Chapter VII: The Finances of Japan

Flourishing condition of Japanese finance on the eve of the war with
China—Present Japanese financial problem the result of the
important military, naval, and public works undertaken by the
Government at the close of the war—Enormous expense of this
programme, demanding a loan of £24,000,000—Gradual method of
paying off this debt in nine instalments—Impossibility of floating
the loan on the home market, all Japanese capital being locked up
in the various newly-created industries—Debts incurred in
connection with the programme of expansion, whereby the ordinary
Budget was doubled—Progressive scale of taxation from the present
date until 1905—Absolute necessity of augmenting certain
taxes—Projected imposition of increased taxation, especially upon
land and on beers, wines, and spirits—Taxation as compared with
the population of Japan and other countries—Prospects of Japanese
finance.

Before the war with China, Japanese finance was in a most brilliant condition, and the fiscal year April 1st, 1893, to March 31st, 1894, the close of which preceded hostilities by only a few months and which is the last of which accurate accounts have been published, showed a return of £8,588,300 ordinary and £315,913 extraordinary revenue, making a total of £8,904,213, as against £8,458,187 expenditure, the surplus being £446,026, which on a Budget of £10,400,000 was a very creditable but by no means an exceptional result. As a matter of fact, there had been only one deficit, that of 1891–92, resulting from the exceptional expenses incurred by the nation through the disastrous effects of the earthquake of 1891, one of the most terrible on record even in Japan, where these dreadful visitations are of very frequent occurrence. The whole financial tendency of the preceding years is summed up in the statement that at the beginning of the year 1896–97 £3,900,000, derived from accumulated surpluses, was at the disposal of the Treasury, although £2,300,000 had already been withdrawn from this reserve fund to help in defraying the expenses of the war.

On the other hand, the National Debt at this period was not higher than £28,350,000, of which £1,570,000 was paper money in circulation. It had therefore diminished since 1890–91 by £2,300,000, of which £1,450,000 was due to the withdrawal of the paper money. These notes had been issued at a period when the new regime was not firmly established, the insurrection at Satsuma still to be suppressed, and the Government unable to obtain cash, even at a very high rate of interest. In 1881 the premium upon silver, the standard currency, had risen to 70 per cent., thanks to the energy of Count Matsukata, the very able Minister of Finance. It fell to 9 per cent. by 1884; in 1886 par was reached. The paper money of the State and the national banks was gradually withdrawn and replaced by notes of the Bank of Japan, payable at sight. In brief, if we compare the figures of the Debt and the Budget with those of the population, 41,500,000, we can only envy the financial situation of Japan on the eve of the war.

Although the expenses of the Chino-Japanese War, which were partly covered by the indemnity obtained from China and partly by a public loan, undoubtedly checked the progressive prosperity of the country, they had nothing whatever to do with the present financial problem, which has been created by the magnitude of the military, naval, industrial, and commercial enterprises undertaken by the Japanese Government since the close of the war. Between 1895 and 1896 the Government decided to double the strength of the army, by raising the number of divisions from six to twelve (exclusive of the Imperial Guard), and it will now thus muster 150,000, as against 70,000 to 75,000 on a peace footing, and 500,000, instead of from 270,000 to 280,000, in time of war. The fleet is to be increased from 43 vessels of 78,000 tons, _plus_ 26 torpedo-boats, without a single cruiser, to 67 men-of-war, of which 7 are first-class battleships, with a displacement of 258,000 tons, besides 11 torpedo-boat destroyers and 115 torpedo-boats. The creation of numerous arsenals and fortifications will eventually complete the programme, but beyond these War Office expenses, very considerable sums have been spent in the construction of railways, extension of telegraph lines, creation of new ports, subventions to the mercantile marine, and in the establishment of a second University at Kioto. The plan of railway extension which was decided upon in 1893 by the Diet must be completed according to contract in 1910. The other measures for the augmentation of the army and navy were included in the programme of the Ito Cabinet, which the Chambers accepted immediately after the signing of peace. This extra expenditure is to be disbursed in ten instalments from 1896 to 1906, and some further amendments and additions were made during the Parliamentary Session of 1896–97. The expenses entailed by these extensive schemes, together with the railways, are tabulated below:—

Navy and arsenals £22,650,000 Army 8,220,000 Fortifications 940,000 Other military expenses 680,000 Railway construction 7,980,000 Increase and improvement of lines 2,650,000 Telephones 1,280,000 Construction of ports 790,000 Defence against floods 1,970,000 Subventions to banks 2,060,000 Creation of a tobacco monopoly 820,000 Subventions to various industries, commerce, agriculture, and other public works 1,460,000 ——————————— Total £51,500,000

Of this amount £32,495,670 was for War Office expenses, and £19,005,406 was intended for the very extensive commercial enterprises.

In 1893 a loan was voted to be issued as and when required to entirely cover the expense of the new railway lines. The indemnity was £30,000,000, _plus_ £4,100,000 as compensation for the retrocession of the Liao-Tung Peninsula, imposed upon Japan by the Russian, French, and German Governments. This latter sum, as well as the first instalment, £7,500,000, of the indemnity was duly paid into the Japanese Treasury on November 8, 1895; the remainder was to be paid by regular instalments on May 8 of each year until 1902. China, however, availed herself of a clause allowing her to pay off the debt at once, and thus escape interest charges, which she did on May 8, 1898. Japanese statesmen had anticipated this act of the Chinese Government, and did not count upon more than £34,100,000. Of this sum £8,000,000 had been debited to the war account, leaving a balance of £26,100,000. In addition to these amounts, the Treasury held the accumulated surpluses, which, on April 1, 1896, attained £3,900,000, to which £500,000 must be added as the surplus in the Budget of 1896–97. The difference between the total of these receipts and the anticipated expenses was to be balanced by a loan known as ‘the loan for State enterprises.’ The following table exhibits the assets for this programme of expansion:

Chinese indemnity[17] £26,100,000
Surpluses of previous Budgets 4,400,000
Railway loan, £7,980,000 21,480,000
Loan for State enterprises, £13,500,000 〃
———————————
Total £51,980,000
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The expenses being £51,500,000, there would thus remain a surplus of nearly £500,000, thanks to the favourable result of the fiscal year 1896–97.

Apart from this financial scheme, however, there was still a war charge which had not been foreseen. It had at first been believed that the island of Formosa would be self-supporting, an illusion which was soon dispelled, and the Government had therefore to grant this new acquisition for a period of years a subvention from the Imperial Treasury of about £600,000, to obtain which various receipts officially described as extraordinary, such as voluntary contributions and restitutions, sales of State lands, and interest on divers funds had to be drawn upon. These receipts generally averaged £200,000, and by the year 1905–6, the time fixed for the conclusion of the expansion programme, will have furnished between £1,500,000 and £1,800,000; for the remainder it will be necessary to have recourse to a loan, and supposing that during this period the subvention of the Japanese Budget to Formosa, which must necessarily diminish year by year, rises to about £4,000,000, another loan of between £2,000,000 and £2,500,000 will have to be raised. Japan would therefore have to borrow about £24,000,000 from 1896–97 to meet the extraordinary expenses she had undertaken. On the other hand, when these were met, her ordinary Budget still remained greatly augmented by the necessity of maintaining an army and navy double what they were before the war.

This being the case, two important questions presented themselves. In the first place, was it possible to raise without difficulty a loan of £24,000,000, and from whence was it to be obtained? In the second, was the country sufficiently rich, once the scheme was executed, to maintain this increased expenditure, and by what means would it be able to obtain fresh resources to pay current expenses? The first question contained the principal difficulty. Not only did Japan need to borrow £24,000,000, but she had to borrow most of this without loss of time. Naturally, the Administration decided to carry out with the least possible delay the essential parts of the programme already determined upon, especially those connected with the national defence, and the Budgets of 1896, 1897, and 1898 were therefore most heavily charged with the extraordinary expenses. The extraordinary Budget of the first year reached £10,300,000, that of the second £14,200,000, that of the third £6,000,000. In no case, however, could the surpluses of the previous Budgets and the part already paid out of the indemnity (which was £20,600,000, of which £8,000,000 had been handed over to the War Office) have sufficed to provide such large amounts. It was therefore necessary to borrow in 1896–97 £1,830,000, in 1897–98 £6,880,000, while in 1898–99 a further issue of £4,500,000 had to be made. Now the grave situation which arose was this: the issues of 1896–97 were readily taken up by the public, but in 1897–98 only a third of the sum needed could be obtained, because the conditions of the market were too unfavourable and disposable capital was lacking. Whereas in the summer of 1897 £4,000,000 of a 5 per cent. Japanese loan was floated on the London market at par, the Government offered the Japanese people bonds bearing the same interest at 94, but they were not placed without much difficulty.

All the capital in Japan is locked up either in previously contracted State loans or in the innumerable commercial enterprises which have sprung up in the country during the past few years. When we remember that nine-tenths of the £40,000,000, at which the National Debt stood after the war, is in Japanese hands, and that it is with their own money that they have constructed railways and established new industries, there is no ground for surprise at this lack of ready capital. In view, however, of the evident impossibility of placing a domestic loan for the sum required, two alternatives remained: a foreign loan, or a reduction to more modest proportion of the programme of expansion.

The result of an appeal to foreign capitalists would no doubt have proved successful if the attractive interest of from 5 to 5¼ per cent. had been offered. Japan offers excellent security. Her finances have hitherto been admirably managed, and her liabilities do not appear to be in excess of the capabilities of her people. Nevertheless, the project of a foreign loan seems to have met with serious opposition from many eminent people in Japan, which arose from a twofold cause: first, fear of compromising the independence of the country by supplying foreigners with a pretext for interfering in the internal affairs of the Empire, in case there was any difficulty in fulfilling obligations; and, secondly, the national pride, which regarded it as humiliating for Japan to become indebted to Europe. This latter motive was doubtless the most powerful, but it rested upon an altogether exaggerated notion of national dignity. What all the great Powers of the world, except, perhaps, France and England, have done, Japan might do without sacrificing her dignity. The Japanese Government, after long hesitation, in which it perhaps missed the most favourable opportunity, decided in June, 1899, to issue a 4 per cent. loan on the London market at the rate of 90 francs. The high rate of issue did not greatly tempt the public, but that part of the loan not then subscribed will be gradually issued and advanced by the banks which undertook the issue, and thus the Japanese Treasury will find itself in possession of sufficient funds to proceed with its programme until money is more plentiful at home. In the meantime, so far as concerns the honourable intentions of the Japanese to fulfil their obligations, we may rely with safety upon their natural high sense of honour, and rest assured that they will do everything in their power to meet their obligations. Moreover, the resources of Japan, which I will briefly analyze, appear sufficient to enable the country to meet without much difficulty the interest on the loans as well as the permanent expenditure resulting from its greater national importance.

Let us, to begin with, review the principal items in the revenue as tabulated in the Budget of 1897–98:

Land tax £3,870,000
Income tax 190,000
Tax on drinks 2,990,000
Tax on tobacco 310,000
Registration 750,000
Tax on sales, contracts, etc. 590,000
Customs 660,000
Various duties 490,000
Posts and telegraph 1,210,000
Profits of the State railways 540,000
Crown land products 290,000
Other items 250,000
Receipts from Formosa 810,000
———————————
Total £12,950,000
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This Budget is higher by one-half than that of 1893–94, the total of which we have already given, and whose ordinary receipts did not quite reach £8,600,000. This increase results from four causes: (1) better returns from the public services—railways and posts; (2) a slight increase in the revenue from taxes whose rate has not changed, and also in the Crown lands; (3) the establishment of two new taxes on registrations and sales, contracts, and other commercial deeds, the aggregate value of which increased the revenue by about £1,200,000; (4) the reorganization of the tax on drink, increased by £1,150,000, and of that on tobacco, in consequence of this product having been converted into a monopoly, the effects, however, of which were not felt in 1897–98, for it only came into force in January, 1898. To these we must add the receipts from Formosa, which, unfortunately, are not net receipts. The total revenue for the fiscal year 1897–98 was £12,950,000, and exceeded ordinary expenses by £600,000; but these figures will undoubtedly be greatly augmented when the programme of expansion is completed. It is calculated that by the year 1904–5 the ordinary expenses will stand as high as £17,300,000, in order to meet which it will be necessary to raise another £4,400,000 by increased taxation.

Taxation in Japan has a natural tendency to increase. During the years 1887–94 the annual rise was between 1¼ and 1½ per cent. at a time, when it was not affected by any unusual excitement. This was before the war. Assuming that it only advances at the rate of ¾ per cent., it is expected that by the year 1904–5 the increase will add £500,000 to the £9,800,000 of 1897–98. On the other hand, the Customs tariff, which was kept exceedingly low by the treaties with foreign Powers, has risen in consequence of the revision of these treaties, and, it is hoped, will produce an increase of £600,000. The tobacco monopoly will also, it is anticipated, produce £800,000 per annum, an absolute increase of £500,000 on the existing returns. There remains, therefore, £2,800,000 to find, which will doubtlessly be obtained from the increased receipts of the posts, telegraph, and telephones, and by the extension of the State railways now in existence, and the exploitation of those in process of construction.

The recent excessive activity in commercial circles has suffered a check of late, a halt not very surprising after such a forced march. In the meantime, there is some risk that the returns of the posts and railways may not increase as rapidly as the more sanguine anticipate, for the new railways are not likely to prove as profitable as those already in existence, which pass through richer regions. During the interval 1892–96 the net railway returns to the State, without including any remarkable increase in the lengths of their lines, was doubled. By the year 1904 it is calculated that there will be 1,250 miles of rail instead of the 600 in 1897, which it is estimated will yield an increase of £550,000 upon the present returns. As to the posts, telegraph, and telephones, whose rough receipts were augmented by about 80 per cent. during the last four years, there is every reason to believe that they will in 1904–5 be £850,000 above what they are at present. Thus we have £1,400,000 added to the necessary £2,800,000. The remaining £1,400,000 will have to be taken from various other sources of taxation. The question now arises: Will the country stand further taxation without protest? The answer seems to me reassuring. The land tax before the Restoration and even to the close of the seventeenth century, as can be verified by reference to many important historical documents, was seven times more burdensome than it is at present, and was paid in kind—in rice, or other kindred products—and yielded to the daimios and the Central Government 147,000,000 bushels of rice per annum. At the price fetched by rice in 1897, when the harvest returned a fair average, the land tax should now represent about a sixth of this amount, and the total Budget of £17,300,000 anticipated for the year 1894–95 only claimed 93,100,000 bushels. If we add to these all the provincial and communal Budgets, we find not more than 127,400,000 bushels of rice. It is therefore untrue that the Japanese are not better off to-day than they were under the old regime. Since the introduction of the present financial conditions and the abolition of the feudal system, prices have increased enormously. From 1887 to 1897, according to the Monthly Returns published by the Bank of Japan, on the returns of about forty principal products of the Empire, we find that they have increased in value by no less than 73 per cent. Salaries have augmented even to a greater extent, and the population has risen 4,000,000, so that an addition of 45 per cent. upon the taxes leaves the taxpayer less heavily burdened than before. The most important of all these taxes may strike us as distinctly heavy, but we must not forget that in former times it was the only form of taxation. In those good old days nine-tenths of the population lived in the country, which was divided up among the daimios, the peasantry being their tenants; but at the abolition of the feudal system the peasants, under the new law, became proprietors, without having to pay a fraction either to their former masters or to the Government.

In 1896 the agricultural produce of Japan was valued at £62,600,000, exclusive of the produce of the fens, which, however, is very important. The land taxes, therefore, at £3,800,000 are only 5·6 per cent., and the local land tax 2·8 per cent. of this total. All this is not excessive.

Finally, the land tax includes £352,500 derived from the tax on urban building land, which pays £1 12s. per acre, only four times as much as the rice-fields, and should easily return from £200,000 to £300,000 more. As regards the total of the land tax, it was decreased by one-sixth in 1877; an equivalent increase would bring in a return of about £600,000 more, and this could be effected without much inconvenience, owing to the general increase in the value of property. The tax on _saké_, the principal drink of the country, was raised in 1897 about one-half. It would bear augmentation, as at present it pays 5d. per gallon on a drink which is worth 1s. 3d. a gallon. In general, the Japanese financiers prefer to raise existing taxes rather than establish new ones. If we study the question from another point of view, and examine how best to increase Japanese taxes, let us consider the Budget as it will be five years hence, after the necessary taxes already mentioned have been added to it. Of the £17,300,000 of the Revenue, £3,400,000 will be derived from Crown lands, railways, and posts, £850,000 from Formosa, and £13,000,000 from monopolies and taxes paid by Japan proper. The population, increasing as it does at the rate of 350,000 to 400,000 souls a year, will have reached 45,500,000, contributing to the State at the rate of £13,000,000, or about 5s. 9d. per head, which does not seem to us excessive when compared with what is paid by people of other countries. A Frenchman, for instance, pays £3, an Italian £1 12s., a Russian 12s. 9d., an Egyptian 16s. 9d., and a Hindu 3s. 9d. I have not selected these nationalities haphazard, but because each of them has some special characteristic in common with Japan, especially Egypt, essentially an agricultural country. I do not think that anybody can maintain that an Italian, as a rule, is five or six times richer than a Japanese, or an Egyptian three times, or that the 130,000,000 of Russians, 20,000,000 of whom are Asiatics, possess incomes double the average to be found in Japan, and there is no doubt an immense inverse difference between a Hindu and a Japanese. Bearing in mind these facts, one must certainly conclude that the amount which the Jap will pay to his Treasury is considerably lighter than that obtained from almost every people in the Old World. With regard to the National Debt, five-sixths of which is held by natives, at the present moment it does not exceed £40,000,000, but it will reach its maximum in 1901, when it will stand at £49,930,000. The annual repayment stands at present at £720,000, but will increase to £1,000,000 in 1903, and go on augmenting, so that by 1938, unless fresh obligations are incurred beyond those already in view, Japan will be free of debt.

The financial difficulties confronting Japan at the present moment are therefore not so formidable as they appear. In 1899 the Chamber increased the land tax, which it had previously very persistently refused to do. At the same time it raised the tax on _saké_ and on the posts. The Budget of ordinary receipts was therefore advanced to £19,000,000. This figure may appear excessive, but it shows a surplus of £4,000,000 on the actual expenses, a fact which indicates the intention of the Government to pay off as soon as possible the extraordinary expenses of the Ito programme, which means that these increased taxations are to be considered merely as temporary. They may possibly impede commerce at first, a thing which, unfortunately, cannot be helped, but, at any rate, the future will be considerably benefited thereby. The finances of Japan have, happily, always been managed in a highly satisfactory and prudent manner, and if the Empire carries out the present plan of expansion, and does not embark on any fresh schemes involving further outlay, Japan seems to have found a clear way out of the transient difficulties which at one time weighed upon her finances.