Japan by the Japanese/Chapter 15.5

As the revolution of 1868 was an event necessitated by the force of circumstances, besides being the restoration of a legitimate authority, it was accomplished with comparative case so far as the transfer of the political power was concerned. Japan had then to enter on a new course in her national and international existence. It was necessary for this hitherto secluded nation fundamentally to remodel its institutions in order to equip itself for the intercourse with the Western countries, and for participation in the general progress of the world. The fall of the Shogunate and the revival of the Imperial rule was thus only the beginning of a difficult and complicated task—the making of a new Japan, of which the establishment of the financial system was an important aspect.

It is not surprising that a Government emerging from the throes of a revolution should be financially embarrassed at the outset. But the case of the Imperial Government just after its return to actual power was a peculiar one owing to the nature of the Government it had replaced. How chaotic were the finances of the new Government may be imagined from the fact that in the first year of its existence the revenue accruing from the taxes was little more than one-tenth of the expenditure, and that the deficit had to be met principally by the issue of inconvertible notes. The items of the revenue in 1868 were as follows: Taxes, 3,157,310 yen; issue of notes, 24,037,390 yen; loans and miscellaneous receipts, 4,732,482 ​yen. Nor was this state of things confined to the year immediately following the revolution. One of the most pressing needs of the new Government was, therefore, to secure sufficient resources for the Treasury by establishing a proper system of taxation, and in doing this care had to be taken for making the new system consonant with the policy of facilitating and encouraging the economic progress of the nation.

It is a known characteristic of the feudal system that under it there is not a clear distinction between administrative power and proprietary right, and Japan under the Shogunate was no exception to the rule. The lords not only governed, but held a sort of proprietary right over their respective territories, with the result that the right of the people over their estates was restricted in more than one way, and that the land-tax had much the nature of rent. The land-tax in the form of rice was invariably the principal source of the lords’ revenue, though, in the absence of a fixed and common system of taxation, its rate varied in different fiefs, and other miscellaneous duties were imposed, according to the industrial conditions of the different localities. Hence the burden of the agricultural population was unduly heavy, the rate of the tax on land ranging between 30 and 70 per cent. of its produce. As to the people in general, their position as taxpayers was ill-defined, because they were liable to the arbitrary imposition of extra contributions in money and personal service. In fact, the feudal system under the Shogunate was a military organization in which the welfare of the agricultural, industrial, and commercial people was wantonly sacrificed to maintain the warrior class retained by the lords and clans. While the position of the people as tax-payers was thus ill-defined, the position of the Shogunate as the central Government was financially also a peculiar one. The Shogunate exercised a supreme authority over all the fiefs, but the whole country was not under its direct government. The lords of the fiefs, holding their territories by grant or recognition of the Shogunate, were required in case of need to put their military force at its disposal, and to render it certain other services. Contributions, not very great in amount, were also made by some of the fiefs to the revenue of the Shogunate; but no direct tax was to be imposed by the central Government upon the people of the fiefs. The ordinary revenue of the Shogunate was raised principally from the territories reserved as its own distinct from the fiefs held by the lords. It would seem, therefore, that in this respect the Shogunate was merely the largest of the fiefs. Now it will be easy to understand how the financial difficulties of the newly-restored Imperial Government were aggravated by the peculiar nature of its predecessor. The central authority was transferred to the Imperial ​Government, but the resources of the whole country were not yet under its command. It was not enough for the new Government simply to take the place of the old, but the social and political organization had to be changed radically so as to meet the requirements of the novel situation. Before anything like a sound financial adjustment could be hoped for, it was essential to effect the complete abolition of the feudal system with the fiefs and the undue privileges of the warrior class.

The impulse for unification, conscious in certain sections of the nation and unconscious in others, was indeed one of the most potent causes that brought about the revolution, and by the time it was effected the centralization of authority was almost universally perceived as an indispensable antecedent to the establishment of the new order. Thus, in 18609, the second year of the revolution, all the lords of the fiefs surrendered of their own accord their domains and people to the Imperial Government, and in 1871 a prefectural system was instituted for the administration of the whole country, putting it under the direct control of the central Government.^[1] The feudal privileges of the lords and their retainers were thus abolished, and the country could be henceforth governed by uniform laws, before which all sorts and conditions of people were to stand on the footing of equality. One of the important results of the abolition of the feudal system was that it became possible to make a clear distinction between the administrative power and proprietary right over lands which were united in the lords of the fiefs. In the petition of the lords for permission to surrender their domains and people to the Imperial Government, it is given as a reason of their decision that, ‘since all domains and people belong to the Emperor, we, subjects of His Majesty, must not own them privately.’ In confirming the territorial sovereignty over the domains thus put under its command, the new Government retained the administrative power according to the modern principles of public law, while the proprietary right over land was granted to private persons. Herein was laid the foundation for a stable financial system calculated to secure sufficient revenues to the Government, and to put the tax-paying duty of the people on a well-defined basis. The first step toward giving full effect to the new principle was the reform of the land tax law, which is to be counted among the most important events in the annals of new Japan.

​Of the fundamental principle of the new régime, as announced in the famous five articles of the Imperial Oath which were promulgated on the morrow of the revolution, three features may be noticed as standing out most prominent, viz., active participation in the progress of the world, respect for public opinion in the direction of State affairs, and the social emancipation of the whole populace.^[2]

As the respect for public opinion culminated in the establishment of a representative system, and the active participation in the general progress led to the acquisition by Japan of a perfect international status by the revision of treaties, so the emancipation of the people prepared the way for a remarkable display of economic activities. Of course, no definite time can be pointed to as marking the consummation of the last of these eventualities, as in the case of the other two. If, however, it were to be commemorated in association with a particular event, the land-tax reform would be the most fitting one. The abolition of the fiefs doing away with the privileges of the warrior class was the destructive side of the emancipation; but the land-tax reform, confirming the most important form of private property, was the greatest legislative measure on the constructive side.

The reform of the land tax was proposed in 1879, the fundamental laws relating to it were promulgated in 1873, and its execution was completed in 1881. Though the measure was called a reform, it was in reality nothing less than the genesis of a uniform system necessarily following from the unification of the country. The salient features of the new system may be epitomized as follows:

1. The proprietary right of private persons over land was definitely recognised and confirmed. In Europe there seem to have been cases in which feudal domains were retained as private possessions, either by the Crown or by the Princes, even after the political system of overlordship ceased to exist. Consequently the conversion of the feudal tenure into perfect proprietorship had sometimes to be effected by means of purchase. But the case was different in Japan, all the feudal tenants being at once, and without any transaction of a personal character, recognised as owners of the respective lands actually held by them. For giving up their domains the feudal lords and their retainers were indemnified by the grant of Government loan bonds.

2. Restrictions on the people’s right over their land were taken away. This is but a corollary of the recognition of their perfect ownership. Under the Shogunate the sale and purchase of land was forbidden, though various fictions were not ​unknown. The feudal tenants also had not the absolute liberty of deciding for themselves what products to raise from the land they cultivated. Since each fief aimed at being self-sufficient so far as possible in its supplies, and the production of rice was everywhere considered all important, official interference was exercised sometimes in disregard to the aptitude of the soil. But the full proprietorship confirmed by the land-tax reform included as a matter of course the right of alienating or exploiting the land according to the free choice of the owner, so that the resources of the country might be developed and utilized to the best advantage.

3. As the basis of taxation, an official assessment of the value of land was made throughout the country. This accounts for the fact that rather a long time was required for completing the land-tax reform. Under the Shogunate the produce of land was the basis of taxation, so that the annual crop had to be officially examined from time to time. Not only was the process highly embarrassing to all concerned, but it was not calculated to insure a steady public revenue. The adoption of a new basis of taxation was therefore to be desired from all points of view, only the undertaking was one of tremendous magnitude, as may be imagined from the fact that the cadastration of land has not been finished or even attempted in certain countries of Europe. But the Government of Japan, impetuous for reform and progress, was strongly determined to overcome every obstacle in accomplishing it. In assessing the value of land, the annual amount of its net average produce for five years was first converted into money value according to its average price for the same period of time, and then the money value of the produce being considered as interest, the estimated amount of capital necessary for yielding it was regarded as the value of the land.^[3] By this method the official assessment of the value of land was completed in 1881, and it was revised in 1899 with a view to removing certain unfair inequalities, so that Japan has at present a cadaster of tolerable perfection.

4. The land tax was made payable in money, whereas under the Shogunate it had to be paid in rice and other produce. With this change the quasi-rental character of the land tax entirely disappeared, and its rate was fixed at a percentage of the officially assessed value of land. The burden of the agricultural population was also considerably lessened, for the tax on land was at first fixed at 3 per cent. of the assessed value, and in 1877 reduced to 2½ per cent., at which latter rate it remained till the recent slight increase of taxes as a part of the post-bellum financial programme.

​The significance of the land-tax reform is manifest from the preceding summary. Land being, after all, the basis of our material life, there can be no question about the importance of a radical change in the system of land tenure. Indeed, the land-tax reform ushered in social conditions under which a free play of the economic forces of the country became possible. The general principle that the tax-paying duty of the people should be regulated by proper laws was also implied in and exemplified by the land-tax legislation—a principle afterwards guaranteed by a provision of the Constitution.

As regards the revenue of the Government, it was natural in the early years of the present era that by far the largest portion of it should come from the land tax, because Japan of old was essentially an agricultural country, and other industries on a large scale were yet to be started under the new régime. Even in 1881, the year in which the land-tax reform was completed, the yield of the land tax, which was then the sole direct national tax, amounted to 42,000,000 yen in the totality of tax revenues of 60,000,000 yen. A fundamental source of the national revenue was thus furnished by the land tax. But, to meet the increasing needs of the rapidly progressing country, it was necessary to seek, besides the comparatively stationary land tax, such sources of revenue as would automatically augment in proportion to the growth of national wealth. Hence the new Government, sifting the miscellaneous taxes that had existed under the Shogunate, imposed certain indirect taxes, and in 1887 introduced the income tax as a new direct tax. Among the indirect taxes, the saké tax has always occupied the foremost place, though in former times there was no fixed system of taxing alcoholic drinks. The adoption of the present basis of taxation—the amount of saké brewed in the measure of koku^[4]—dates from 1878. The rate of the saké tax, which had been gradually raised since then, stood at four yen per koku before the carrying out of the post-bellum programme.

After the war of 1894–95 the national expenditure increased by leaps and bounds in consequence of the various schemes purposed to equip the country for facing the new situation in the Far East. The extraordinary expenditures were to be met by the war indemnity and public loans, but to meet the increase of the ordinary expenditures there was no other choice but to increase the taxes, which means has been thrice resroted to—first in 1896, then in 1899, and lastly in 1901. The increase in the annual revenue resulting from the post-bellum augmentations of taxation is estimated at 95,000,000 yen.

Thus, while post-bellum the programme included the ​imposition of new and the increase of old taxes on the one hand, certain taxes have been abolished on the other hand, with a view to simplifying the system of taxation.

Looking back over the development of our system of taxation, we may notice that the basis of national finances has widened proportionately to the growth of economic activities. It is a gratifying fact that, whereas the land tax was at first the only substantial source of revenue, other taxes, particularly indirect ones, have gradually gained in importance, so much so that one of them (tax on alcoholic drinks) has virtually gone ahead of the land tax.

During the first few years of the present era the fiscal administration was in a most imperfect condition, each department of the Government managing its fiscal affairs with a large degree of independence in absence of fixed rules. In 1872, the year following the political unification of the country by the establishment of the prefectural system, a first step was taken towards the management of fiscal affairs by the Minister of Finance, and in 1873 a ‘procedure of receiving and disbursing’ was determined which contained the germ of a budgetary system. The law of financial administration which was enacted in 1881 provided, among other things, for the formation of a Board of Audit directly responsible to the Emperor. By this time it was established in principle that the Government’s fiscal affairs should be managed by the Department of Finance subject to the examination of the Board of Audit. But the carrying out of the principle in practice was attended with great difficulties, owing to the practice of allowing the various departments to keep in their hands the respective funds appropriated to them—a practice which originated in the financial chaos after the Restoration, and which was for long a fruitful source of abuses. The year 1883 is memorable for the final abolition of this practice. The receiving, keeping, and disbursing of public money was entirely and effectively centralized in the Department of Finance in that year, and afterwards was entrusted to the newly established Bank of Japan. A fundamental reform of far-reaching consequences was thus accomplished in the system of financial administration. Another important advance was made in 1886, whence dates the practice of publishing the annual budgets and settled accounts in Imperial ordinances. With the promulgation of the Constitution in 1889 the law of financial administration was revised, and the system of financial administration was given the present shape. The Budget is now prepared by the Minister of Finance, and has to be voted annually by the Diet, to which the settled accounts, as attested by the Board of Audit, are also presented. Before the establishment of the Diet, all reforms in the system ​of financial administration were directed to unification and regulation within the Government, and, when this was fairly accomplished, the Constitution provided for political restraints from the outside over the management of the public purse. It will be seen, therefore, that our present system is, on the whole, in accordance with accredited principles of financial administration that prevail in the Western countries.

The reform of the monetary system forms one of the most important chapters in the financial history of new Japan. One yen in gold, which is the new unit of coinage, was made approximate in value to the old unit in silver so as to avoid an abrupt change in the price of commodities and a disturbance of the relation between creditors and debtors.