“Poor Peasant, Poor Country”?

This chapter discusses the Matsukata deflation and its impact on domestic agriculture and industry and on foreign trade. Regardless of whether scholars hold negative or positive views of the Matsukata reform, they have tended to overstate both the short- and long-term impact of the deflation-induced depression as well as the role of the reform itself in bringing about the “Matsukata deflation” in the first place. If Matsukata had strictly followed an orthodox program of financial stabilization, the depression would likely have been as severe as most accounts claim. But his deviations from orthodoxy—boosting government spending, promoting exports of commodities from the rural sector, and the like—helped to buffer the economy and abridge the downturn. In short, the chapter asserts that one needs to qualify the commonly held view that the Matsukata reform was “a devastating experience for millions of people.”

Austerity and Expansion

This chapter describes the outbreak of military crises on the Korean Peninsula, the worsening of the domestic depression brought on primarily by Matsukata's own currency contraction, and other exigencies which prompted him instead to increase government spending, generating fiscal deficits that he financed not by boosting tax revenues but by promoting exports and selling public bonds. In responding to these trends through a pragmatic embrace of public bond issuance and state-led export promotion, Matsukata departed significantly from classical economic liberalism. He began turning toward such positive policies as early as 1883. In that regard, the Matsukata financial reform as it unfolded combined the contractionary program of Sano with the expansionary approach of Ōkuma. This policy mix, in turn, would help shorten a sharp, deflation-induced depression that Matsukata initially expected would continue for a year or two longer.

The Matsukata Reform as “Expansionary Austerity”

This concluding chapter returns to the notion that Matsukata merged the positive and negative policies of his predecessors along liberal nationalist lines, pursuing a kind of “expansionary austerity” during the Matsukata deflation. It argues that Matsukata Masayoshi was committed to reform and modernization of Japan's fiscal and monetary systems and to encouragement of private enterprise, but not in a categorical orthodox liberal or neoliberal sense. He certainly set out to create budget surpluses through fiscal austerity. Yet he demonstrated flexibility in response to a series of unexpected developments that compelled the Finance Ministry in fact to increase government spending. As a result, the Finance Ministry was able to accumulate enough specie and money in the reserve fund to redeem a sizable portion of fiat notes, back the issue of convertible paper money by the Bank of Japan, and finance military expansion as well as enable the state to remain actively involved in the economy.

Departures from Orthodoxy

This introductory chapter briefly considers the ways in which the reforms of Finance Minister Matsukata Masayoshi unfolded along the lines of mid-nineteenth-century British-style orthodoxy or the late-twentieth-century International Monetary Fund version. It then goes on to argue that Matsukata was dealing with the challenge, shared by many of his contemporaries, of establishing a modern financial system in a developing state emerging from warfare and aiming to industrialize. At least on monetary policy, his economic nationalism was of the liberal nationalist variety like that of state leaders in other late industrializers. Moreover, Matsukata emerged as a practitioner primarily of unorthodox policies from the standpoint of both nineteenth- and late-twentieth-century versions of financial and economic orthodoxy. He also departed from orthodox mindsets in his pursuit of statist and nationalist priorities, his commitment to made-in-Japan solutions, his reliance on local intellectual tradition, and his willingness to be flexible in response to “the dictates of practical expediency,” as he would proclaim in 1886.