JAPANESE AT WAR

Evening Post, Volume CXXVI, Issue 3, 4 July 1938, Page 9

JAPANESE AT WAR

ECONOMY EXAMINED

GREAT FINANCIAL STRAIN

DECLINE OF EXPORTS

Now that public, opinion in Japan is prepared for a protracted struggle in China the question of the country's financial ability to carry the war burden assumes increasing importance, wrote the Tokio correspondent of the "Manchester Guardian" recently. The hope of wearing Japan down, of precipitating some kind of financial and economic collapse, is one of China's main hopes in prolonging resistance, as few realistic Chinese anticipate military victories, except perhaps in smallscale partisan warfare. During a recent trip to China I heard a Chinese, discussing an unsuccessful Japanese air raid, make the following exultant reckoning: "It cost the Japanese at least 20,000 dollars in bombs to plough tip a few holes in the ground which we can fill up for 20 dollars." If Japan's war economy is to function smoothly two major problems, one internal and the other external, must be solved. The first is the question of an unprecedented quantity of new Government bonds. The second is the maintenance of equilibrium in the international balance of payments without further depleting a gold reserve which has already been drawn on heavily. THE JAPANESE BUDGET. Japan's ordinary Budget for the fiscal year 1938-39 was fixed at the figure of. 2,867,797,000 yen. (The yen has now been stabilised for several years at the value of approximately Is 2d.) Revenue is a little over 2,000,000,000 yen, borrowing to balance the ordinary Budget amounting to about 690,000,000 yen. But this Budget is completely overshadowed by a mammoth war Budget of 4,850,000,000 yen, which has recently been authorised by the Diet. Of this sum 4,450,000,000 yen is to be raised by the flotation of new loans, the remainder being covered by tax increases. When one adds to this prospective bond flotation of 4,450,000,000 yen the 690,000,000 yen which is contemplated for new loans in the regular Budget and a further sum of one rrtilliard yen which was authorised for borrowing last year, but has not yet been raised, the prospective increase in the Japanese national debt exceeds the staggering figure of six milliard yen. This is equal to the entire amount of increase in the national debt between 1931 and the end of January, 1938, a period of lavish spending and consistently unbalanced Budgets. Between 1931 and the present time the Japanese national debt rose from 5,900,000,000 yen to 12,189,000,000 yen. , BALANCE OF PAYMENTS. Yet, rightly or wrongly, Japanese financial experts seem to be less concerned with this vast prospective increase in internal bond "flotations than with the question of keeping the balance of Japan's international payments in order. They maintain that an increase in internal debt can always be "managed" somehow without any consequences more deleterious than a moderate rise in the cost of living, which, for some classes of the population, will be compensated by high war-time wages and profits. What has helped to stave off the process known in Japan, as "malignant inflation" (as distinguished from a moderate rise in prices) is the tendency of the funds created by new bond issues to revolve within a very narrow circle. x The money raised by the annual sale' of bonds to the Bank of Japan and to other large banks has mainly gone into the pockets of munitions industrialists. They have put their profits into the banks, which have thus been able to absorb more bonds. Optimists here believe that this same process, on a larger scale, can be repeated in the coming year, and that nothing more serious than a gradual' upward trend in prices need be apprehended. More concern is felt about the international balance of payments. Of-' ficial opinion is strongly opposed to further depreciation of the yen, on the ground that this would serve no useful purpose and would increase the cost of the raw materials which Japan must obtain from abroad. In order tp maintain the Is 2d rate an excess of payments to foreign countries over receipts from these countries must be avoided. Here Japan faces several handicaps. RESTRICTING IMPORTS. Exports for January were down by about 18 per cent, compared with January, 1937, and, for several reasons, an even sharper rate of decline may be expected for the whole year. Diversion of factories from peace-time to war-time production, higher costs of production, difficulties in obtaining raw materials because of the stringent restrictions imposed on import trade, boycotts in various foreign countries —all these factors are adversely affecting Japan's export trade. At the same , time there is an irreducible minimum of imports of raw materials and supplies essential for the prosecution of the war, such as scrap-iron, petrol, lead, and nickel. Japan's solution for the economic problems which have arisen as a result of the protraction of hostilities far beyond original calculations is to proceed on a pay-as-you-go basis, financing the additional unproductive war imports out of decreased consumption at home. Indeed, there is no alternative to this policy; for foreign loans arid credits are out of the question at a time when primary Japanese Government obligations are quoted far below par in London and New York. Gold cannot be thrown into the balance, because Japan's heavy exports of gold, totalling 830,000,000 yen during 1937, have brought the country's gold reserves to a dangerously low level. A sum of 801,000,000 yen in gold is maintained as a theoretical currency reserve (the yen has long been inconvertible) and is still more necessary as an emergency fund in case the war should assume more serious proportions. Apart from this, it is doubtful whether Japan has more than two or three hundred million yen worth of gold at its disposal. Japanese investments abroad are valued a% 1,500,000,000 yen; but these could scarcely be realised at face value in the event of a general liquidation. GOLD PRODUCTION. So what Japan is doing is restricting her imports, month by month, to a figure approximately equal to exports, plus newly mined gold. Gold production both in Japan proper and in Korea is being vigorously promoted, and an output of approximately 20,000,000 yen a month is hoped for in the current year. This restriction of imports means that the domestic consumer will suffer, both in quantity and in quality. While all industries which minister to the prosecution of the war are booming, there is a noteworthy reduction in the output of goods designed for civilian consumption. The rates of curtailment of production which were being enforced in some leading peace-time industries in January, 1938, were as follows: —Cotton yarn 49.5 per cent., rayon 55 per cent, woollen yarn 60 per cent., Portland cement 65 per cent. This reflects both the shortage of imported raw materials and the decline of ordinary building

which has set in since the outbreak of hostilities.

NO FEAR OF COLLAPSE,

So far as the present war is concerned, Japan seems able to carry on indefinitely with its existing economic and financial resources. The greatest difficulties would rather seem to lie ahead, when the physical and psychological war-time controls are loosened and the Japanese people come to realise that the chief fruit of victory is a markedly reduced standard of living.

The entry into the war of some stronger Power, or the imposition of drastic sanctions would alter the economic picture whitSh has just been outlined to Japan's disadvantage. But Japan's leaders believe that the antiCommunist Pact offers a check on the likelihood of Soviet or British intervention on China's behalf. As for sanctions, Japan certainly would not back down, because any Cabinet which yielded to such open foreign pressure would most probably be machinegunned out of existence. The Japanese reply to strong sanctions would almost certainly be raids on those islands and countries of South-eastern Asia which are within striking distance of the Japanese Navy and which contain valuable raw materials. It is highly doubtful, in view of the rapid mounting of Japan's debt and the mortgaging to war needs of its productive capacity, whether means can be found in any near future to carry out the large-scale schemes of industrial development in North China which are so glibly canvassed in the Tokio Press. The first phase of Japanese domination of North China and the Lower Yangtze Valley may take the form of infiltration of Japanese goods; and even in this field the prospective profit is considerably diminish* ed by the.war-time devastation and confusion and consequent loss of Chinese purchasing power.