´´ Did Korekiyo Takahashi Save Japan?

Tuesday, November 8, 2016

Did Korekiyo Takahashi Save Japan?

The Showa Depression of 1929-1932 wreaked havoc on the Japanese economy and society. Its main consequences can be described as follows. The macroeconomic downturn was felt primarily in falling prices and not so much in output contraction.

The Japanese society as a whole was hit hard by the Showa depression, especially in rural areas. Rural impoverishment became severe around 1931. During the Showa depression the Japanese public became greatly frustrated with the deflationary policy of the second Wakatsuki Cabinet and, finally, the government was removed and was succeeded by the Inukai Cabinet in December 13, 1931. (Ohno)

Korekiyo Takahashi: The Japanese Keynes

Veteran Korekiyo Takahashi came back as Finance Minister for the fifth time in his career (Shizume). Takahashi is often described as the Japanese Keynes. Long before John Maynard Keynes published it famous book The General Theory of Employment, Interest and Money in 1936 Takahashi adopted Keynesian politics.

Takahashi's policy has drawn attention from economists, historians and policy makers from around the world. Among them Ben Bernanke who has spoken highly of Takahashi's accomplishments by stating that: " Finance Minister Krekiyo Takahashi brilliantly rescued Japan from the Great Depression through reflationary policies in the early 1930's." (Bernanke) Other observers noted that: " It was inevitable that Japan should go off the gold standard (...) What followed probably could not have been anticipated: one of the most successful combinations of fiscal, monetary, and foreign exchange rate policies, in an adverse international environment, that the world has ever seen (...) " (Hamada)

Like Shinzo Abe today did Korekiyo Takahashi follow a three pillar strategy to revive the Japanese economy. Namely, currency depreciation, fiscal stimulus and monetary expansion. Thus, Takahashi is the intellectual father of the fiscal and monetary policy of Shinzo Abe, the so called Abenomics. Actually, Abe's policy is just an imitation of those Takahashi prescribed Japan after the Showa depression and therefore the policy mix would be better labeled "Takahashinomics".

This post is the last on a series of writings on Japan's other "lost decade", concentrating on Takahashi's economic policy response to the Showa depression.  The first post, which is to be found here:Japan's Other "Lost Decade" - The Showa Recession and Financial Crisis , presented Japan's Showa recession of the 1920's. The second one, to be found here:Japan's Other Lost Decade - The Showa Depression , concentrated on Japan's depressionary period of 1929-1931.

Takahashi's Economic Policy

Just months after his return as minister Takahashi moved Japan off the gold standard in December 1931. The yen immediately depreciated significantly. (Shibamoto) In addition, Takahashi prescribed Japan fiscal stimulus and an easy monetary policy over the following few years. But the medicine that Mr.Takahashi was administering the Japanese economy was by no means a fast-selling item with the general public. He faced fierce opposition by the people at the beginning of its term.

An editorial in a Japanese newspaper during that time stated that: " (...) recent policy for inflation is intended to lower the value of money and to increase prices of goods by issuing more currency. The recovery obtained by such a policy is not a real recovery that would come from restoration of business activities (...) Some measures for relief of business might be needed. If it went so far as to step forward an excessive expansion of money, however, this policy would break the foundation of our currency system and ruin all of our businesses (...) We eagerly hope that the government makes every possible effort to contain the inflation within a certain appropriate limit and to prevent various harms that would be generated by inflation (....). " (Hamada)

Only when Takahashi's policy gained traction and bore fruit did the public opinion start to cautiously shift in favor of its policy mix.

" (...) we can notice that more and more countries in the world have been moving toward a policy of reflation in order to resolve depression since the beginning of this year. Incidentally, our nation is running the forefront of this stream. Although it is quite difficult to predict what this stream will bring about in the end, we have clearly realized that its net benefit in this transitional period seems to be substantial. The problem for the next year is how we can minimize the fiscal, economic, and social costs of the ongoing policies, and pave a road toward a true restoration of the balance in government finance and the growth of the private economy (...). " (Hamada)

Takahashi's policy regime has since been labeled as the “Takahashi economic policy.” As mentioned before it was a three-pronged macroeconomic policy with exchange rate, monetary, and fiscal dimensions. But what was the exact composition of his policy mix and what did it entail?  


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