The Geopolitics of Helicopter Money: Japan 1894-1936

Last week, we described in some detail the process of “monetary funded fiscal spending” (MFFS). Part 1 of this series included a discussion of why MFFS might be implemented, how it would work and the potential problems that come with using it. In this week’s report, we will examine two historical examples where forms of MFFS were implemented, Japan in the 1930s and the U.S. during WWII. Next week, we will conclude the final report of the series with market ramifications.

Japan’s industrialization began with the Meiji Restoration which started in the late 1860s. The country became a rapidly advancing power in the region, defeating China in the First Sino-Japanese War (1894-95) and Russia in the Russo-Japanese War (1904-05). The former gave control of the Korean Peninsula to Japan and the latter announced Japan’s entry as a major world power.

Japan continued to expand its influence in the Far East. It was aligned with the Allied Powers during WWI and played an important role in protecting sea lanes from German attempts to disrupt shipping. It also expanded its influence in China, a point of contention with the U.S. The post-WWI period initially began with strong economic growth but a series of supply and demand shocks rocked Japan’s economy in the 1920s.

Important events included the Great Kant? Earthquake in 19232 and a financial crisis in 1927, which was caused by expectations of a return to the gold standard. Japan’s decline was capped off by the onset of the Great Depression, which coincided with fiscal austerity and another attempt to return to the gold standard.

In the face of a dramatic downturn, Takahashi Korekiyo became finance minister. He immediately ended the previous government’s austerity program with a series of measures, including taking Japan off the gold standard, which led to a rapid depreciation of the yen, and increasing fiscal spending, which rose by 58% from 1931 to 1933. This spending lifted government spending from 10.7% of GDP in 1931 to 14.7% in 1933. In 1931, the government balance was a small surplus (0.1% of GDP); it became a deficit of 6.1% of GDP by 1933. However, one of the most controversial measures Takahashi implemented was to engage in MFFS by prevailing upon the Bank of Japan (BOJ) to purchase the bonds created by the deficit, effectively monetizing the debt. These measures were quite effective, allowing Japan to recover much faster than other industrialized nations.

Helicopter Money