Japan by the Japanese/Chapter 16.3

Those who are not guided by reliable information are very apt to be led astray in their survey and judgment of Japan’s financial strength. When so-called bank failures, accompanied with a run on the existing banks, are observed, the cry of a financial crisis seems to be based on facts. But a careful observer, who has some knowledge of this country’s financial conditions, will not be easily deceived by the cry raised by superficial observers and pessimistic alarmists. They know that such occurrences are only temporary and short-lived. They are nothing but a natural result of the sudden expansion of Japan’s industry and commerce consequent upon the economic condition of things brought about after the close of the last war. Financial stringency may be likened to a periodic attack of sickness occurring especially when the body is in a state of rapid and vigorous growth, so that the above phenomena, alarming as they may appear to superficial observers, serve to prove to the serious students of Japan’s finances that they are the signs of future growth instead of being the symptoms of an alarming decay. Just ​as a rapid development and growth of the body often causes a lack of proportionate and corresponding degree of growth in its component parts, thereby causing a state of sickness, so in a country where a sudden expansion of its industry and commerce have taken place periodic vicissitudes in its economic affairs can hardly be avoided. The rapid extension of Japan’s commerce and industry meant an increased importation of ships, rails, machinery, as well as factory accessories, thereby causing the balance of trade to be adverse, while among the business companies started at the time of the industrial expansion not a few were without proper foundation for the work and business projected; and some companies were started as a mere speculation. I give here a table showing the growth in the number of companies in the seven years ending 1899:

Thus, it was inevitable that the time must come when the substantial business concerns and the weak and speculative undertakings should be separated from one another. Until 1900 everything went well. The call for payment of shares was promptly met, and the transactions of business companies with the banks went on without a hitch; but, as stated before, the work of sifting the chaff from the wheat was going on when the result was apparent. As might be expected, not a few honest concerns had to suffer to some extent. The greatest cause of the failure of unreliable business concerns consisted in their over-issue of promissory notes, and some of the smaller banks depending upon the payment of those notes first exhibited signs of suffering. This state of affairs once made known, small depositors very naturally would make a run on those banks, while the larger and more substantial banks could not altogether escape the effects. Fortunately, however, the larger banks were sufficiently provided with funds to meet the pressure, and the pessimistic prophecies were disproved.

It must be clear to anybody that money deposited in a bank does not mean its safe custody in its vaults, and that any sudden and unexpected run on a bank would cause the fall of even a large and substantial concern. It must also be ​apparent that the shareholders of a business company do not always base their amount of subscription on the amount of cash at their command, but on various forms of properties, such as bonds, real estate, merchandise, etc., so that a sudden requisition to convert them into ready money could not fail to cause a financial disturbance of no small magnitude. The cry of danger menacing the finances of this country has been raised by mere alarmists, who, judging by the sudden demand for ready money, accompanied by its natural consequences, jumped to the conclusion that Japan’s financial credit was in danger. The mistake was caused by judging a nation’s wealth on a wrong basis. It need hardly be stated that the existing financial condition of this country is far from that which the alarmists would have the world believe. The so-called financial crisis, instead of being such, is to be looked upon as a phenomenon of progress and advancement.

The alarmists also lament the excess of imports over exports, and conclude that Japan’s wealth will be drained in proportion to the excess of imports. They forget that the foreign trade is not the only criterion of national wealth. Statistics give data for investigations, but they are often so faulty that it is not wise to base arguments solely on those figures. Especially is this the case with those that deal with the data concerning the foreign trade of any country. The economical progress of a country cannot be judged by the figures of its foreign trade alone, but it cannot be denied that they afford a very important evidence for observing the growth of a country in its commercial and industrial advancement. I give here a table of Japan’s foreign trade for the ten years 1891–1900, from which it will be apparent that her commercial transactions are showing a remarkable development:

​The growth of industries and commerce means an expansion of foreign trade, and in course of development an occasional excess observable in imports need not be taken too seriously. As a nation grows its needs will increase, and such goods imported are part of the country’s wealth, while many of them will be productive of further wealth for the nation at large. The expansion of the volume of foreign trade, even if there be temporary excess of imports over exports, must be looked upon as a healthy symptom of national growth.

In this connection it may be added that financial stringency observed in business circles is apart from the question of our national revenues and expenditures. Should the Imperial Government find a deficit in its revenues, there is an ample capacity in our national wealth to raise funds by issuing Government bonds. The financial danger so loudly talked about was nothing but a certain amount of trouble experienced among the commercial and industrial circles, and brought about by the causes already referred to. It had nothing to do with the condition of our State finances, which are on the soundest basis possible, as will be shown later. Here I would call the reader’s attention to the fact that the amount of our national debt is so limited that its per capita rate ranks lower than that of any other country. Japan, with its 45,000,000 population and almost limitless natural resources yet undeveloped, has indeed a bright future in every respect.

The disturbance in the condition of our State finances in 1901 was mainly brought about by the expansion of Governmental undertakings, and a deficit of about 21,000,000 yen was to appear in the 1898–99 fiscal year, and of a little over 37,000,000 yen in the year following. This deficit, however, was met by raising taxes on land, saké, incomes, etc., and also by floating a foreign loan; the former would realize fully 44,000,000 yen, while the latter was to have brought into the country £10,000,000. Both of these were successfully realized, and the Government finances for 1900–01 were restored to a sound condition, so that the Budget for the year presented a normal aspect:

A balance of 1,500,000 yen is clearly observable in favour of revenue, and in order to meet the extra outlay, measures for increased taxation were carried by the Diet, with results estimated at over 21,000,000 yen in 1902–03, which it was ​estimated would be more than sufficient by 1905–06 to pay off all the disbursements of the North China affair. I shall not go into further details, but add that both the State finances and the industrial and commercial future of Japan are such as would present an inviting feature for foreigners’ investments in any form, if their actual state is carefully studied without sensational and racial prejudices, so often observable in the arguments advanced by foreign critics.

As stated above, many of the undertakings started after the war were not honest concerns, and the stringency of 1900–01 meant nothing but that the weak and speculating enterprises were working out their own destruction. The nation at large learned a lesson from the crisis, that in all business undertakings only the honest and substantial concerns can survive the test of social and business morality, which never waives its strict requirements.