Japan was the first non-Western country to intentionally transform its economy into a developed capitalist system. In 1882 the Japanese government established the Bank of Japan on the European model of central banks. This was three decades before the United States created the Federal Reserve System and occurred at a time when feudalism was still a fresh memory in Japan.
After the Meiji Restoration in 1868 the government launched Japan on an intensive program of Westernized economic development. The new government found gold, silver, and copper coins circulating alongside paper money issued by feudal lords and merchants. Like previous revolutionary governments, including the Continental Congress of the United States, the Meiji Restoration government turned to the issuance of inconvertible paper money to finance government spending. Inconvertible paper money is paper money not convertible into any type of precious metal. In 1877 the government issued another round of inconvertible paper money to suppress a rebellion. This touched off an inflationary surge from 1877 to 1881.
The Japanese government learned from European and American models. In 1872 Japan had adopted a system of national banks patterned after the national banking system in the United States. Like their counterparts in the United States, these banks held government bonds as collateral for bank notes. The government’s inconvertible paper currency was redeemable in government bonds, but the system broke down after the government allowed national banks to issue inconvertible bank notes in the late 1870s.
In 1881 the Japanese minister of finance visited Europe to study central banking systems. The National Bank of Belgium had been created in 1850 and appeared to the Japanese as the most advanced institution of its type. The United States had no central bank, and the Bank of England had evolved over nearly two centuries without a written constitution.
The Bank of Japan Act of 1882 provided for the establishment of the Bank of Japan. The bank was organized as a private joint-stock company. The government furnished half of the capital. Government officials not only appointed the governor of the bank and other bank officers, but also supervised the policies and administration of the bank. The bank held a monopoly on the issuance of bank notes, and served as a lender of last resort to other banks.
The Bank of Japan was set up to serve as the fiscal agent of the government, to stabilize seasonal and regional fluctuations in the flow of funds, to finance international trade, and to hold specie reserves. The Japanese Treasury exerted strong influence on the operations of the bank. In 1897 Japan went on the gold standard, making the bank notes of the Bank of Japan fully convertible into gold.
In 1868 precious metal specie accounted for 75 percent of the money supply. By 1881 that percentage had decreased to 20 percent. Bank deposits accounted for 7 percent of the money supply when the Bank of Japan was formed. By 1914 this percentage had grown to 44 percent. Japan’s economy became highly monetized, complete with bank notes and bank deposits.
In June 1997 the Japanese Diet enacted new legislation, the Bank of Japan Law, which provided that the autonomy of the Bank of Japan be respected. In 1998 the Bank of Japan began a major reorganization aiming at streamlining operations and reducing unnecessary holdings, such as surplus real estate.
The process that led to the formation of the Bank of Japan reveals something of the method that lies behind the Japanese economic miracle. Today Japanese commercial banks are among the largest in the world.