Japan’s Ill-Fated Experiment With Money Doctoring

Nov. 29 (Bloomberg) -- The business of giving advice to other nations on how to manage their finances has always been a contentious undertaking.

In the 1910s, U.S. economists such as Edwin Kemmerer preached the virtues of a stable currency to Mexico and Guatemala; more recently, Greece has received plenty of advice from the International Monetary Fund.

Much of this counsel has been dispensed with the ostensible goal of promoting international stability. But there have been other, less well-known instances of money doctoring that have served an overtly nationalist agenda. This was the case with Japan from 1895 to 1937, when the emerging power used money doctoring to check U.S. influence in the Pacific.

When Japan was forced to open the country to “free trade” with the militarily far superior Western powers in the 1850s, its leaders soon understood that the forced introduction of foreign advisers in the fields of finance, the military, medicine and policy making entailed a long-term risk for its sovereignty.

Meiji Elite

When chances for removal of foreign influence occurred, members of the newly formed Meiji elite were quick to embark on policies that cemented autonomy and sovereignty. In the 1880s, Finance Minister Matsukata Masayoshi put an end to foreign borrowing and simultaneously curbed the influence of British advisers in monetary affairs.

After 1890, military victories became a lever for projecting Japanese monetary and economic influence abroad. The defeat of China in 1895 resulted in the annexation of Taiwan and with it, an overhaul of the island’s monetary and economic infrastructure. Taiwan became a laboratory for the currency imperialism that Japan was to implement elsewhere.

Although reforms were not immediately successful, advisers learned to reckon with different degrees of economic integration with the Japanese mainland. Then, when Japan moved to the gold standard in 1897, it imposed a gold-exchange standard on Taiwan, which was brought into a position of monetary dependence similar to the one Japan had found itself in only decades earlier.

This first example of total subjugation of one Asian country by another was a harbinger of things to come. After the Russo-Japanese War, Korea was also incorporated in the empire. The draconian monetary plan known as the Megata reform effectively relegated Korea to a Japanese satellite.

Even nowadays, it isn’t easy to account for the military rigor with which Japanese reformers sought to control Korea’s currency and national finances. There, money doctors wanted total control over their patient, and this aspiration wasn’t only against the latter’s will. At times, it was simply greater than their concern with the patient’s health: “Japanese policy was above all devoted to uplifting Korea, but unfortunately not its people,” as one observer concluded long ago.

Subsequently, Japan’s heavy-handed interventionism was increasingly governed by its interests in China. There, a growing conflict of interest with the U.S. over control of the region led to the adoption of a policy known as Pan-Asianism. This led Japanese policy makers to begin a lending spree using so-called Nishihara loans.

Humiliating Defeat

It was a high-risk gamble to gain primacy in Asia by means of a decisive economic blow (it combined, among other things, large-scale lending for industrial projects with a monetary-reform effort). Its architects made a strategic mistake. Japan suffered a humiliating defeat. Apart from a token repayment of 5 million yen, it was forced to write off the whole loans series, amounting to 140 million yen.

The impact of the Nishihara loans was enormous. Only after the Great Depression did Japanese leaders dare to return to an audacious plan for currency imperialism. The time seemed ripe. Having left the gold standard and adopted a countercyclical economic policy, Japan had escaped the worst effects of the Great Depression; the U.S. was still struggling with a lagging economy. Even then, the geopolitical momentum was deeply anti-Japanese. President Franklin D. Roosevelt’s silver-buying policy was in no small part inspired by a desire to “spite the Japanese imperialists in China.”

Japanese policies at the time -- withdrawal from the League of Nations, the Amau doctrine and full-scale war with China in 1937 -- only fueled Western suspicion of Japanese intentions. In 1940, U.S. officials discovered a large war chest of dollars, fraudulently hidden in the books of the New York branch of the Yokohama Specie Bank. U.S. reaction was swift and decisive, freezing Japanese dollars and gold held in the U.S. This financial blockade, recently documented by Edward Miller, destroyed Japan’s ambitions to force the countries within the Pacific Rim onto a yen standard.

Japan’s fate in the Pacific War is well-known. Ironically, the end of the war also brought back the figure of the money doctor, though he would travel in a different direction. In 1948, the American banker Joseph Dodge laid out the framework of an economic-stabilization program that did more than underscore Japan’s subordination to the U.S. It was, at the same time, the end of blocism as a doctrine, and the consolidation of a world order under the dollar.

(Michael Schiltz is associate professor at the Institute for Advanced studies on Asia, University of Tokyo. He is the author of “The Money Doctors from Japan: Finance, Imperialism, and the Building of the Yen Bloc, 1895-1937.” The opinions expressed are his own.)

Read more Echoes columns online.

To contact the writer of this post: Michael Schiltz at

To contact the editor responsible for this post: Max Berley at