Japanese tragedy

The tragedy unfolding in Japan at the moment is of unfathomable proportions.  Natural disasters, nuclear disasters, and a great deal of worry that the worst is not yet passed.

This is, of course, not the first time Japan has been rocked by a devastating natural disaster.  The Great Kanto Earthquake, a severe quake of 7.9 on the Richter scale, struck at 11:58 am on September 1, 1923.  The devastation was extensive: 3.4 million people were affected, of which more than 100,000 died.  The government later estimated that the aggregate amount of assets destroyed was equal to about 38 percent of 1923 national income (the equivalent of $4 to $5 trillion in the US today).  Journalist Joshua Hammer has examined (both in a book and a recent blog post) the extent to which the earthquake accelerated Japan’s march towards militarism and World War II.

The earthquake also contributed to a severe financial crisis that erupted three and a half years later.

The government acted forcefully in the financial realm following the quake, directing the Bank of Japan to rediscount (i.e., buy) debt securities from within the earthquake area that had already been bought by banks (so-called “earthquake bills”), but had no chance of being paid anytime soon due to the financial devastation.  The government was prepared to compensate the Bank of Japan for losses up to ¥100 million.  The bank took on more than ¥400 million of these securities, about half of which it still held in the spring 1927, when the maturity of these earthquake bills (which had already been extended twice) approached.

Government attempts to resolve the outstanding bills were sidetracked by political wrangling.  Before the issue could be settled, however not before the finance minister erroneously stated in public that a major bank had failed, a financial panic erupted.

The Bank of Japan should be praised for its swift and decisive expansionary monetary policy in the wake of the recent disaster.  Japan’s weak coalition government will have to avoid the indecision and wrangling that turned the 1923 earthquake into the 1927 financial crisis.