Japan by the Japanese/Chapter 15.4

The business of the Finance Department proceeds very evenly, whatever may be the changes occurring in the Cabinet. The working out of the details and minutiæ of the financial estimates and accounts must necessarily proceed without interruption. The organization of the Finance Department is such that this will always be the case.^[2]

As might be imagined, the Finance Department is the vital heart of the Government, since it is to it that application has always to be made for funds to carry out any schemes or programmes. Of the three bureaus of the Finance Department, the Account Bureau is the most important, as in it all the work of the Department originates and is put into action. The Cash and Debt Bureau and the Tax Bureau are the two wings of the ​Account Bureau. The first has charge of the actual spending of the money, and has attached to it a Cash Office, or, rather, a series of Cash Offices of varying importance and size. The second has two offices attached to it, and has as its duty the gathering in of the taxes and other financial resources it the Government. These two offices are the Collection Office and the Custom House. The work of the Central Cash Office is performed by the Bank of Japan, which attends to the issue of notes and of loans.

The procedure in the Financial Department is as follows with regard to the Budget, which is prepared in the Account Bureau: The various departments of the Government send their estimates to this office, and from them I construct the Budget, and also the methods and means by which the various charges are to be met. This Budget is sent to the Cabinet, and from the Cabinet to the Emperor, after whose sanction it returns to the Cabinet and is presented to the Parliament. The Budget, having passed the Parliament, returns to my office. I authorize the Cash Offices, through the Cash Bureau, to pay to the various departments the respective sums necessary for their work, and at the same time notify the Tax Bureau how the money is to be raised. All through the financial year I am receiving the accounts of the actual revenues and expenditures as contrasted with the estimated. Finally, when the accounts have been received from all the departments, the total revenue and expenditure is made out and submitted to the Cabinet. Hence it goes to the Audit Bureau for examination, and is afterwards returned to the Cabinet. Then it receives the Imperial sanction, and is presented to the Parliament. In the case of extraordinary expenditures, the Cabinet consults the Account Bureau as to how these are to be met, whether by increased taxation or by loans, etc. To take the case of the recent North China expenditure. There was a general desire to rely upon an indemnity from China, and raise a loan to defray the expenses of the expedition. I objected to this because of the uncertainty of the payment of an indemnity, and also because it was an extremely unpropitious time to float a loan. I therefore recommended increased taxation upon articles of luxury, such as saké, beer, and tobacco. These new taxes were only adopted by the Government after much discussion. It was my hope that when the Chinese indemnity should be paid to utilize the sum, which would be so much free money, in doing away with the bad taxes—that is, such taxes as are levied upon the necessities of life, as opposed to those levied upon the luxuries. As it is now, the taxes upon what may be called the luxuries of life are not very high in Japan to what they are elsewhere in the world. The ​financial conditions of the Japanese Government are quite sound, there being always an excess of revenue over expenditure. The question in the Cabinet which has caused so much talk of financial peril simply resolves itself upon inspection into this—the immediate fulfilment or the postponement of the projected Governmental works, such as railway construction, river improvements, etc., and does not in any way demonstrate financial weakness.

I will explain here the exact position of our financial arrangements, as I believe it is not only essential for our own people, but equally important for those who are the holders of Japanese bonds. I might compare the Diet which sits to discuss Japanese financial affairs to a shareholders’ meeting, in which is discussed the financial position of a company. So I think it well to set forth the real situation as to Japanese finance for the benefit of our creditors at home and abroad. To clear away any misunderstandings is my duty. In the Diet of 1902 the land tax and financial and administrative reform questions were undoubtedly the two great subjects upon which the House was unable to agree with the Government. But these differences of opinion did not arise from any troubles in our finances, in which there were no difficulties whatever. The discussions chiefly confined themselves to the economic result of the land tax increase, and to what extent the reforms should be carried out. Foreigners, however, might have thought that the recent dissolution of the Diet pointed to the existence of something grave in our financial system. Briefly, all the Government sought to do was to provide funds for naval expansion. If, therefore, the Government had abandoned the scheme, there would have been no necessity to increase the land tax. The question of reform in administrative expenses can hardly be considered as one imperilling the safety of the national existence. As I have often repeated, such a thing as the struggle of political parties is not a matter of the slightest importance to those concerned in the management of our national finance, whose sole object is nothing but the sound development of it. There need be no difficulty in our finances if they are managed so as to guarantee a little surplus of revenue over expenditure by curtailing the sphere of national undertakings. It must, however, be kept in mind that the question of national development cannot always be viewed from the financial point of view alone. There are various important problems to be taken into consideration for the furtherance of national strength, and according to these our financial programme must be inevitably drawn up. If we regard the matter from the financial point of view only, there is, as a matter of fact, nothing more essential than strict ​economy. Having regard to the present state of politics, naval expansion must be considered as a matter of the utmost urgency; but, from the financial point of view, any scheme tending to increase our burdens should not be encouraged. If, however, it has once been settled that certain expenditure is necessary, we must be prepared to meet the outlay in such a way as to involve the least possible trouble. In the year 1896, when we drew up the present financial programme, in accordance with an entirely different condition of things resulting from the war with China, it was generally acknowledged that the strain on our resources would be an extremely severe one. For, according to the plan then adopted, the annual expenditure, which had been only 80,000,000 yen in the previous year, was to be more than doubled, and in course of time to be increased to the enormous amount of 300,000,000 yen. With a view to giving freer scope and greater activity to our future financial operations, which were to be undertaken under entirely new conditions, we introduced the gold standard, and also adopted the system of a Government tobacco monopoly. Whilst the new programme was in progress under efficient management, the money market unfortunately began to present very depressed conditions, as the result of which many complaints were heard amongst the general public. Consequently, when Marquis Ito formed his Cabinet, with Count Inouye as Minister of Finance, it was decided, in view of this depression of the money market, to modify the financial programme. In order to relieve the money market, Count Inouye purchased Imperial bonds to the amount of 30,000,000 yen, with the money held by the Imperial Treasury as a reserve; and also lent to the Industrial Bank an amount exceeding 3,000,000 yen, from which fund the Bank gave financial assistance to those industrial companies at Osaka and other towns which were in difficulties. Finally, various undertakings started after the war were postponed. The policy of the Financial Minister was at the time criticised as being unprogressive. But as his policy was no more than a slight modification of the original plan, necessitated by the bad economic condition of the country, it could hardly be possible to justify the criticism. The Bill for increasing the land tax—proposed by the same Minister in 1888 as a part of his scheme—was not approved by the Houses, and Parliament was dissolved, followed by the resignation of the Ito Cabinet.

Then Count Okuma’s Ministry came in. The policy of the new Cabinet, which further increased military expenditure, caused severe criticism, principally on account of its inconsistency, the Ministry having previously opposed the very scheme of military expansion. But this could easily be explained by the Government. Count Okuma practically made no ​fresh increase in expenditure, but, as the result of a general rise of prices, the original estimates for such items as the purchase of land, the construction of barracks, and other matters, were simply altered accordingly, thereby causing an increase of about 5,000,000 yen. The Okuma Cabinet collapsed after a brief period of three months, and was followed by the party of Marquis Yamagata. The new Ministry was successful in carrying through the increase of the land tax, by which about 40,000,000 yen was added to the annual revenue. In the meantime the money market began to improve. The Bank had to lower its rate and to increase the maximum limit of note issue uncovered from 85,000,000 to 120,000,000 yen. The so-called backward policy of Count Inouye was gradually replaced by the former progressive principles embodied in the post-bellum financial scheme. Owing to the heavy excess of the imports over the exports, however, the depression of the money market was again acutely felt. Consequently a reorganization in the financial and administrative systems came to be considered as imperative for alleviating the suffering in industrial circles. In 1900, on account of the Boxer outbreak in China, which compelled the despatch of our troops to that country, a sum of 20,000,000 yen had to be raised by increased taxation. On this account the necessity for the reforms referred to was all the more strongly felt. In the Diet of 1901, when the Government had a great controversy relating to financial affairs with the Upper Houses, Marquis Ito declared for the first time that the Government intended to carry out these reforms at all cost, and, at the same time, the idea that private as well as public undertakings must not be conducted on too large a scale began to become more general. Since then the Government started inquiries into matters relating to the question of reforms. The present Katsura Cabinet, which succeeded the Ito Cabinet, made another movement by appointing, with the consent of the two Houses, a special Commission for the purpose of examining into administrative affairs. In view of the decision carried out in connection with the thorough reorganization of our financial system, the Ito Ministry was compelled, as soon as the Diet was closed, to modify the Budget Estimates, which were passed by both Houses. Because, if the original estimates for 1901–1902 were put into operation, there would have been the necessity of raising a sum of 100,000,000 yen, consisting of the amounts to be obtained from the floating of a loan, from a temporary borrowing for the Boxer accounts, and from the issue of Exchequer bonds. The opinion of Mr. Watanabe, then Minister of Finance, was that the original programme would, if carried out, again seriously endanger monetary ​conditions to the detriment of the economic progress of Japan. He therefore proposed to abandon some of the Government undertakings, and, as the first step towards this end, to postpone the floating of the loan referred to. The Government discussed Mr. Watanabe’s policy. Some of the Ministers urged that to stop the loan, which had been sanctioned by a Diet, would be too inconsistent an action on the part of a Government who had originally proposed it in the Budget Estimates. Although it was at last agreed upon to reduce the proposed loan by 9,000,000 yen, the suggested exclusion of any loan from the Budget Estimates for the following years was not decided upon, and this disagreement of opinion amongst the Ministerial members led, as might have been seen, to the immediate downfall of the Ito Cabinet. After this, as I have already stated, the Katsura Cabinet came into power. As regards financial matters, the difficulty was equally felt by the new Ministry. The Government, however, saw that if they really intended to carry out the reforms, solid and far-reaching principles by which such reforms should be guided must, in the first place, be laid down. Considering that the essential object of public finance is nothing but the economic prosperity of the country, and that if the general economic condition is prosperous, the public finance will be equally so, the Government decided to pay special attention to the improvement of the money market. At this time there was the sum of about 50,000,000 yen of the loan already arranged to be raised. The Government resolved not to float any further amount except the sum mentioned. In order to accomplish the compilation of the Budget Estimates for the year 1901–1902 on principles of strict economy, 9,000,000 yen were deducted from the arranged loan, and 30,000,000 yen were saved from the abandonment or curtailment of the public undertakings, amounting in the aggregate to 39,000,000 yen. When the present Ministry was formed a meeting of the Prefectural Governors was summoned, and the importance of provincial finance in relation to the national finance was explained, and they were advised to refrain from increasing local expenditure through indulging in extravagant works, and particularly to put a stop to the custom of raising local loans. Next, the Government paid attention to the evils resulting from the establishment of small banks, which were becoming too numerous. With small capital and less experience in banking business these banks only encouraged the fixing of capitals in industrial enterprises to an extent which could never be justified, considering the actual state of things, and the money thus disbursed mostly did not return to the banks for profitable employment. The results of this were the ​expansion in currency circulation, the abnormal fixing of capitals, and, worst of all, the failure of these petty banks, which brought about frequent disturbances in the money market. In the belief that, while discouraging the fresh establishment of these banks, if an effort was taken towards rearranging the business of the banks already existing, there would be ample room for improving the economic conditions of the country, the Government considered measures should be taken in regard to this matter. As, however, it was not desirable, from the legal point of view, to entirely suppress the creation of banks, it was proposed to impose on them a restriction by fixing a minimum amount of their capital, and the establishment of banks whose capital was under 500,000 yen was forbidden. This measure was so successful that, while petty banks of suspicious character immediately disappeared, the reorganization of those whose business had been in disorder was effected, and the floating of local loans was stopped by degrees. These regulations relating to the banks, combined with the postponement of public loans, began to tell favourably on our money market. The principal feature of the Budget for the year 1902–1903 was strict economy, which was manifested in the curtailment of any expenditure which was not absolutely necessary. All the funds available were employed for the purpose of redeeming the public debt. Some efforts have also been made for the encouragement of thrift among the people. In connection with the matter the Prefectural Governors were instructed to use every possible means within their powers for carrying into effect this idea. The result obtained so far seems very promising, as may be seen from the steady increase in the public deposits of the post-office savings-banks. The results of the measures thus taken by the Government for the furtherance of the economic prosperity soon began to manifest themselves. For since then prices and wages have been declining. The adverse condition of our foreign trade has been remedied. The rate of the Bank of Japan has come down, and, excepting a trifling amount issued towards the end of last year, we have not seen any important over-issue of notes, which had hitherto been rather an ordinary feature. As to the condition of the money market, it may be mentioned that the money deposited without interest at the Bank of Japan by other banks reached the considerable sum of 20,000,000 yen. This is an unusual state of things never seen before in the history of the Bank, which, on the contrary, used to lend to these banks. Again, the trade returns for 1902 show at a glance an excess of the imports over the exports amounting to 13,000,000 yen. But it has been ascertained that, if the method of calculation with regard to imports is applied to the case of exports, and if ​various expenses are included in the values of exports, this adverse condition would be totally reversed. In 1902 it was found that the value of the exports was really in excess of the imports to the extent of about 15,000,000 to 16,000,000 yen. While these symptoms of economic prosperity might, indeed, be a matter of congratulation for our financiers, it is very wonderful to see how rapidly the economic conditions of the country have been developed.

Now let us proceed to the discussion of the question of financial and administrative reorganization which largely bulked in the session of Parliament in 1902–1903. To deal with this most complicated problem the Government ordered, in 1902, a Special Commission, of which I am a member, and to which allusion has already been made. The Commission was subdivided into three different sections, namely, finance, administrative, and official organization, and I have been entrusted with the control of the financial section. As I have been, therefore, personally concerned in this matter, I may say that I can dwell in full detail on the result of the inquiries which have been undertaken since then in relation to the subject of financial reform. Seeing that so far our financial system had been partially reorganized and placed in somewhat safer conditions than formerly, our thoughts naturally turned to the question of what measures should be taken in the future. We felt the necessity of enlarging the scope of our inquiries, so that we might gain an insight into everything happening in foreign countries as well as at home which may be utilized for our own purposes. The first and most important matter which engaged our attention was the growth of our relations with the Asiatic continent, which was taken into full consideration when the post-bellum financial scheme was first drawn up. With the steady development of the national strength our operations, political and commercial, much increased in activity in these countries. Under the circumstances that the future augmentation of national expenditure was unavoidable in view of our ever-increasing influence in that continent, inquiries were made to ascertain what sources of revenue were available to meet future requirements of expenditure. It was found that the land tax was not a very promising source of revenue, as it was not practicable to increase it beyond a certain point, and, besides, any attempt to increase it has always been the cause of political disturbances. We found, however, that the best sources of revenue were liquor (saké) and tobacco, which, if properly managed, would make a considerable addition to our revenue. Customs duties may be thought by some to be an equally promising source of filling the public coffers. But we must be careful not to conclude that after the lapse of twelve ​years the Customs duties can be raised without any disadvantage to ourselves. It is not so easy a matter to raise tariffs, because in dealing with other nations the principle of reciprocity is essential, and we cannot raise our duties freely lest we should incur retaliation under disadvantageous circumstances. Besides the liquor and tobacco taxes there is another good source of revenue in the sugar excise.

Although we have not had enough time yet to see the results of this tax, still, it may be safely said, if we do not wish to encourage the development of our sugar industries, there is room for increasing the tax; on the contrary, if we intend to do so, it is not advisable to increase it. As the Government adopted the latter view, it was decided to leave the tax at its present rate.

In addition to the sugar excise, an excise duty on silk piece-goods has been discussed as a possible source of revenue. But on making inquiries, however, it has been found that all the methods contemplated as to how the tax should be levied are impracticable under the present conditions of the industry.

Amongst the future sources of revenue it may be mentioned that forestry is one having a good prospect of development. Much public discussion having been started on the question of forest exploitation, the Government established a committee, of which I am a member, to superintend the administration of forests, and the work of improvement is now in progress.

Now let us turn to the examination of the two best sources of revenue—namely, liquor and tobacco—which will always afford interesting items of economic study to any Ministry that may come into power in the future. Hitherto the subject of saké brewing has been studied by the Government from a revenue point of view alone. Seeing, however, that an enormous quantity of it, amounting to 4,000,000 koku (a koku is equal to 39.7 English gallons), has been annually brewed, the Government also felt the necessity of treating the matter as one of the largest national industries capable of further development. Saké resembles in many points beer, which is an important article for export in several foreign countries. The only significant difference between the two is in the material used, which is rice in one and malt in the other. In England there are about 200 breweries which turn out more liquor than 15,000 breweries in our country do in the form of saké. This fact shows very clearly that there must be some defects in our brewing industry, which is no doubt very primitive. If, therefore, our system is thoroughly improved by scientific methods, we are of opinion that there must be a good prospect of its being produced with considerably smaller cost than at present, and that at the same time it will be practicable to increase the ​tax on the industry. As to the tobacco tax, the matter still remains a question to be solved in several countries. In Europe the tobacco industry is mostly monopolized by the Governments. In England and America it is a private enterprise. But if the industry entirely falls into the powerful hands of a company or of a trust, it will, in fact, become a monopoly. The time will soon come to decide the question whether the industry should be made a Government monopoly or should be managed by a trust. There will be, however, only two courses open for adoption—namely, either that the whole industry should become a Government monopoly, as it is in France, Austro-Hungary, and Italy, or that it should be controlled by means of a heavy tariff, as practised in England. At any rate, as tobacco is an article of great home consumption, and, besides, as the industry can be very easily controlled in Japan, it will doubtless become a highly promising source of revenue in the future, although there will arise various complicated problems to be dealt with in connection with the operation of monopoly systems, in case the entire industry should be made a Government enterprise. After all, it is clear that it will be impossible to find better sources of revenue which admit of further development than the aforesaid taxes on saké, tobacco, and sugar, and the Customs duties, of which the first two are the most promising.

When we next turn to the item of expenditure, it should be taken into consideration that there are a great many undertakings to be accomplished in the future in connection with the development of the national interests and with the progress of civilization. These are, amongst others, the improvement of railways, roads, and harbours; undertakings in China and Corea; the establishment of educational institutions; and the construction of lighthouses, waterworks, drainage works, etc. But by far the greatest and most important question to be dealt with is that of naval expansion—namely, the ‘Third Naval Expansion Scheme.’ That the necessity of increasing our navy would arise must have been no doubt foreseen by some people. We who were associated with the management of the finances, however, did not expect such a necessity would arise at such a juncture, yet it has come, and at the same time has come the difficulty of providing funds for this expansion scheme. Of the various undertakings planned in the post-bellum administration scheme which was formed directly after the war with China, the most important was the naval and army expansion, which we have treated since then as the vital question of our national welfare and development. This scheme of military expansion was so arranged as to be finally completed at the end of ten years—that is, between 1903 and 1904.

​As regards this matter, it may be mentioned that the Powers have adopted the policy of accumulating gold in their chief banks. France has 1,400,000,000 francs in gold kept in the Bank of France, and Russia and Germany have as well an enormous amount of gold hoarded up in their banks. That the chief object of this step is to provide for emergencies is only too clear. In the case of Japan, there are 100,000,000 yen in gold held by the Bank of Japan as a specie reserve; and, besides this, there is a special war reserve amounting at present to 50,000,000 yen. This latter fund is solely devoted to the expenses of possible war. The only Power besides Japan which has a similar reserve is, if I rightly remember, Germany. In the manner above referred to, we had been preparing for the maintenance and mobilization of our army and navy, and the preparation had nearly reached the stage of completion when the necessity for again increasing our naval force became imminent, as already noticed. The total expenditure for this new expansion scheme is estimated at 115,000,000 yen, of which the cost of warships forms, as a matter of fact, by far the largest part. The sum includes, besides the cost of ships, expenses required for the enlargement of naval stations and additional maintenance and reserve funds, which are inevitable from the increase in our fleet. And when this expansion scheme is completed, the sum of 6,000,000 yen will be required annually for the purpose of maintaining the additional ships arranged for under this scheme. The reasons which induced us to spend such a huge sum on naval expansion are well known, and need no explanation from me. Briefly, however, the scheme was simply elaborated in accordance with the development of international politics, and from the fear that the predominance of Japan’s sea power would be in danger in the near future if things were left alone. In order to secure our national progress and safety, it was considered indispensable to extend our influence far into the Asiatic continent. We could not endure to sacrifice our interests already acquired beyond the sea. This was the reason for the third naval expansion scheme. As it was impossible to defray all the expenses of the scheme from the sources of revenue then existing, we had to look for another suitable source. After careful investigation, it was found that there was no better source of revenue available at that time than the land tax, which, if simply kept at the rate then in operation, instead of restoring it to the original lower rate, would be able to fulfil our objects excellently, without causing any unnecessary trouble and without putting any fresh burden on the people. However, it is not advisable to stop other useful undertakings contemplated by the Government simply on account of the naval expansion. Some say that it will be impossible to do both at the same time, and that to accomplish one the other must be abandoned. My ​opinion is that, in the present age of keen commercial competition all over the world, it is unwise to devote all our means to the construction of warships, to the sacrifice of undertakings intended for the economic progress of the country. If there is any means by which we can attain our object of commercial supremacy without increasing our fleets, there will be nothing so fortunate for the nation; but, unfortunately, it seems that, under the present state of affairs prevailing in the Far East, it will be impossible to find such a means. From the political and commercial points of view, we can never allow our sea power to diminish, which, if once lost, will never be regained. Under these circumstances, we cannot but express the fullest sympathy with the naval expansion scheme in question, notwithstanding that we fully understand that the economic progress of the empire may be hindered to a certain extent by indulging in military activities, and by curtailing the sphere of remunerative undertakings throughout the country.