessels. On the trade routes where Japanese vessels had
maintained liner services we could not see any Japanese vessel after
the war. Japanese shipping was entirely destroyed by the war. The

movement toward economic democracy refused the prewar economic
policies of Japan which were characterized by the government's
patronage to the few special firms and the intense nationalistic pro-tectionism. The circumstances were also the same in the shipping
industry, and all of the prewar shipping policies and acts wereabandoned.
On the other side a series of the occupation policies intending todemocratize the economy of Japan were proceeded. In company withthe agrarian reform and the destruction of Zaibatsu (financial combi-nes), the Law concerning the Prohibition of Private Monopely andMethods of preserving Fair Trade(5), so-called the Anti-monopoly Law,

was enforced in April 1947. The Anti-Monopoly Law, following theAnti-Trust Act of the United States, aimed to promote the welfare of

citizens through the maintenance and the promotion of free and faircompetition among firms, and also by the prohibition of market
monopoly and the elimination of the undue competitive methods.
The Fair Trade Commission was established in accordance with the(5) Law No. 54 of 1947.

ON THE SHIPPING POLICY OF JAPAN 181
act, and endeavored to realize the aim of the act. However, theminimum actions to restrict competitions that is necessary to maintainthe normal economic activities were excluded from the application of
the act. But there was no prescription for the shipping industry not

to apply the act, when it was enforced, Consequently in April 1949
the Fair Trade Commission decided to inquire into the practices of
the Far Eastern Freight Conference with the suspicion that the confe-

rence had violated the Anti-Monopoly Act.(6) ,However, considering
the need of a shipping conference to stabilize shipping market, theMarine Transportation Law(7) which allowed the existence of shipping confe,rence was rapidly legislated and enforced in June of thatyear. This law, like the shipping act of 1916 of the United States,
took the pesition of the special legislation to the Anti-Monopoly Law

for the purpose not to apply the latter to the shipping industry andcontained the articles which prescribed the approval of shipping
conference and the restriction of the practices of conference.

The contents of the Marine Transportation Law relating to theregulation of the conference are as follows.

(Exception to the Application of the Private Monopoly Law and Trade
Association Law)
Article 28. An agreement, contract or conference activity (hereinafterreferred to as the "conference activity, etc.") on the transportation conditions such as freight, passenger rates and charges, sea route, ship's assign-

ment or shipment of cargoes as is made between the ship-operator and othership-operator, and not falling under either of the following items, shall be

exempted from the application of the provisions of the Law concerning theProhibition of Private Monopoly and Methods of Preserving Fair Trade(Law No. 54 of 1947) and the Trade Association Law (Law No. 191 of(6) Even after the enforcement of the Marine Transportation Law the judgement of
the case continued. Since the contract rate system and the system of the penalty
against shippers were suspected of the violation of the law.

But considering the circumstance of Japan under the occupation of the allied
powers and the international response of the case, the Fair Trade Commission
negotiatod unoMcially with the conference and discontinued the judgement with
(7) t LhaewreNtUol .t lt sh7at otfh fgC407?ference improved the agreement clauscs spontaneously.

182 HIROMASA YAMAMOTO
1948). However, this shall not apply to the cases where the unfair competitive method is adopted or the substantial restriction on competition in thespecified transaction field tends to cause the unjust raising of freight rates,

passenger fares and charges.
( 1 ) To restrict a shipper's liberty by means of deferred rebate system.•••(2) To use a fighting ship.•••(3) To retaliate upon a shipper by way of unfairly or unjustly refusing
to transpert his cargoes, restricting them and making a similiar discrimination on the ground that he entrusted his cargoes to a ship-operator
not engaged in the said conference activity, etc.

(Report on Agreement on Transportation)
Article 29. The ship-operator shall, in case be intends to make theconference activity, etc. as referred to in the preceding Article, make inadvance a report to that effect to the Minister of Transportation. The
same shall apply to the case of change of the conference activity, etc.

(Acts to be Prohibited)
Acticle 30. It shall be unlawful for any ship-operator:( 1 ) To make any unfair or unjustly discriminatory contract with any
shipper basod on the volume of freight offered, or unfairly treat or
unjustly discriminate against any shipper in the matter of cargo spaceaccommodations or other facilities; the loading and landing bf freightin proper conditions ; or the adjustment and settlement of claims ;(2) To make or give any undue or unreasonable preference or advantage
to any particular person, 1ocality or description of traMc in any respectwhatsoever, or to subject any particular person, 1ocality or description

6f traMc to any undue or unreasonable prejudice or disadvantage inany respect whatsoever.
(3) To allow any shipper to obtain transportation for property at moreor less than the rates or charges fixed in the tariffs which have beenreportod in accordance with the Provisions of Article 19-(3) (including

the case of mutatis mutandis application of the said Article under
Article 19-(1)), by means of false billing, false classification, false

weighing, or any other unjust or unfair device or means;(4) To be a party to any combination, agreement, or understanding,express or implied, with respect to transportation of persons or proper-ON THE SHIPPING POLICY OF JAPAN 183
ty, that admits only upon unjustly discriminative terms as comparedwith other parties thereto or excludes, except for just and reasonablecause, any ship operator who has applied for admision thereto :(5) To enter into any combination, agreement, or understanding, express
or implied, with respect to transportation of persons or property, that
attempts to fix any rate, fare, or charge which is unjustly discrimina-tive between shippers or ports, or unjustly discriminative to Japanese

exporters as compared with their foreign competitors or which isotherwise unjust or unreasonable.

(Authority of the Fair Trade Commission)

Article 31. No finding or action on the part of the Minister ofTransportation under the provisions of this Law shall be construed asbinding on the Fair Trade Commission whether or not, a conference
activity, etc. on transportation conditions falls under any item of Article
28 or of Article 30 (including the case of mutatis mutandis application of

the respective item under Article 30-(2) paragraph 2), or as preventing
the Fair Trade Commission frorn issuing a notice of hearing o- exercisingauthority under the Law concerning Prohibition of Private Monopoly andMethods of Preserving Fair Trade on the ground that such conference
activity, etc. allegedly violates the said Law.

By the enactment of the Marine Transportation Law together
with the abandonment of the prewar shipping policies, Japan adopted
the policy which, though admitting the existence of shipping cartels,
intended to control its monopelistic evils. When the law was enforced,

the shipping conferences had already been formed on the routes toand from the ports of Japan. Therefore the nations concerned in the
shipping paid attention to what regulation against conference would

be drawn up by the Commission. •Hereafter we shall consider the postwar regulating policy against

shipping conference only regarding to the problem of the refusal of

the entry to newcomers and point out the diMculty of the problem.
(3) Regarding to the Refusal of the Entry to New Comers
When the Marine Transpertation Law was legislated, the closed
membership of the conference was regarded as unlawful. Since by184 HIROMASA YAMAMOTO
the provision of article 30-(3) any ship-operator was prohibited toenter into any combination, with respect to transportation of persons

or property, that did not admit the entry of new comers without sameterms as other members when any ship-operator applied for entry.
We cou!d consider that the law prohibited absolutely both the refusalof entry by conference to new comers and the admission by conferenceof the entry with unjustly discriminative terms.

But by the amendment in May 1950, the law was amended as
we see the provision of article 30-(4) of the present law. Considering

the actual conditions that the shipping conferences, which wereorganized on the trade routes under no jurisdiction of the Federal
Maritime Board of the United States, adopted the closed membership,
this revision was performed to approve the refusal of the entry to

newcomers if the conference had the due and reasonable causes todo. However, we can not find the established judgement even atpresent to show what should be regarded as the due and reasonablecauses. Because the accusers withdrew its appeal to the Fair Trade
Commission for the reason that they could enter into conferences
before the Commission would have delivered final decision. But it
is possible to recognize the basic attitude of the Commission regar-

ding this problem in the development of cases. The Commission, it
seemed, did .not wish to solve the problem positively according to
the law. Rather the Commission inquired the state of the affairs on
the one hand, and made an effort to solve the question by the negotiation between the conference members and the outsider on the other
hand, This attitude of the Commission is very interesting as comparedwith the Federal Maritime Board of the United States which did not
approve the refusal of the entry at all according as the almost sameprescription as that of the Marine Transportation Law of Japan. We
shall give a glance at the development of the case of the Shinnihon
Line v. Japan/Persian Gulf/Japan Conference, as the leading case of

the refusal of the entry under the jurisdiction of the Fain Trade

Commission.

ON THE SHIPPING POLICY OF JAPAN 185
On t-he trade route between Japan and India, Pakistan and
Persian Gulf the conference was organized before the war by N. Y.
K. and O. S. K. Iines of Japan and B. I. and P. O. Iines of the United

Kingdom. In April 1951, for the first time after the war Japanese
shipping placed vessels on this route with the permission of the occu-

pation forces. At that time there was no conference on the route.
Based on the understanding between the occupation forces and British
lines (B, I. and P. O. Iines), Japanese shipping decided the scheduleof vessel operation, and according to which the Japanese shipping
companies would perform eight voyages a year with three groups,that is, N. Y. K. and Mitsui lines group, O. S. K., Yamasita andShinnihon Iines group, and Kokusai group which was organized by
Iino, Mitsubishi, Toho and Nissan lines. Meanwhile the move toorganize the conference became clear, because the controlling powerof the occupation forces over the Japanese economy would have been

lost by coming into effect of the peace treaty between Japan andallied nations in May 1952. At that time Everett and A. P. L. Iinesof the United States and Marsk line of Denmark in addition to thelines mentioned above maintained the liner services on the route, andB. I. Iine took the position of the ringleader of the lines, other lines

following B. I. Iine's tariff rates. In November 1952 the Colombo
Meeting was held for the preparation to organize shipping conference,and Shinnihon line and Kokusai line were not invited to the meetingin spite of their wishes to enter the conference if it would be formed

in future. In consequence of the meeting the establishment of theJapan/Persian Gulf/Japan Conference was made public in Decemberof the year, and the conference announced to shippers to put in
operation the contract freight system. Shinnihon line and Kokusai
Iine were omitted from conference members as was expected, though
the conference admitted the entry of Maersk line and Everett line as

regular members and Mitsui Iine and Yamashita Iine as associatedmembers notwithstanding the fact that they were not conference
members before the war.

1eo HIROMASA YAMAMOTO'

Shinnihon line appealed to the Fair Trade Commission that theconference was unlawfu1 because it had refused entry to the accuser,
and at the same time it applied to the Commission of the injunction
by court against the dual contract system that would be carried out
from February of the next year. The Commission invited the conference and advised to put off the performance of the dual contractsystem and to solve the question by negotition with outsiders. But
the conference did not change its attitude to exclude the applicants,

and then at last the Commission decided to begin the judgement,
Meanwhile almost all of the shippers withheld to contract with theconference regarding the dual rate system by the time of the solutionof the case, and some of them hoped the entering of the outsiders to

the conference, The conference persuaded shippers to contract withthe dual rate system from summer of 1953 on the one hand, andmade effort to win in the rate competition on the other hand. The
conference cut down the rates on a larger scale in September 1953 andat last made the tariff open except a few items. Then severe competition began between the conference and the outsiders,

Thenafter, in June 1954 Toho Kai-un line abandoned the liner
service of the route, dropping from Kokusai line because of the lossof the operation, and then the newly created J. I. P. Iine, of which

members were Shinnihon line and three lines formerly organized the
Kokusai Iine, made joint service of the route. J. I. P. Iine gave theconference the notice that J. I. P. Iine hoped entry into the confe-

rence and prepared to withdraw its appeal to the Commission if
admitted to be a conference member, 'Because of such conditions theCommission once postponed the judgement indefinitely. In November
1954 J. I. P. Iine succeeded to join the conference and consequently
the procedure of the judgement came to an end without clear concluslon.

• The delay of the judgement about this case was due basically tothe attitude of the Commission that restrained to show its positive
opinion, wishing to solve the problem by the negotiation of the parties

ON THE SHIPPING POLIaY OF JAPAN 187
concerned as far as possible. So the case came to end by admitting
outsiders into the conference before the Commission gave judgement.
However, we can draw out several problems in relation to the regulation against shipping conference in the process of the case.

It is better for us to remember that the Fair Trade Commission
has not delivered a decision to any case regarding shiPping cartels as

yet. Of course we may count many reasons why the Commission did
not decide on cases, nevertheless we can not always remark that theobject of the Marine Transportation Act was attained because theCommission did not exert the positive actions according to the act to•prevent the monopolistic evils of the conference and the rate war.

For e'xample in the case we saw above the Commission did not use
the means to prevent the rate competition, and consequently bothconference members and outsiders suffered from the loss of the operation of liner boats, and foreign trade of Japan was obstructed becauseof the unstability of the rates.

• Then, why did the Commission hesitate to exert the positive
regulation? At first we may guess that the Commission faced the
diMculty what condition should be regarded as the due and reasonable causes of the refusal of the entry to newcomers, In addition,

many troubles may be expected to occur when the Fair Trade
Commission of Japan, not of the international judicial organization,

regulated against international shipping cartels. For the shipping
conferences, one of the international cartels, had the long tradition

from the early time and there are nations uninclined to regulate
against this organization. Therefore the Commission, we guess, considered desirable to solve the problem not by the judicial order but

by the negotiations among the parties concerned, warning the confe-

rences not to continue the monopolistic practices if the abuse ofmonopolistic power of the conference was found. • 'Thus, notwithstanding the fact that Japan has the act of the same
nature as the Shipping Act of I916 of the United States, Japan showsdifferent attitude from that of the United States that regards unlawfu1

188 HIROMASA YAMAMOTO
the refusal by the conference of the entry of a new comer. The
difference of the attitudes toward the problem between Japan andthe United States must be sought in the difference of the economic

conditions between them The trade routes to and from the ports of the United States
flourish with vast cargoes of import and export of the United States,

and there they maintain main liner services most important in theworld. Because the United States had and has also now interest in
foreign trade rather as shippers than as carriers by water, it has•become very nervous with the monopolistic evils of the shipping
cartels, and also has the power to control the shipping cartels unila-

terally with no consideration to other shipping nations. And theUnited States has taken the positive regulating policy against shipping

conferences and forbade the closed membership of the conference,taking no notice of the traditional freedom of the shipping industry.

And we may also regard the regulating poIicy of the United States
as the powerfu1 tools to foster its old but under-developed shipping
industry.

The economic conditions of postwar Japan was in contrast withthat of the United States. Post-war Japan had to endeavor after thefavorable balance of payment by means of the development of foreign

trade and shipping. Therefore it was very important for Japan toopen liner services of Japanese vessels on the trade routes to andfrom Japan. But the recovery of the Japanese shipping industry after

the war was very slow. When Japanese shipping began its activities,
foreign shipping companies had already made up the system of confe-

rence in the main trade routes around Japan. Japanese shipping
companies, as new comers, had to beg for the admission to the confe-

rence, to be its member or to compete with the conference. Regarding the trade route which had the terminal ports in the United States,

Japanese lines could easily become conference members, since theconferences were under the jurisdiction of the Federal Maritime Board.

In contrast•with the above cases, on the routes where the sovereinty

ON THE SHIPPING POLICY OF JAPAN 189'

of the United States could not reach, Japanese lines experienced therefusal against the application to be conference members for thereasons of overtonnage or others. On such routes the lines, such as
N. Y. K. and'O. S. K., which had the experience to place vessels on
the routes concerned before the war, could enter to the conferencewith less diMculty than on other lines which had no experience ofthe liner service on those routes. However N. Y. K. and O. S. K.
Iines also damaged by the war, for they had to submit to the far
fewer voyages a year compared with the prewar period. In thosecircumstances the standing was quite unfavorable to the lines which
intended to begin liner service newly after the war. In this place
we ought to consider briefly the programmed shipbuilding after the
war for the understanding for new liner operators ofJapan. In Japanthe occupation forces forbade the compensation by the government
for the loss of the vessels caused by war, and shipping companies had
no fund to build vessels. Therefore the vessels necessary for Japanese

shipping and trade were built partly with the governmental loans.
At the time of shipbuilding liner boats were favored from the pointof view to encourage the foreign trade of Japan and to increase theearning of the shipping, However, the qualification to build liner
boats was not confined to the prewar liner operators. The vessels
were allotted to shipping companies indifferently whether they had
the experience of Iiner services or not, because the shipping circle

demanded the another method to compensate for the war damages
instead of the wartime special compensating system in relation to thevessels. (In addition we can not deny the positive role of the post-

war economic policy which checked the concentrated allotment ofliner boats to the special shipping companies.) Consequently there
were several shipping companies which possessed liner boats for the
first time and began liner service. Such companies were not regarded
as the qualified operators by the conference, so they were necessarily

refused the entry to the conference when they wished to place thevessels on the routes where the conference adopted the closed mem-190 HIROMASA YAMAMOTO
bership. Then new liner operators of Japan were unsatisfied withthe closed conference system. Though Japanese shipping companies
coincided in their interests in the fact that they had to set themselves

against foreign shipping companies which restored the liner operation
soon after the war, there were much difference of interests among themregarding to the entry into the conference. N. Y. K. and O, S. K.
Iines gained advantage from the closed membership of the conference,
and at this point their interests coincided with the interests of the

British lines. But the new comers of Japanese shipping hoped to
enforce the regulating act against shipping conference as strictly as
was seen in the United States.

'

As is wellknown, the United Kingdom has not regulated shipping
cartels traditionally, admitting the autonomy of the conference. This
British policy toward shipping cartels is of course due to the superio-rity of British shipping and is useful to maintain its actual results.

British lines are dominant not only on the routes to and from theUnited Kingdom but also on the routes between foreign ports, andtake the leading position in the conferences. For the purpose toprotect and maintain their position in the world shipping, the United
Kingdom need the very system of closed membership of a conference
and need not check the practices that shipping cartels adopt. Rather
it will oppose regulating policy of other nations against that system.

The refusal of the entry to Japanese lines showed the clash between
British shipping which had already completed its position and Japanese

shipping in the process of recovery, especially the Iines newly begun

liner services after the war. .
Of course we can not answer easily to the question which is betterfor the public welfare to leave the self-governing of conferences or to

regulate them by the law. If the exclusionism of conference is very
intense, many monopolistic evils may occur and then it is necessary
to eliminate the evils. On the other side a severe rate competition,
often seen where there is no conference, makes dangerous the existenceof shipping companies and injures the enlargement of foreign tradeON THE SHIPPING POLICY OF JAPAN 191
through the unstability of rates, Therefore it seems necessary to havethe co-operating organization of shipping companies employed on thesame route. Indeed it is very diMcult to eliminate the disadvantageof the shipping conference leaving its advantage. In addition theregulation against conferences by one nation has the great possibility
to conflict with other countries' interest, differing from the regulation

on domestic industries. Then we may expect that the regulation of
one nation against the conference will become the child of the compromise between the interests of its own shipping and trade and theconsideration for other nations' interests. May we not say that theattitude of the Fair Trade Commission of Japan toward shipping
cartels has been produced from the very conditions mentioned above?
The Commission should prevent the monopolistic evils of the conference by means of warning not to exert its monopolistic pewer, but
still for the development of Japanese shipping it is better, we guess,for the Commission to approve the closed system of conference andgive the autonomy to the hand of the conference, respecting the long
tradition of the shipping industry, than to compeI the conference toadopt the open membership. Because the latter method has thepessibility to produce the confiicts among the nations concerned.

We have seen the economic background of the problem regarding
to which the Fair Trade Commission wished to solve the question
through the negotiation of the parties concerned. The Commission
showed the different attitude from the Federal Maritime Board of U. S.

,regarding the method how to eliminate the monopolistic evils of theshipping cartels.(8) Which is more reasonable for the development of
the shipping and foreign trade of the world ? We wish to investigate
this point.

May we regard that the object has been attained to exclude thefaults of the conference Ieaving the merits, by the judicial precedents(8) With regards to the Unite States regulation of the conference membership, see thenext book.
Marx, D. Jr.: International Shipping Cartels, 1953. pp. 122-125.

192 HIROMASA YAMAMOTO
of the Unired States, according to which the conference was forced toadmit the joining of an applicant, if he has the ability and the will

to maintain liner service, and overtonnage on the route cannot be
considered as the due and reasonable causes of the refusal?

In liner services the firms are few because of the nature of theservice, consequently there we find the condition either of a hard rate

war or of the combination of the firms to prevent competition. The
rate war among liner operators is not desirable because foreign trade
is injured by the unstability of the rates and also by the great riseof rates when the rate war is over. Only by the existence of shipping
conference the stability of the freights can be maintained. It was dueto the conditions mentioned above that the Shipping Act of 19I6 of U.
S. was enforced for the purpose not to apply the Anti-Trust Act to theshipping conference and that the conference was regarded as legal by
the former.

And then the shipping conference is usefu1 to the rate stability
only in the case when its monopolistic power is strong enough. Mereexistence of the conference can not have the advantage of the ratestability if the conference admits free entry to all applicants, because

it will result in the supply of vessels over the demand for tonnage inthe route, and consequently the revenues gained from liner service fall

down gradually and at last reach the point unde! the operating cost.
In such a condition the object to organize the shipping conference islost for the shipping companies, and we may expect the drop of the
weak firm from the conference members or the destruction of thecartel itself. The conference admitting the free entry to new comers
contain in its nature the danger to be overtonnage in the route where
the conferences are organized, and to destroy itself. Then, is it notright to consider that conferences may refuse the entry with the reasonof the redundant tonnage on the route where the overtonnage is clear,so far as admitting the existence of shipping cartels to be useful be-cause of the rate stability? To consider that the overtonnage can not
be the reasonable reason of the refusal of entry, the writer is convin-ON THE SHIPPING POLIaY OF JAPAN • 193
ced, contradicts theoretically with the attitude to admit the advantageof the shipping conference system.

However, to admit "overtonnage" as "the due and reasonablecauses" of the refusal has the possibility to produce many diMcult
problems when it applies to the actual regulation. Because it is very

diMcult to show the objective indications that the route is overtonnaged. In addition conferences often use the overtonnage as an excuseof the refusal of entry so as to assure the monopoIistic gains. For

example the Japan/European Homeward Conference had refused theentry of the Mitsui line for the reason of overtonnage in the route,but afterwards it changed the reason of the refusal to that the appli-

cant had the nature of private carrier when the outsider could havethe support of shippers. In this connection the overtonnage was amere pretext. And a more diMcult problem will arise, that is the
problem of the rates level, even when considering the optimum ton-nage on the route. When the conference asserts that the present
tonnage matches with the demand for vessels and that the additionof vessels will result oversupply of vessels, its assertion is based on thepremise that the tariff rates are given and unchanged. But the tariff

rates adopted by the conference is not always adequate, and the cut

down of the tariff rates may induce new demands for vessels. Then
we need the examination of tariff rates whether it is reasonable or

not even when we are to consider the problem of overtonnage. We
may hear the opinion of shippers with regard to present tariff for that

purpose, but we have no warrent that their opinion is due and reasonable. In short we can not find the objective criteria to decide what
are the due and reasonable causes of the refusal of entry. In the caseof the monopolistic firms in domestic industry the government candetermine the price level and the number of the firms in considerationof its influence to the whole domestic economic activities. But in thecase of the international cartels the criteria of economic policy can
not decided because of the differ.ence of the interest of nations con-cerned. Therefore we cannot answer which is better, the regulating

194 HIROMASA YAMAMOTO
policy of Japan, or of the United States, Or we may say that bothof them are undesirable. . 'The writer also consider that the regulation of shipping conference

by one nation has much disadvantage, since the shipping conferences

are organized by members of many countries, and the regulation
against it by the domestic law may cause the confiicts among thenations concerned. European nations including the United Kingdom
hold the critical opinions against the regulation towards shipping

conferences on the one side, and Japan and the United States havethe regulating act of the same nature on the other side, though latter

two have the possibility to show another interpretation of the Iaw
each other. Every nation has the interests in shipping conference,and the interests of one nation may be different frome those ofanother. Therefore the establishmefit of the international organization

which deals with the shipping conference is the shortest way toharmonize the interests of nations and the advantage and disadvantageof the shipping cartels, though we cannot expect much from it,THE PRICE FLUCTUATION RESERVESYSTEM IN JAPANSusumu WATANABE

I
Within the pages the author proposes to observe the economic
needs that have cal!ed into being the price fluctuation system in Japanand the defects ascribed to it, and then to investigate from a theoretical point of view a desirable improvement on the existing system.
A cry was raised for the recognition of that system in tax law inbusiness circles in the latter half of 1950, when prices were on theincrease under the influence of the Korean War. It was because theyfeared immeasurable losses consequent on a subsequent decline in.
prlces.

The Japan Tax Association published ` Proposals on the Valuationof Inventories' in August 1951 and demanded that an inventory
reserve system be established. The following quotation from its
preamble will throw light on the importance and urgency of establishing a price fluctiration reserve system :"An ordinary accounting procedure will figure out an immense
profit in such a period of rising prices by matching the past cost of

an inventory against the current revenue. Such a profit, however,195196 SUSUMU WATANABE
will be swept away as soon as prices begin to decline. Such an " inventory profit", or a profit caused by rising cost, if taxed or disposed of,will cause great distress or even failure to business enterprises when

prices decline. The present price level ofJapan is far above those ofother countries, and, because of the weakness of the Japanese economic
foundations after the War, prices show violent fluctuations, affected byprice fluctuations abroad. Under these circumstances, a future pricedecline will deal a serious blow at Japanese enterprises, especiallybecause they have lost their hidden reserves as a result of the inflation

during and after the War. It is, therefore, necessary that the Government should allow the enterprises to set up inventory reserves in orderto mitigate the adverse effects of price declines."

In the above referred to `Proposals' the Association urges theneed of inventory reserves from this point of view and goes on t.oshow in concrete terms the method of calculating them. For want of
space we cannot go into its details here. But it must be pointed outthat the opinion was theoretically well based in that it recognized an`inventory profit' as one to be properly excluded in measuring abusiness ' income. 'It was not until December 8, 1951 that a price fluctuation reserve

system was introduced into the Special Tax Treatment Act. As forcorporations, the system was applicable as from the accounting period

ending on or after January 1, 1952. The newly-born price fluctuation
reserve system may be outlined as follows :Corporations filing tax returns on blue forms (no mention ismade here of the price fluctuation reserves allowable to individual

businessmen filing their.returns on blue forms) may set up pricefluctuation reserves to provide for possible losses consequent on theprice decline of inventories and securities, and may deduct the amountsof the reserves subject to the following limitations :(1) The excess of the total book value of inventories over 909oof the total market value of the same at the end of the period.
(2) The excess of the total book value of securities over 909e of

THE PRICE FLUCTUATION RESERVE SYSTEM IN JAPAN 197
the total market value of stocks or 950/o of that of other kinds of

securities at the end of the period. The market value here is theaverage of daily final quotations for one month ending on the closing
date.

The amount credited to the price fluctuation reserve account isallowed as a deduction, and the amount thus deducted will be added
to the income in the following period.
At its initial stage the price fluctuation reserve system allowed asa deduction the excess of the total book,value over 90"/o of the total
current price (95e/o in the case of securities other than stocks) at'''. one which allows inventories andThis system is, in its essence,

end of the period.

securities to be valued at 909/o of their total current price at the endof the period (at 950/o in the case of securities other than stocks). It
permits the setting-up of the reserve in periods of falling prices, but

not in periods of rising prices. When priees are declining, the earnings of an enterprise are too low for it really to avail itself of thebenefit of the systetn.

II
It is proper to assume that, on the contrary, a price fluctuation

reserve should be so devised as to be credited in periods of rising
prices and debited in periods of falling prices, since it is intended toprovide for possible losses consequent on a price decline. Criticism
was levelled at this point.

In June 1952 the Business Accounting Standards Council, in its` Proposals for a Reconciliation of Tax Law and Business Accounting
Principles', states as follows concerning the price fluctuation reserve
system :"A price fluctuation reserve is, in its nature, not a valuationaccount like a reserve for bad debts, but without doubt belongs toearned surplus. In the light of its accounting nature, therefore, it

should be charged to earned surplus instead of being debited in theincome statement at the time of its setting-up. This kind of reservethe198 SUSUMU WATANABE
should be conceptually distinguished from a reserve for bad debts,
reserve for repairs, etc. It does not harm to alleviate a tax burden

by allowing this kind of reserve to be set up in periods of falling
prices, but it is more desirable to push the idea a step farther tomake possible its setting-up in periods of rising prices." •The ` Proposals ' merit peculiar notice in that it regards the pricefluctuation reserve system provided in the Special Tax Treatment Act
as the outcome of tax pelicy and defines the reserve as of the natureof earned surplus.

The Taxation System Inquiry Committee appointed by the Prime
Minister submitted its repert in November 1953, recommending theprice fluctuation reserve system to be reformed as follows :" The excess of the book value of inventories (including securities
held by securities dealers)'over 90e/o (950/e in the case of securities

other than stocks) of their acquisition cost or of the market value atthe end of the period, whichever is the lower, should be allowed tobe credited to the reserve account in order to make it possible to set

it up in periods of rising prices as well. But the existing systemshould continue to apply to inventories to which the Lifo method isapplied and to securities held by any persons other than securities

dealers." .

The Committee had in mind a price fluctuation reserve system

under which it is possible to set up the reserve in periods of rising

prices as well, but the reserve was not such as to be automaticallyreduced according to price declines. This view of the reserve wasalso open to criticism as will be seen later.

III
On the recommendation of the said Committee, the price fluctuation reserve system was reformed in 1954, and the new Act as outlined

beIow took effect as from April 1, 1954: 'The amount creditied to the reserve not exceeding the total of theamounts calulated as follows to provide for possible losses consequenton the price decline of inventories and securities may be deducted forTHE PRICE FLUCTUATION RESERVE SYSTEM IN J'APAN 1oo
purposes of income determination :(1) The total of (a) and (b) below in the case of inventories
and securities to be inventoried valued on the Lifo basis':(a) The excess of the total book value of inventories over 90e/eof their total market value at the end of the period.

(b) The excess of the total book value of securities to be inven-toried over 95% (900/o in the case of stocks) of their total market
value. The market value here is the average of daily final quotations

for one month ending on the closing date.

(2) The total of (a) and (b) below in the case of inventories
and securities to be inventoried valued on a basis other than Lifo.

(a) The excess of the total book value of inventories over 900/oof the said total book value or of the total market value at the endof the period, whichever is the lower.
(b) Th.e excess of the total book value of securities to be inventoried over 950/o (909o in the case of stocks) of the said total bookvalue or of the total market value at the end of the period, whichever is the lower.

(3) The excess of the total book value of securities other thanthose to be inventeried over 95e/o (90e/o in the case of stocks) of
their market value at the end of the period.

The amount credited to the price fluctuation reserve account isallowed as a deduction, and the amount thus deducted will be added
to the income in the following period, as was the case under the old
Act.

The new provisions distinguish among (1) inventories and securities to be inventoried valued on the Lifo basis, (2) inventories andsecurities to be inventoried valued on a basis other than Lifo, and (3)securities other than those to be inventoried, and apply a common
standard to (1) and (3) and another standard to (2) in calculating
the limit of the reserve. If, therefore, this reserve system is utilized

to the fu11est extent, the book value minus the amount of the reserve
set up, that is, the net valuation of the .inventories or the securities toam

SUSUMU WATANABE

be inventoried may be practically lowered to 900/o (950/o'in the caseof securities other than stocks) of their market value with regard to(1) and (3), and to 900/o (959o in the case of securities other thanstocks) of their cost or market, whichever is the lower, with regard to(2). The result is that inventories and securities under (1), becauseof being valued on the Lifo basis, and securities under (3), becauseof not being securities to be inventoried, are subjected to unfavorable

treatment in comparison with those under (2).

IV
The present price fluctuation reserve system is open to criticisms

as mentioned below :(1) Because of the unfavorable treatment of the Lifo method ascompared with other methods in connection with the setting up of thereserve, many enterprises have given up their Lifo method in favor ofsome other method.
Such unfavorable treatment of the Lifo method is accounted forin some quarters of the tax administration :"We have kept preserved the system unchanged with regard toassets valued on the Lifo basis on the ground that enterprises will
have unduly large reserves with regard to sucts Lifo assets if thebenefit of the reform is extended to them, seeing that the purpose of

the Lifo method is to keep low the book value of inventories inperiods of rising prices."

The real purpose of the Lifo method is to charge properly thecurrent cost of sales against the current revenue but, from the stand-point of the valuation of ending inventories, Lifo valuation must intheory be Iower than valuation by any other method in periodsof rising prices. But it is true only when the Lifo method has in factachieved its real purpose. The Lifo method does not necessarily achieve

its purpose when inVentory holdings change at the end of each period.

It frequently happens that the Lifo method falls short of achieving
its purpose in Japan where the dollar value method is not recognizedin tax law. Lifo valuation is not always lower than valuation by

THE PRICE FLUCTUATION RESERVE SYSTEM IN JAPAN 2elother methods. 'If a common standard is applied in calculating the limit of theprice fiuctuation reserve with regard to inventories and securities under(1), (2) and (3) mentioned in a preceding section, and if the reserve

that,can be set up with regard to Lifo assets by applying that common
standard is found to be small, this result is a matter of course and is

not blameworthy. It is not proper that inventories and securities
under (1) and (3) should be discriminated against by introducing a
different standard (` percentage of cost' basis) into those under (2).

(2) The valuation of the inventories and securities to be inven-toried valued on a basis other than Lifo is practically able to bcr
lowered to 90a/e (950/o in the case of securities other than stocks) of
their cost or market, whichever is the lower.
Here the question is that enterprises can hold a price fiuctuation
reserve at all times (both in periods of rising and fa11ing prices) byhaving at their disposal the `percentage of cost' basis and the `percentage of market' basis as a standa,rd for calculating the limit of thereserve. The amount of the reserve thus set up will be added to theincome in the following period and the reserve will disappear as amatter of course in tax law. So long as, however, an enterprise has
inventories and securities to be inventoried at the end of a period, it

will be allowed to set up a new reserve, with the result that it
can always hold a reserve equivalent to 100/b of their cost or market,

whichever is the lower. (That an enterprise is prevented from setting

up a price fluctuation reserve by its !ow earnings in periods offalling prices is irrelevant here.) It has thus become possible toset up a price fluctuation reserve "in periods of rising prices aswell" as recommended by the Taxation System Inquiry Committee.
But the reserve was not such as to be automatically reduced according to price declines. The taxation authorities criticize this point asfollows in connection with a reform in the Special Tax Treatment
Act:"This price fiuctuation reserve systeM, as compared with other202 SUSUMU WATANABE
reserve systems, is strongly characterized by its nature as a generalreserve made out of business income. An enterprise, for instance, canstill hold the reserve even when in periods of fa11ing prices the reserve

must be reduced for the equalization of its profit or loss,"

Properly speaking, a price fluctuation reserve should not be onethat can be set up in periods of rising prices as well, but one thatcan be set up in periods of rising prices alone. It should be a reservethat must be automatically reduced in periods of falling prices, since

it is intended to provide for possible losses consequent on a pricedecline.

v
Moreover, the existing price fluctuation reserve system is questioned by the tax authorities. For instance,(1) The reserve is not regarded as a deduction, but as belonging to earned surplus from the point of view of business accounting
principles with an inherent tendency to conservatism.

(2) Is there any reason for being of such a reserve system inspite of the fact tax law recognizes the cost or market, whichever islower basis in addition to various methods of valuation that can bechosen according to the peculiar circumstances of an enterprise?

The writer is of the opinion that the solution of these questions
depends on the interpretation of the reserve as earned surplus or as
an adjustment account. If it is to be interpreted as earned s'urplus,

then it is obviously a matter of favor in tax law to allow it to be
set up as a deduction, with the logical consequence that its necessity

depends solely on the economic situation at a given time. An enterprise has its financial foundations fortified by having a re'serve withregard to its inventories and securities, and increases to that extent

its qbility to stand losses consequent on a price decline. It solely

depends, therefore, on the view one takes of the existing economic

conditions in Japan whether and how far such a tax law favor isneeded besides the regular methods of valuation. A price fluctuation
reserve system of this nature should be abolished when enterprises inTHE PRICE FLUCTUATION RESERVE SYSTEM IN JAPAN 203
general have recovered their financial strength.

A price fluctuation reserve is generally held to be of the natureof earned surplus. But this view should be subjected to examination.
It is justifiable on the sole presupposition that business income should

properly be measured by traditional methods such as Fifo and others.

But the business income so determined includes an `inventory profit
or loss,' which is in reality an apparent or fictitious profit or loss.

For simplicity's sake, let us assume that the quantity of inventories

at the end of the period is equal to that of inventories at its beginning. If, for example, the Fifo method is applied in periods of rising
prices, the valuation of the same quantity of inventories will gradually
increase as a result of inventories being successively replaced by thoseof higher costs, and the ending inventories will be valued higher thanthe beginning by the following amount (inspite of both the quantities

being
the same): ' ' 'begnning quantity Å~ (cost at the end of the period-cost at its beginning)This amount is identified with what is called `inventory profit',
To value the ending inventories higher than the beginning inventoriesof the same quantity really means to raise the value of the same
quantity of inventories by revaluation, and, on the other hand, tooverstate the profit for the period by understating the cost of sales bythat amount. The `net income for the period' determined by ordinary accounting methods like Fifo or average cost methods inevitably
includes an `inventory profit' in this sense.

Therefore, to set up a price fluctuation reserve by charging to
the revenue the amount equivalent to the inventory profit signifies
the correction of the understated cost of sales, and the price fluctua-tion reserve account may be considered as an adjustment to straightdn
the distorted profit or loss calculation caused by the revaluation of

the ending inventories. Through this procedure it becomes possible
to determine a profit or loss in the truest sense by excluding inventory

profit from the stated profit or taxable income determined by ordinary accounting methods. In the writer's opinion, a price fluctuation

204 SUSUMU WATANABE
reserve with this meaning is an adjustment, not earned surplus. And
such a price fluctuation reserve is the only reserve justifiable from thepoint of view of accounting theory.
A price fluctuation reserve based on such a theoretical foundation
can be set up in period of rising prices and automatically be reduced
according to price declines. The amount to be credited to the reservecan be accurately calculated in conformity to a definite formula. It
is because its object is not to allow an enterprise to have a generalreserve with regard to its inventories, but to properly determine its

business profit. A price fluctuation reserve system founded on thistheory will be free from all criticisms levelled at its predecessors.

Additional Remarks :The price fluctuation reserve system above discussed has recently
been revised, the new provisions taking effect as from April 1, 1957.
Main points of the reform are as follows :(1) 90e/o in the preceding pages should read 92%,and 95e/o should
read 960/e. This means a reduction of the extent of price fluctuation
reserve allowance by 200/o.

(2) Where the amount as determined by the method above
described as the maximum limit of the' reserve is greater than theamount of income as determined without including as a deduction
the amount to be debited to the reserve, the maximum liMit should
be reduced to the amount of income so calculated. In other words,
a deduction is allowed to the extent of the amount of income before
debiting any amount to the reserve.

LOCATIONAL PROBLEM IN THE NEW
MAJOR BRANCHES OF JAPANESEINDUSTRIES FROM 1954 TO 1956

Minoru BEIKA(1)
Our present prosperity is said to be caused by the abundance ofindustrial investment as well as the prosperity of expert trade. Apartfrom the latter, the former, the recept vigorous additional investmentin the industries seems to have been mostly due to the so-called technicalinnovation which has remarkably progressed over the world. The
representative progress is found in the adoption of automation. Many

industrial firms in Japan also, have invested additional capital inmachines, equipments and plants following modern technology. 'Such increasing investments for the physical equipments are actually to be found in the renewal of the old-type machines in the plantson the one hand, and in the establishments of the new plants on theother. The latter are necessarily related to the problems of the plant

location. Moreover, as the result of these new establishments, theindustrial regional structure in our country has changed to some degree.
In this article, the writer intends to enquire into the regional develop-205

206 MINORU BEIKA
P,e",,t,i2.X",'.in.d,",S,1/iie,Si,O,r,t,h,el,"g.t,l..h.re.e,g,e.a,',S•.frOmi954toi956,and

But as the writer could not collect the detailed data of all the new
establishments of our industrial plants, he was compe11ed to restrict his
research to the principal new 'plants which have been reported in somemajor economic papers. Even these materials could give the characteristic outline of our late regional industrial development. .

(2)
In our country, most of the industrial activities have concentrated

in a few central districts, Keihin (Tokyo and Yokohama), Hanshin(Osaka and Kobe), and Chukyo (Nagoya), where especially many
classes of industries have accumulated. These three districts haveoccupied 43% of all our industrial workers in 1954, and 589o of themetallurgical and engineering workers, 389/o of the textile industrial

workers, 270/o of the food and drink industrial workers, and 379/o ofthe other workers. But recently a considerable number of the newplants have been developed in the several local regions besides the'above-stated industrial districts.

The new plants found in the last three years are about 81, 29
plants (35%) out of these are located in the three central industrial
districts and 52 plants (65%) in the other local regions. This is theevidence that the industrialization of the local regions has progressedto some degree. These industries chiefly consist of the chemical industry, chemical and synthetic fibre industry, cement and its products

industry, pulp industry, and some other industries. It is noteworthy
that most ofthese industries belong to the apparatus industry, Needlessto say, each of them has respectively some particular Iocational characteristics, which will be described later in more detail.

It is a noteworthy fact that 75e/o of the new plants are situatedon the central region (including Nagoya), the Kinki region (including

Shikoku and Kyushu), while the eastern and northern (including
Tokyo and Yokohama) have less number of the new plants. Never-LOCATIONAL PROBLEM IN JAPAN FROM 1954 TO 1956 207''
theless, the last region, Tohoku and Hokkaido, is the one important
object of the unified regional development policies in Japan. So, it
seems to be a dithcult problem to proceed with the policy in regard
to the regional industrialization at least. The policy maker should
reinvestigate the conditions which make it possible to reallize theindustrialization poIicy, relating to both the regional location factors
and the business features of the concerned industrial plants.

(3)
Thirty-two plants of the represcntative firms were closed in thelast three years, which correspond to about 400/o of the new establish-

ments. But they chiefly belong to the apparatus industries as above
stated, which consist of relatively large-sized plants. Moreover, mostof them have developed as modern factories of the new industries.
On the contrary, 700/o of the closed plants, belong to the textile
industries using traditional materials; especially 800/o of thdm belong

to the silk industry. These plants of the silk industry were closed
because of the lack of their materials and markets. They are small
or medium sized and were located scatteredly on various rural partsof our country. These silk industry locations are very different fromthe newly industrialized regions.

The other closed plants are about 10, which belong to the metallurgical, engineering, chemical and paper industries. But these are
exceptional in each industry, and closed by their own respective economic or administrative causes,. Therefore, the weight of the closed plants are very small incomparison to the new establishments of the developing industries.

But the regional structure of our industries has changed to somedegree; the coastal districts in our central and western regions havebeen industrialized gradually, but several inner districts in the wholecountry were deprived some of their industrial activities by theseclosed plants. ,208 MINORU BEIKA(4)'

In our textile industries, about 15 new representative plants havebeen constructed or are under construction for three years. Most ofthem do not belong to the industry using the traditional fibre materi-als, but to the chemical or new synthetic fibre industry. Hitherto,
the productive capacity of the latter new textile industry had beenenlarged in the existing plants, because the industry has the charac-

teristics of the apparatus industry, of which our most firms haverelatively fewer number of plants than our cotton spinning multi-plantfirms, and some of their plants have been under their tests in a partof their existing plants. Recently, the firms of these new textile

industry have remarkably developed, and necessarily have been required to have other plants of more productive capacity or have the newproper plants. Accordingly, these new plants have been constructed
mostly in' suitable locations as the coastal districts in our westernregion; Chugoku, Shikoku, and Kyushu.
On the other hand, the some cotton spinning multi-plant firms,
which are representative in our country, have constructed newly a few
cotton and staple-fibre spinning plants in several districts where they

have found their alternative markets. But since these cases are only
a few, the regional structure of our cotton textile industry has notbeen changed so much. Half of our cotton industry are located on
Chukyo (suburbs of Nagoya) region and Kinki (suburbs of Osaka)
region, and the other half are scattered on the other rural districts,

chiefly Chugoku and Shikoku.
Therefore, although l5 plants have been newly established and22 plants closed from the view point of the number of plants only,
the former are larger-sized by the newly developed technology, andthe latter are medium or smaller-sized ones using traditional materials,

and necessarily we could find any of the changing regional structure
in our industries by their respective Iocational characteristics.

LOCATIONAL PROBLEM IN JAPAN FROM 1954 TO I956 209(5)Cement and related products industries have also developed considerably and about 20 plants have been constructed in these periods.
These plants consist of three types of business feature, which are themulti-plant firms producing chiefly the portland cement, the iron andsteel or chemical firms producing the cement as their by-products, andand the cement products (concrete pole etc,) firms.
The first type, the 5 original cement firms, of which the representa-

tives have many plants in several districts, chiefly material-oriented,
partly market-oriented, have constructed 5 plants respectively, for the
purpose of making better their locational situation about their markets
or material districts on enlarging their productive capacity. Therefore,

these 5 new plants are located on different local districts. Moreover,two competitive representatives of those firms have established several
service-stations about storing and packing in some local market centers,

where they have not yet any plant. •The second type, the iron and steel firm, the chemical firms andthe other industrial firm, have constructed 4 cement plants as theirsubsidiary businesses, for the purpose of utilizing their by-products.

The representative iron and steel firm has constructed a new cement
plant in the firm's ground of Hokkaido plant for covering the insufficient supply in Hokkaido and utilizing the coke waste broken out
from the furnaces. The representative chemical firms also have established their cement plants at Kyushu and Hokuriku in the same way,

Each of them has been controled formaly by each independent firm,
but actually by its parent firm above stated.
The third type, the cement products (concrete pole etc.) firms haveconstructed 8 new plants in our central industrial districts ; Tokyo, Osaka,

and Nagoya. Most of them belong to the two representative andcompeting cement firms, which have respectively tried to integrate
vertically and to secure their markets more firmly.

The new plants of the first and second type have been found210 MINORU BEIKA
chiefly in our several local districts, and the ones of the third type in

our three central districts. Moreover, it is remarkable that each representative cement firm has iritegrated the cement products fields verti-

caly, and the other some industrial fitms have gradually invaded into

the cement industry for their many sides development policy.

(6)
The features of development in the chemical industry are oftep
above all found not only in the type of adding the new plants to theoriginal plants, but also in the type of enlarging the existing plants,

since the industry has tended to develop to many-sides associatedly by
the tecihnological characteristics. Accordingly, it is particularly neces-sary to see the both sides in the regional development of such industry.

About 20 and a little over new plants have been newly establishedin our chemical industry, for these periods. These plants belong chiefly
to the newly developing classes in the industry ; the petroleum chemical

products industry, the natural gas chemical industry, the new salt
making industry are the representatives.

The former two industries have recently appeared before the footlight and become one of the topics in our business world. Therefore,
most of these new plants are situated in several local districts, especially

Chubu and Kanto regions, utilizing the material resources there, inother words, material oriented. But we could not always expect somedevelopment of such new industries only by the existence of thematerials there. There have not yet been any such new plants in
Hokkaido and Tohoku, where there are found considerable coalfields
and natural gas resources, Not to say, such new development requires
more locational factors together with the material resources.

The new salt making plants have been constructed on several
districts from the north (Hokkaido) to the south (Kyushu) in Qur
country, utilizing the lower grade coal or the surplus electric power,by the leading coal mining firms and some Iocal public bodies.
The other new plants belong to the chemical-fertilizer, plastics,

LoeATIONAL PROBLEM IN JAPAN FROM 1954 TO 1956 211'

caustic soda, carbide, sulphuric acid, liquid oxygen, agricultural medi-cine and the other industries. One staple-fibre firm has planned toestablish the cellophane plant near by the existing plant, and moreoveradjoining it, the chemical fertilizer firm has prepared to establish thecaustic soda plant, and then both firms have planned to integrate eachother for utilizing these new and old plants more eMciently. Such caseis found in Shikoku region. One chemical fertilizer firm has constructed the sulphuric acid plant in the coastal district near by theexisting fertilizer plant, The othen two chemical fertilizer firms decided to set up the synthetic resin plant by their joint investment nearby the existing plant of the one firm. One oxygen multi-plant firm,in which the market is one of the impertant 1ocation factors, hasconstructed one plant for liquid oxygen in Kyushu, one of our heavy
industrial districts. Therefore, most of the new plants above stated,are 1ocated on several local districts having any one of their proper
locational advantages.

On the other hand, the remarkable development of the existing
plants has been found chiefly in the central industrial districts, whichmostly belong to the chemical fertilizer and synthetic resin industries.

'These enlarging development of the existing plants seems to ,aim atadvancing to the new fields rather than increasing the productive
capacity of their old products. It is reasonable to advance following
such expanding processes in the chemica1 industry.

In short, the industrial development in the chemical industry has
been advanced by the technological relativity and synthesis. And the
new establishments which are found chiefly in the new fields, are oneof the principal factors for industrialization in our local districts.

(7)
The metallurgical and engineering industries in Japan had remarkably developed during the War time, and encountered the severe
depression by the war damage and the compulsory limitation of production after the war, Naturally a considerable number of the broken

212 MINORU BEIKA
and idle plants were found in the industries. Therefore, the recent
recovery and development of these industries could have been realized

mostly in their existing plants by the repair and renewals of theirmachines and equipments. Moreover, these recent development has
been found chiefly in our representative firms of iron and steel industry,Thus the establishment of the new plants for these three years,
have been relatively few in these industries in spite of their remarkabledevelopment at these periods. Accordingly, we can find less characteristic changes in the regional structure of these industries, althoughseveral new steel plants and engineering plants have appeared in some
districts.

(8)
Our pulp and paper industries have encountered the misfortunethat we have been forced to be deprived of half or over of thematerial resources by our defeat in the 2nd War. For the last ten
years, these industries have endeavoured to recover the balance between

the demand and supply. As one of the results of such efforts, a considerable number of plants have been newly constructed in the westernpart of Japan by the wood resources in the innerpart of our country.
For these three years, the same tendency has continued. 7 out of the

8 new plants have been found in these regions, Chugoku, Shikoku andKyushu. These p}ants chiefly have been controled by the middle classfirms in these industries, while the representatives have already reconstructed or enlarged their productive capacity before these periods,(9)
In the food and drink industries, about 9 new p14nts, which be}ong
to the relatively larger firms, have been constructed as follows.

(a) beer breweries 4(b) milk products plants 2(c) other plants 3
Our beer industry has been controlled by only 3 large firms, inLOCATIONAL PROBLEM IN JAPAN FROM 1954 TO 1956 213
which one medium sized firm is about to be added recently. Eachfirm, excluding the last new firm, has already distributed five or six

beer breweries in several market centers in our country. These four

competing firms have decided to construct the new breweries respectively in the districts, where they had not any before,

Our two representative multi-plant milk products firms, also haveestablished the new plants in Tokyo and Osaka, for obtaining theirsuperior positions in the competing markets.

The other three are a fruit juice extract plant, a sugar refining
plant and an edible oil plant, and the former two are situated in Kobe
and the suburb, since they are market-oriented.

(10)
To sum up. We could find the remarkable development of ourchemical industries, including the chemical and synthetic fibre industri-es, for the last three years, from the view point of the establishmentof the new plants. Especially they belong to the newly developingclasses in these industries. These new plants, which are chiefly local

material-oriented, have been helpfu1 enough to develop industriallyseveral local districts outside the central districts.

Some new plants have been established to penetrate into the newmarkets, where their firms have not as yet their own plants. They
belong to the cotton and staple-fibre spinning industries, cement andits products industries, and food and drink industries. Therefore, theirlocations have been found chiefiy in the central market districts andpartly in several local market districts.

Some of the other plants have been constructed in several local
districts for aiming at tapping their material resources. These belong

to the pulp industry and cement industry.

Thus, the regional structure in our industries has been changed
gradually to some degree, by our industrial development which consistof the enlargement of the existing industries and the new constructionof the new industries. At the same time, the writer must indicate the214 MINORU BEIKA
one impertant point in the locational problems of the industry, at theend of this article. Namely, that is the relation between the plant
location and its business feature. The industrial firm is to decide thelocation of its plant not only by its locational factors, but also by theconsideration of the relation with the other many factors which affectthe business feature and business policy. The locational problems inrecent industrial development above stated, seem to show us several
facts relating to these points on other occasions more in detail.

BUSINESS PROBLEMS IN AN
INTERNATIONAL SITUATION

Tadakatsu INOUEI
In many of their features, the business problems which arise- in
an international situation necessarily differ from those in an internalsituation. The business activities played in an inte.rnational setting

frequently face the peculiar problems which the interstate businessactivities do in no way experience. Therefore, it is necessary for abusiness man whose activities will be international to take seriously•

into account the nature of the business problems in an internationalsituation. If he is lacking in this understanding, he will hever succeed

in his project, In fact, we can easily obtain such cases from a longand broad business experience. One of the chief examples is theunsuccessful venture of the International Mercantile Marine Company

commonly known as the Morgan Shipping Combine.' Tracing thehistory of one of Morgan's great failures, this article aims to indicate

the complexity of the business problems in an international situation.

II
The I. M. M. was incorporated in October, 1902, as the result ofa plan which was formulated by John Pierpont Morgan to consolidate

215

216 TADAKATSU INOUE'

the varions steamship lines running between the United States andEurope. The basic unit in the combination was the International
Navigation Co. popularly known as the American Line. This American corporation had one Belgian subsidiary company, the Red Star

Line. At the same time, the I. M. M, acquired complete ownershipin the Atlantic Transport Line, an American-owned company, and
the White Star and Dominion lines, and part ownership in another
British company, the Leyland Line. Thus the I. M. M. controlled
about forty per cent of all the Atlantic lines. The authorized capitalstock of the I. M. M. was $60,OOO,OOO 60/o cumulative preferred and$60,OOO,OOO common stock. The authorized bonds consisted of $75,OOO,OOO collateral trust 4Yz% golcl bonds and $2,OOO,OOO 5e/6 gold

bonds inherited from the International Navigation Co.

Shortly after the I. M. M. was organized, a great shrinkage invalues of the securities took place. On December 31, 1903, thepreferred stock was quoted at $18 and the common stock at $5. It
seems to us that the stock quotations indicated a general convictionthat the success of the shipping combine was problematical.
The average of net earnings of the I. M. M. for its first decade

as a going concern was about $5,OOO,OOO this average does notallow any deduction of steamship properties. To show whether the
average was satisfactory to the combination, we may compare thecorresponding figures of the subsidiary companies for four years prior

to the consolidation. They were as follows:
White Star Line•-•-•-••••••••••-•-•-•••-••--•••••••••••••$2,063,675

American Line, International Navigation Co.••...••..••. 1,l16,OOO

Leyland Line•••-••-••••--••••-•-•-•--•-••••--••••-•• 1,565,OOO
Dominion Steamship Company •••••••••••••••••••••••••••••• 628,ooO

Atlantic Transport Company•-•-•-•'••••••-•-•-}••••••• 735,OOO-

Total net earnings•-••••--••••-•-•"•-••••••-•$6,107,675

It thus appears that the average of the net earnings of the I. M.

M. was rather lower than the aggregate average of the net earningsof the individual lines. This fact seems to indate that the shipping

combine had hardly enjoyed the advantage common to most combi-

BUSINESS PROBLEMS IN AN INTERNATIONAL SITUATION 217
natlons.

It was more unfortunate, however, that the I. M. M, announced,
on September, 1914, its intention to defer payment of interest due in
October l on its collateral trust 4he/o gold bonds. The bond-indentures provided for a six months' lapse in time after any deferredinterest payment before default could be confirmed legally. But
default become legal on April 1, 1915, when the company had not
met the interest payment on its bonds. The I. M. M. then had tobe taken over by a receiver. Now, it would not be going too far to
say that the shipping combine was a failure.

III
One of the chief causes leading to receivership of the I. M. M.
in 1915 was its watered or inflated capitalization. Just how excessive

its capitalization was is apparent at a glance. The individual lines

which went into and made up the combination had an aggregate
capitalization of about $29,OOO,OOO. In the new company, it outstanding securities in the fall of 1915 was $175,591,OOO, of which $73,992,

545 was bonds, and $51,726,300 60/o cumulative preferred stock. This

total imposed upon the I. M. M. an unusually heavy burden of fixedcharges. It is hardly to be wondered at that the company promotedby the great Americ'an financier could not meet its obligations in 1915.

For the explanation of the chief reasons of this over-capitaliza-

tion, we turn back again to the formati6n of the I.M.M. On
February, 1902, an agreement was entered into by Morgan withrepresentatives of the various steamship companies, English andAmerican. This agreement provided capitalization of the new company, properties to be acquired, valuations placed on the sev'eral
properties, method of payment, and sale to'a syndicate of the securities. By the agreement, the purchase .price of most of the companies

was based on the profits of 1900. For example, in the venders'
agreement between Morgan and the White Star Line, it was statedthat "the valuation of the said shares hereunder and under saidprincipal contract shall, provided, be a sum equal to ten times the net

TADAKATSU INOUE

218

profits of the company of the year 1900, subject to the following.

exceptions••••••." The year 1900, however, was one of abnormal
profits, The "boom figures" as a basis of purchase calculations
naturally gave the capitalization of the proposed steamship corporation a highly inflated aspect.

Of course, most things have their prices. But, in organizing a

big company, there are usually many conflicting interests to bebrought into harmony. And each seller na'turally holds out for all
he thinks it possible to get. It is, therefore, a matter of bargaining

and the final price is likely to be high. In the same way, Morgan
had to pay too much for his lines.
It seems, however, that the amount of purchase prices was not aserious matter to Morgan, Tho financier, encouraged by the immediate success of the United States Steel Corporation, expected the

profits of the combination to carry high fixed charges. In thisconnection it is related that, when Morgan was asked what had been
the price paid for one of his recent puchases, he replied that hedid not know. However, the monopoly advantage which Morgan
supposed was never gained.

IV
Over-capitalization, from which the I. M. M. suffered, was not
peculiar to the combination. In forming combinations of all kinds,
so called "watered" stock is usually issued, For instance, such was

the case in the formation of the United States Steel Corporationin 1901. Herbert Knox Smith, Commissioner of Corporation, estimatedthat substantially half of the corporation's total issue of securities

am6unting to $1,400,OOO,OOO in round figures was not based on any
tangible property assets. Nevertheless, the formation of the SteelCbrporation was a great success. By the outbreak of the World War
I, the watered capital of the corporation had been squeezed out by
devoting profits to additions and improvement of its plants. Further,.it was said that the corporation's properties in October, 191g, wereactually worth about $2,200,OOO,OOO, or well over $700,OOO,ooO more

BUSINESS PROBLEMS IN AN INTERNATIONAL SITUATION 219
than its entire funded and stock capital. Like the I. M. M,, the SteelCorporation was heavily over-capitalized from the start. Unlike I. M.
M., the Steel Corporation has attained unusual success. What factors
led the Steel Corporation to a success and the I. M. M. to a failure?
The general consensus of opiniori is that while the Steel Corporation

enjoyed a monopoly advantage, the I. M. M. did not. The entire
trouble with the shipping combination undoubtedly originated in its
total lack of monopoly elements.

v
The original intention of Morgan, presumably or perhaps, was toabsorb all lines, if possible, including the Cunard Line, a Iarge British

concern in the North atlantic shipping business. And if the wholelots of the Iines could be obtained, the Cunard included, the passenger

fares could be so advanced as to produce greatly improved profits.
If this project was in fact more or less at the back of his mind, it

must have been considerably upset by the .refusal of the Cunard
Company to come into the combination. Why did Morgan fail toacquire this British company?
In a important respect, the shipping combination differed fromthe United States Steel Corporation. All of the corporations whichcame into the Steel Corporation were American-chartered institutions ;all were operated in the United States and were subject to' State andFederal laws. But the shipping combination had to be created throughthe assimilation of corperations flying the British flag and the flagsof some of the Continental nations, as well as steamship companies
chartered in the United States. As its title indicates the International Mercantile Marine Co. was an international corporation, andthe first one of its kined ever propesed. The formation of the ship-ping combination, thus, necessarily involved complicated businessproblems which would reflect international relations.

As has been stated, Morgan acquired several of British great
shipping companies, including the famous White Star Line, with its
magnificent fleet, containing some of the finest ocean liners. This

220 TADAKATSU INOUE
purchase, however, produced a deep impression upon the British
public who was naturally jealous of everything that would affect theposit-ion and interest of the British mercantile marine. From thenaval point of view, it also caused grave uneasiness. It was naturalthat the British public should look to the Government and should
expect the Government to take some action in the matter.
As an outcome, the Government entered into an agreement with
the Cunard Company, which was still left out of the Morgan combination. The Cunard Company pledged themselves to remain in every
respect a British company, managed by British directors, with theshares not to be transferred to anybody but British subjects, Theagreement also placed the entire Cunard fleet at the disposal of theAdmiralty, The Government agreed to give Cunard Company a
subsidy of $750,OOO annually, and to lend the money for the constraction of two vessels of 24 to 25 knots, charging interest at the rate of

25i-O/o per annum. Now, Morgan had to give up his original plan toacquire the Cunard Line, without which he could not possess thedominance necessary to control the entire Atlantic trade.

Shortly after this, the British Government also made an agreement with Morgan. The intention of the Government was to securethat the British companies in the combination should remain British,
not merely nominally, but in reality. The agreement provided that:the. majority of the directors of the British subsidiary companies
should be of British nominality ; the vessels should fly the British flag ;they should be oMcered by British oMcers, and mannecl in reasonableportion by British crews, As has already been stated, Morgan had
already acquired all the shares of the White Star and Dominion lines,

and a majority of the shares of the Leyland line. By the agreement,

however, any amount of ownership would no longer give him safe
'control over the British subsidary companies.

VI
We have outlined the experience of the I. M. M. which fell far
short of success, One of the chief reasons for this failure was theBUSINESS PROBLEMS IN AN INTERNATIONAL SITUATION 221
terrific fixed charges resulting from heavy capitalization. Overcapitalization, however, was not peculiar to the present case. It was anusual accompaniment of all kinds of combination. Mor'eover, there
were many successful combinations capitalized on a basis similiar tothat of the I. M. M.

The more important reason for the failure of the I. M. M. wasits total lack of a monopoly advantage. If the combination had
possessed the dominance necessary to control the entire Atlantic trade,

it would have produced greatly improved profits fu11y suMcient tocarry high fixed charges, and thus would have not been taken overby the court in 1915,
As has been indicated, the lack of a monopoly advantage in theI. M. M. was apparently caused by the failure of the acquisition of
the Cunard Line. The original intention of Morgan was to absorb
all lines, including the Cunard Line. But, this comprehensive scheme
was considerably upset by the refusal of this British Iine to join the

combination.

The formation of the North Atlantic shipping combination wasthat of an international corporation. Morgan had to buy up foreigncompanies as well as American chartered companies. But the purchaseof a considerable portion of British shipping in the Atlantic greatly

exercised the British public. Much agitation was carried on in England in reference to the effect of the combination on English trade.

As a outcome, the British Government entered into an agreementwith the Cunard Company. This agreement provided that the Cunard
Company should remain in every respect a British company. Thus
Morgan's efforts to acquire the Cunard Line was blocked. It is perti-

nent to ask whether he should have foreseen the national pride andprestige of foreign peoples which frustrated his project.
* On the history of the I. M. M., this paper mainly used the following: N. S. B. Grasand H. M. Larson, Caschook in Ainerican Bust'ness History, 1939; E. D. Meade, The

Capitab2ation of the International Mercantile Marine Company, Political Science

Quarterly, Vol. XIX, No. 1; J. Moody, The Trath about the Trusts, 1904; E.

222 TADAKATSU INOUE
Murken, Der grossen transatlantischen Lira'enreederes'verbb'nde, Pbols "nd Interessen-

gemei'nschaften bis zum Ausbrnch des VVeltkrieges, ihre Entstehung, Orgam'satton
utid VVirjbsamka't, 1922; P. Overzier, Der Amen'kanisch-Englische Schiffahrtstrust,

1912.

THE RESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTRATION, KOBE UNIVERSITY.
The Institute was founded in 1919
attached to Kobe University (the KoiffiRels" nyn. -sE'lllg g•:l" Eg

be Higher Commercial School at thattime) with an endowment fund of F.

M fIt tE{

Kanematsu &Co., Ltd., the pioneer:fi

firm of Japan-Australia trade, which

provided the school with a buildingt"*"e,ajg ,.}•/t'st•pt.ew.Mldit

S".ii'l.l'ix/r$,-,///j•I•,F,vg,ifv•x-

and a found to carry on researchwork. In 1949, the Institute became

an oMcial organization attached to
Kobe University, maintained by the national
The aim of the Institute is to carry on

treasury.

the scientific and synthetic study ofIndustrial economy in its two teams of researchwork, namely, the Research Teamof International Economy and the Research Team of Business Administration. The
former comprises five sections, each taking

charge of research work on Foreign

Trade, Marine Economy, International Finance,

International Rules and Agreements

on Commerce and Area Study on Latin-America; the latter comprises four sections,each of which undertakes to do research work on BusinessManagement, Accounting,Rationalization of Industry and Labor Problems.
Besides these regular research sections, we
related to the regular research sections tohave horizontal study groups closely

carry on special research work by aCommittee of Specialists. In the field of international' economy, two committees for

special study, the Committee on Asian Economy

and the Committee on Latin Ame-rican Economy, have been organized ; and in

the field of business administration theCommittee on Company Accounting has been formed, The said special research workis carried on by the faculty of the Instituteand by extra-Institute and extraUniversity research workers.

The results of the research work are publishedness Review, the Kobe University Internationalin the Kobe Economic & Busi-

Economic Review and the Kobe

University Business Review (each publishedannually) and in the monthly journal"Kokumin Keizai Zasshi" (Journal of Economics and Business Administration), andsometimes in book form on specific themes.
The Institute has a research staff of 23 members and a secretariate 11
of clerks.

l-'
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THE RESEARCH INSTITuTE FOR II

ECONOMICS & BuSINESSADMTNISTRATION :l

KOBE UNIVERSITY i

Director: Ginjiro sHIBATA l

I

iI

Secretary: Toshio HARA lI GROUP OF BUSINESS i
GROUP OF INTERNATIONALECONOMIC RESEARCH
i ADMINISTRATIONRESEARCH i-tGinjiro SHIBATA

Professor of International i Susumu wATANABE Professor of Accounting I/

i Fukuo KAwATA

Professor of [nternationa] i: I<iyozo M[yATA: Hiroshi SHINJOl

TradeandBEIKA
Marine 1 i'
Economics I Minoru

Trade lProfessor of Plant ,professor of Economics I

Location :Professor of li YaSUtarO HTRAIProfessor of Business iInternational Finance 1'

Administration I

Transportation I Tadakatsu lNouE

Assistant Professor of :l Torasaburo NoMuRA Professor of iilli Taro KAwAKAMI

Business History i

Jiro yAo

Professorof iInternational Finance l NObUko NosE

Assistant Professor i'

TeLichi YAMASAKI

Assistant Professor of i

of Social Accounting i

I

Seiji sAsAKt

Hiroshi SA[ToMasahiro FuJITA

Hikoji KATANO
I

Professor of Private I'

International Law i

Area Study on Latin i'

America I Hideo KLTANIEngineer of Business :Marine Economics i

Machinery i

Area St-dy on Latin l Hisao KAMIMuRA

Assistant in i

Assistant Professor of I

Assistant Professor of i

Arnerica 1
Arnerica
il
Assistant ProfeSSor
Of :• Ryuji TAKEDA

Assistant professor of lArea study on Latin lInternational Trade i
Assistant in Marine i
Hiromasa YAMAMOTO

Economics section I
OMce: The Kanernatsu Memorial Hall,THE KOBE UNIVERSITYROKKO, KOBE, JAPANlmaM32410fi 5 H gemol

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Aecounting lsection l}i