If you think that Fed Chairman Ben Bernanke is unpopular, consider the tragic case of Takahashi Korekiyo, who served as Bank of Japan governor from 1911-1913 and as finance minister and prime minister in the 1920s and 1930s. Gillian Tett recounts his story in the Financial Times.
In the first decades of the 20th century, Japan was an emerging markets growth story not too unlike China in the early decades of Deng Xiaoping’s reforms. The US stock market crash of 1929 and the global recession that followed hit Japan hard. Japan experienced bank failures, a credit crunch, and a deep recession…until Mr. Takahashi came to the rescue. As Tett tells the story,
In December 1931, Takahashi returned to the job of finance minister and fought recession with stimulus: he abandoned the gold standard, loosened credit conditions and raised public spending, financed with new debt.
In some ways, it worked. As the yen lost 40 per cent of its value, exports boomed. Then, as annual public spending rose above 50 per cent of GDP, or almost double the 1929 level, Japan’s economy stabilised, even as the US continued to ail.
But Takahashi encountered two problems.
First, the stimulus did not stop Japan from becoming marked by social fracture, political unrest and nationalism. On the contrary, tensions continued to rise, partly as the large conglomerates, or zaibatsu, were the biggest winners from stimulus. That sparked resentment, not unlike what has happened in the US as Wall Street banks have made profits from quantitative easing.
Second, and unsurprisingly, the spending bonanza undermined confidence in Japan’s government debt and its currency, creating fragility. So in 1936, Takahashi embarked on an exit strategy, cutting public spending and tightening monetary policy. From a macroeconomic perspective, it made sense. But it cost Takahashi his life. As political tensions exploded, he was assassinated by rogue army officers who were furious at – among other things – the military spending cuts. That triggered a slide towards militarism, wild public spending and hyperinflation. (Link to article)
Tett postulates that the experience of the unfortunate Mr. Takahashi is one of the reasons for Japan’s current reluctance to end its fiscal and monetary stimulus programs, which have now dragged on for nearly 20 years. Possibly. Or, it could simply be that in a democratic society, politicians do not have the stomach for austerity, choosing instead to push the problems indefinitely into the future.
Whether Japan chooses stimulus or austerity, it is not likely to matter much. The country’s demographics are in what appears to be terminal decline, which in turn drags the Japanese economy into terminal decline.
Will Japan fall into the grips of nationalism and military rule again? I would find this to be doubtful. It’s hard to imagine a country as elderly as Japan rediscovering the joys of militarism, though this is exactly what George Friedman of Stratfor forecasts in his recent book, The Next 100 Years: A Forecast for the 21st Century.
It remains to be seen. In any event, whenever Ben Bernanke has one of those “why did I take this job…” moment, at least he can take solace in the fact that he’s unlikely to meet the end of the unfortunate Mr. Takahashi.
Related Post: John Law: Rake, Murderer, and Father of Central Banking
This article originally appeared in the HS Dent Blog
Charles Lewis Sizemore, CFA
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