Financial Crisis of 1927

The financial crisis of 1927 in Japan was characterized primarily by a large-scale collapse of banks, both large and small, that resulted in greater financial control of the economy by the biggest banks, which took over the assets of bankrupt firms. The crisis originated in the latter stages of World War I, when companies had to decide whether to reduce commitments in view of an expected slowdown after the war or to expand investments to exploit an anticipated postwar recovery. Many Japanese companies chose the latter option, fueling their expansion with credit. When Japan's stock market crashed in March 1920, the superstructure of this expansion collapsed. Furthermore, now debt-ridden companies lacked the competitive power to engineer a recovery. Their prices had risen more rapidly during the war than those of their Western competitors but had declined more slowly after it due to the underdeveloped state of Japan's technology and the higher costs faced by Japanese companies seeking to manufacture comparable products.

Initial government countermeasures were undermined by the massive Tokyo earthquake of 1923. The financial aftershock of the earthquake created an insurance crisis and greatly expanded the debt held by banks that took out loans to invest in the stock market and in industrial enterprises during the short-term boom after World War I. The government sought to ameliorate the situation with "earthquake bills," a second round of special credit. A key institutional feature of Japanese finance in this era was the "organ bank." Many banks had lent so much to related industrial firms whose fortunes were so precarious that cutting off credit would bankrupt both the firms and the banks. The largest such linkage, and the one that resulted in the biggest disaster, was between the Bank of Taiwan (which was a Japanese bank), and Suzuki Trading Company. In late March and early April 1927, the Finance Ministry warned the Bank of Taiwan to cut back on its loans to Suzuki. Mitsui Bank then called in some of its loans to the Bank of Taiwan, precipitating the closure of both Suzuki and the Bank of Taiwan, with the latter subsequently being reorganized. As a result of this crisis and the consequent short bank moratorium, many banks and the industrial firms that they had financed went bankrupt. Their assets were then acquired by the large zaibatsu (family-owned financial and industrial groups). With their consequent broader control over the banking sector, the top five banks increased their share of national deposits from 24 percent in 1926 to 40 percent in 1930.

The 1927 financial crisis can be placed within the larger patterns of Japan's modern history. At least through the 1980s Japan was credited with dealing exceptionally successfully with economic crises. A frequently cited example is its response to the energy crisis of the 1970s. That, however, was primarily a crisis of inflation. By contrast, the era immediately preceding the 1927 crisis was one of wealth (produced by the wartime boom) and deflation (meaning the decline in prices after the war). There is a striking similarity between that crisis and the prolonged financial crisis beginning in 1990. The latter manifested a similar sequence of boom (generated by inflated asset prices in real estate and stocks) and deflation (the bursting of the financial bubble followed by long-term price decline). This comparison suggests that in the twentieth century Japan has been singularly inept at handling problems of wealth and deflation.

Cho Yukio. (1974) "Exposing the Incompetence of the Bourgeoisie: The Financial Panic of 1927." Japan Interpreter 8, 4 (Winter): 492–501.

Patrick, Hugh. (1971) "The Economic Muddle of the 1920s." In Dilemmas of Growth in Prewar Japan, edited by James Morley. Princeton, NJ: Princeton University Press, 211–266.

Yamamura Kozo. (1972) "Then Came the Great Depression: Japan's Interwar Years." In The Great Depression Revisited, edited Herman van der Wee. The Hague, Netherlands: Martinus Nijhoff, 182–211.