# Japan's wartime command economy

The wartime machine that later survives into peace: bank consolidation, foreign-exchange controls, planning boards, mobilization laws, munitions ministries, savings drives, and main-bank discipline.

*This story parallel: How the Second World War unfolded*
*This story parallel: The military-industrial complex and Pax Americana*
*This story part of: Princes of the Yen: Japan built, bubbled, and broken*
*This story part of: Money and finance*

## 1920s to 1945 — Wartime consolidation of Japanese banks

To simplify credit allocation, the number of Japanese banks was drastically reduced from about fourteen hundred at the end of the 1920s to sixty-four by the end of the Second World War, organized under the National Financial Control Association.

> "To simplify the credit allocation regime, the number of banks was drastically reduced, from about fourteen hundred by the end of the 1920s to a mere sixty-four by the end of the Second World War."
> — Princes of the Yen

## 1931 — Manchuria placed under direct army rule

Manchuria had been under direct Japanese army rule since 1931 and served as the testing ground where planners experimented with the prototype of the mobilized war economy before implementing it in Japan.

> "They had gained invaluable experience in implementing and running this system when they were experimenting with its prototype in Manchuria, which had been under direct army rule since 1931."
> — Princes of the Yen

## 1932 — Foreign exchange control laws of 1932

Japan's 1932 foreign exchange control laws were used to restrict imports and represented the first set of reforms that would eventually create a controlled war economy.

> "The 1932 foreign exchange control laws were used to restrict imports. They had represented the first set of reforms that would eventually create a controlled war economy."
> — Princes of the Yen

## 1936 — Hirota cabinet puts economy on quasi-war footing

In 1936 the Hirota cabinet agreed to put Japan's economy on a quasi-war footing, beginning with a boost to the military expenditure budget.

> "In 1936, the Hirota cabinet agreed to put the economy on a quasi-war footing. The first step was to boost the budget for military expenditure."
> — Princes of the Yen

## 1937 — Full-scale war with China begins

When hostilities with China turned into full-scale war in 1937, the Japanese military pushed through major changes under emergency war legislation, giving reform bureaucrats a mandate to build a mobilized economy.

> "When hostilities with China turned into full-scale war in 1937, the military pushed through major changes under the cover of emergency war legislation, which gave the reform bureaucrats the mandate to establish a mobilized economy with strong government intervention."
> — Princes of the Yen

## 1937 — Konoe cabinet promulgates three wartime control laws

In 1937 the promilitary Konoe cabinet promulgated three wartime control laws that directed critical materials and capital to the munitions industry and expanded bureaucratic control over the economy.

> "The 1937 promilitary cabinet of Konoe (the grandfather of 1993 prime minister Hosokawa) promulgated three wartime control laws. The Export-Import Commodities Emergency Measures Law ordered priority allocation of critical materials to the munitions industry."
> — Princes of the Yen

## 1937 — Temporary Funds Adjustment Law

With the reform bureaucrats in power after hostilities opened in China, the Temporary Funds Adjustment Law of 1937 brought banks' investment and loan decisions under strict control by the central bank and the Ministry of Finance.

> "This law brought banks and their investment and loan decisions under strict control by the central bank and the Ministry of Finance. Funding through the stock market was reduced to a trickle, and the banking system was relied upon for resource allocation."
> — Princes of the Yen

## 1937 to 1945 — Wartime transformation of the Japanese economy

Between 1937 and 1945 the New Economic Order transformed Japanese firms from private profit-seeking undertakings into quasi-public ones focused on growth, replacing the prewar market mechanism with planning and government guidance.

> "The changes implemented between 1937 and 1945 reshaped the function of the firm. Under the slogan “Public interest above individual interest,” the New Economic Order successfully transformed firms from private profit-seeking undertakings to quasi-public ones focusing on growth, not profits."
> — Princes of the Yen

## October 1937 — Cabinet Planning Board established

The Cabinet Planning Board, set up in October 1937, was designed as the economic general staff of the militarized economy, tasked with building a system for maximum growth and directing resources to priority industries.

> "Overall coordination lay in the hands of the Cabinet Planning Board, set up in October 1937. It was designed as the economic general staff of the militarized economy."
> — Princes of the Yen

## 1938 — Industrial Patriotic Societies established

In 1938 the doctrine of the firm as an organic organization was officially implemented through Industrial Patriotic Societies in all companies, while trade unions were abolished and union activity channeled to the company level.

> "The doctrine of the firm as an “organic organization” binding employers and employees together and serving for the public benefit was officially implemented in 1938, with the establishment of Industrial Patriotic Societies in all companies."
> — Princes of the Yen

## 1938 to 1939 — Wartime health insurance laws

The National Health Insurance Law of 1938 and the Personnel Health Insurance Law of 1939 provided virtually complete health coverage to employees, the most advanced welfare schemes in Asia.

> "The National Health Insurance Law of 1938 and the Personnel Health Insurance Law of 1939 provided virtually complete health coverage to employees."
> — Princes of the Yen

## April 1938 — National General Mobilization Law

In April 1938 the sweeping National General Mobilization Law was put to the Diet, allowing mobilization of all physical things in the country and the drafting of imperial subjects; Konoe pushed it through against vigorous resistance.

> "In April 1938, the sweeping National General Mobilization Law was put to the Diet. It allowed the mobilization of all physical things in the country, and it stated that “the Government may in time of war (including incidents that are to be treated as war) draft Imperial subjects and employ them in mobilization work as stipulated by Imperial Decree whenever necessary.”"
> — Princes of the Yen

## April 1938 — National Savings Promotion Campaign launched

In April 1938 a National Savings Promotion Campaign was launched to boost the savings rate to 30 percent of GNP, with savings committees spreading nationwide and a promotion agency established at the Bank of Japan.

> "In April 1938, a National Savings Promotion Campaign was launched that aimed at boosting the savings rate to 30 percent of GNP."
> — Princes of the Yen

## April 1939 — Dividend increase permits required

Beginning in April 1939, firms with dividend rates of 10 percent or more needed a Ministry of Finance permit to raise their dividend rate, making stock investment less attractive.

> "Beginning in April 1939, firms with dividend rates of 10 percent or more—about two-thirds of large firms at the time—required a permit from the Ministry of Finance to increase their dividend rate."
> — Princes of the Yen

## 1940 — Industrial Standardization Law

The Industrial Standardization Law of 1940 set norms and standards rigorously enforced by the military, making quality control a lasting feature of Japanese manufacturing.

> "Quality control had been a major concern of the military, which rigorously enforced norms and standards set by the Industrial Standardization Law of 1940."
> — Princes of the Yen

## 1940 — Proclamation of the New Economic Order

In 1940 the Konoe cabinet proclaimed the New Economic Order, composed of a New Financial System, a New Fiscal Policy, and a New Labor System, as Japan approached entry into World War II.

> "With such legal powers in their hands and with the approach of Japan’s entry into World War II, the Konoe cabinet in 1940 proclaimed the New Economic Order, composed of a New Financial System, a New Fiscal Policy, and a New Labor System."
> — Princes of the Yen

## 1940 to 1950 — Wartime switch to bank funding

Between 1940 and 1950 Japanese firms radically switched their external funding from the stock market to bank borrowing, which averaged 60 percent of liabilities versus 40 percent equity; bank financing predominance persisted until the late 1980s.

> "In the period from 1940 to 1950, on average 60 percent of firms’ liabilities consisted of bank borrowing and only 40 percent consisted of equity financing."
> — Princes of the Yen

## 1942 — Bank of Japan Law of 1942

The Bank of Japan Law was introduced in 1942, largely as a translation of Hitler's Reichsbank Law of 1939. The Ministry of Finance later fought off attempts to change it while the BoJ kept sole charge of window guidance.

> "While the ministry won the first political battle and avoided a change in the Bank of Japan Law (which had been introduced in 1942, largely as a translation of Hitler’s Reichsbank Law of 1939), the Bank of Japan remained solely in charge of window guidance."
> — Princes of the Yen

> "After his "parachute" study, which was published in 1942, Morrison's attention score and the research it generated seem not to be referred to again in the professional literature."
> — Life in Classrooms

## 1942 — National Financial Control Association established

In 1942, as the mobilized war economy was fully implemented, the National Financial Control Association was established as the nerve center of wartime credit allocation, with Ichimada as its first secretary-general.

> "The time to make full use of his knowledge and experience came in 1942, when the system of a mobilized war economy was being fully implemented and the National Financial Control Association was established."
> — Princes of the Yen

## October 1943 — Munitions Corporation Law promulgated

As part of the 1943 Measures to Strengthen the Domestic System, corporate law was changed and the Munitions Corporation Law was promulgated in October 1943, eliminating shareholders' influence on firm management.

> "Thus as part of the 1943 Measures to Strengthen the Domestic System, the corporate law was changed and a new Munitions Corporation Law was promulgated in October of that year. It eliminated shareholders’ influence on firm management."
> — Princes of the Yen

## November 1943 — Creation of the Munitions Ministry

In November 1943 the Cabinet Planning Board was united with the Ministry of Commerce and Industry to form the powerful Munitions Ministry, strengthening the planners' powers.

> "The planners’ powers were also strengthened, when in November 1943 the Cabinet Planning Board was united with the Ministry of Commerce and Industry to form the powerful Munitions Ministry."
> — Princes of the Yen

## 1944 to 1945 — Creation of the main bank system

In 1944 key military suppliers were designated munitions companies, and in 1945 over six hundred firms were assigned designated banks by the Ministry of Finance under a compulsory lending system; these main bank relationships lasted into the present.

> "In 1944, key producers of military supplies were designated as “munitions companies.” In 1945, over six hundred firms received necessary funds to fulfill their production quota via one or two banks that had been allocated to them by the Ministry of Finance."
> — Princes of the Yen

## March 1944 — Share dividends capped at 5 percent

In March 1944 the annual share dividend was decreased to 5 percent, eliminating residual shareholder influence and reducing shareholders to fixed-income investors without a vote.

> "In March 1944, the annual share dividend was decreased to 5 percent. Any residual influence by shareholders over profit allocation, fund-raising matters, and the appointment of managers was eliminated."
> — Princes of the Yen

## August 1945 to October 1945 — Araki appointed BoJ deputy governor, then governor

Immediately after Japan's defeat in August 1945, Eikichi Araki, former wartime head of the Banking Department, was appointed deputy governor of the Bank of Japan, and two months later governor.

> "Immediately following Japan’s defeat in August 1945, he was appointed deputy governor of the Bank of Japan. Two months later, he was appointed governor."
> — Princes of the Yen

## August 1945 — Japan's defeat in World War II

Japan's defeat in 1945 is widely regarded as a watershed heralding a new Japan, with burned-down cities and destroyed factories marking the end of the war in August 1945.

> "The defeat of 1945 is often regarded as a watershed that heralded the beginning of a new Japan."
> — Princes of the Yen

## September 1945 — Occupation Order No. 3 continues economic controls

Order No. 3 of the occupation forces of September 1945 declared the continuation of Japan's wartime economic controls, and foreign currency rationing was reintroduced immediately.

> "Certain wartime legislation was officially reintroduced soon after the war, especially by MITI and MoF: the Order No. 3 of the occupation forces of September 1945 declared the continuation of economic controls."
> — Princes of the Yen

## December 1945 — Munitions Ministry and Home Ministry broken up

In December 1945 the occupation broke up the Munitions Ministry, the heart of the war economy, along with the powerful Home Ministry and its police apparatus including the Thought Police.

> "The Munitions Ministry, at the heart of the war economy, was broken up in December 1945. So was the powerful Home Ministry, with its police apparatus, including the dreaded Thought Police."
> — Princes of the Yen