Commonwealth and Foreign
JAPAN'S WAR ECONOMY
By GUENTHER STEIN
TOKYO, September Mt.
Two and a half months of military victories over China have already raised serious economic problems in Japan, and it was by no means a mere commonplace for the Premier, Prince Fumimaro Konoe, to state, a few days ago, that " the result of modern war will be decided not only by military force, but also by economic power, the strengthening of which is necessary to meet the present emergency." It is clearly in this regard that Japan begins to feel very anxious about the future ; especially since even the military task in China now appears greater and more difficult than had been expected, and since it has become the general impression in the country that there might be but a small breathing spell in between the present Sino-Japanese hostilities and " Japan's unavoidable real war "—with the Soviet Union.
One of Japan's main anxieties concerns the financing of her foreign trade. For even though she is self-sufficient in foodstuffs, she depends on the world's markets for about 7o per cent. of her total raw material requirements ; for much of the new machinery that is needed in the continuous expansion of the country's armament and allied industries ; and for a great number of other goods as well as foreign patent rights wanted by the Army and Navy and by those domestic producers who have to prepare for still greater future demands from the Fighting Services. It is already for some time that Japan's ex- ports, in spite of ever new sacrifices with regard to prices, have been unable to keep up with the import bill which still grows on account of the country's exertions in the field of armaments. The liquid reserves of foreign currency holdings which were at first used to make up for the import surplus, were exhausted at the beginning of last year. More than one-fifth of the national gold reserves had to be sacrificed within a few months afterwards. And it had just become a categorical economic necessity radically to cut down imports when the Sino- Japanese conflict forced them up still more ; and high world- market prices keep on aggravating the dilemma.
At the present rate of disproportion between imports and exports, it would hardly take more than twelve months to eat up the remainder of the country's gold reserves. Radical restrictions of imports for civilian consumption—mainly of essential goods, such as cotton, wool, leather, &c., as most real luxuries were squeezed out from the list of imports long ago—might prolong this period by a few months, but not more. And definite action in this regard is being taken very reluctantly, for fear that export industries might be hit together with those which cater for the home market, and that the chronic social problem might be made very acute indeed by a still quicker rise of the cost of living.
Hope for foreign assistance in the long-term financing of imports, on the other hand, is zero ; nor are Japan's Fighting Services willing to court Britain's or America's favour in this regard by refraining from any action in China which these countries have every reason to resent. On the contrary, even the foreign financing of Japan's exports, which was never regarded as much of a problem, seems to have become difficult now. Japanese Press reports from London to the effect that British banking firms refused, or at least hesitated, to rediscount of to accept Japanese exports bills, came as a great shock to business circles in Tokyo and Osaka who feel, as the Osaka Mainichi put it, that " there is no adequate measure available to deal with such an awkward situation." For 8o per cent. of Japan's export bills are usually rediscounted or accepted in the London market. It seems that the City's reticence vis-d-vis Japan was one of the causes which finally brought about in Tokyo a somewhat more conciliatory attitude with regard to the settlement of the Hugessen affair. For in some Japanese quarters at least, the real or expected difficulties in the London discount market were ascribed to " anti-Nippon feelings" in consequence of the China War in general, and to the shooting by Japanese airplanes of the British ambassador to Nanking, Sir Hughe Montgomery Knatchbull-Hugessen, in particular. In other circles, however, the unfavourable British estimate of Japan's financial and general economic situation was regarded as the main reason. But in both cases Britain was blamed, as usual, for a " lack of proper understanding " of the
real intentions of, and the actual conditions in, Japan. It is just for the purpose of counteracting such " wrong impressions " abroad that Japan has deemed it necessary to send a number of special goodwill envoys to Britain and other foreign countries.
But it cannot be denied that in Japan, too, the financial situation is regarded as heading for dangerous developments. The first three appropriations for the " China Incident " raised the current year's total State expenditure to almost Yen 5,500,000,000, which is 92 per cent. more than originally budgeted, 138 per cent. more than was actually spent in 1936-37, and 311 per cent. more than the total budget of the " Manchurian Incident," 1931-32. Almost Yen 3,400,000,000 will have to be financed by means of new deficit bonds, which tremendous amount more than equals the total of such issues during the last four years, when an average of one-third of the total State budget had already to be financed out of borrowing. The net State indebtedness, which had been Yen 2.5 billion in 1914, and Yen 6.2 billion in 1932, will now rise from Yen I t billion at the end of March, -1937, to at least 54.4 billion Yen at the end of March, 1938. Almost all the new deficit bonds have to be issued within the remaining six months of the current fiscal year, and as the banks are already unable to keep pace with the huge capital requirements of armament and allied industries that were ordered to expand their pro- ductive capacity as hurriedly as possible, while there is no " investing public " to speak of in Japan—it will be the Bank of Japan which, at the risk of large-scale inflation, has to buy the bonds from the Treasury, and to keep them in its vaults, as security for new loans, and finally for an increasing note issue.
State control of Japanese economy, so far, is much less in evidence than might have been expected in a country where such tendencies had always been very strong even in time of peace. This is another disappointment to the Army and Navy, and another source of uneasiness. There are two sets of reasons for the failure of Japan's Fighting Services finally to take full charge of the nation's economic machine. First of all it seems as though they were too busy with military problems and felt too keenly their lack of actual knowledge in the fields of industry, finance, and trade, as well as the shortcomings of Japanese officialdom in this and several other regards, to expose production and distribution to any hazards in the face of a dangerous war situation. Apart from this, the well-organised mammoth concerns and the numerous industrial and other business associations once more proved to have more political power and to feel less urge to hand it over to the State than might have been expected, since they had seemed to fight a losing battle against the Military from the time of the " Manchurian Incident." Neither disorganisation of the country's economic life nor internal dissension could be risked at the present juncture, and this is why a " war economy " as established by legis- lation presented to the extraordinary Diet session of early September, is of a compromise character and restricts only very little what freedom of capitalistic enterprise there is in the country.
It is true that the Government got certain discretionary powers from the Diet, but it is understood that they will be used only where problems such as the maintenance of the Yen exchange and the prevention of a lack of funds for the expansion of armament industries will make strict control measures urgently necessary ; while economic policy as a whole, for the time being at least, will be based on the prin-. ciple of " voluntary co-operation " between the economic powers and the Government. At least as far as the war against China is concerned, the Army and Navy must feel that they can now rely even on the most anti-militarist business leaders. For, much though those may have been against a " punitive expedition against China " before it actually started, to say nothing of a large-scale war with that country, their losses in China are so great now, and the dangers for the future of their investments and markets so acute, that they are bound together with the Fighting Services in the common desire for victory over China.
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