Abstract
This chapter briefly provides empirical and theoretical motivations for research papers that are collected in this book. In the modern Japanese economy, strong money demand has appeared twice. It first appeared during World War II and then, more recently, after the mid-1990s. Such strong money demand enabled the Japanese government to finance large-scale military spending in the first occasion, while it has supported massive fiscal operations developed by the government in the second. For the former part, the economy was forced to implement strict fiscal reforms to prevent hyperinflations from happening once the strong money demand disappeared immediately after the war ended. For the latter, on the other hand, near-zero rates of interest and stable prices continue to coexist with affluent money and poor fiscal surpluses, while strong money demand survives.
The observations associated with the emergence and disappearance of strong money demand are hard to explain by either the quantity theory of money or the fiscal theory of the price level. Here, a monetary and fiscal theory of the price level is proposed as their alternative. In particular, it can successfully identify additional sources of money demand. More concretely, the strong money demand appearing during the war was attributed to immense demand for BOJ notes from black markets, while the current one has been driven by extremely low interest rates, starting from 1995. Employing rich implications from this alternative theory, I fully elucidate the extent to which the current monetary and fiscal situation of the Japanese economy is sustainable, and how it will break down in the near or far future.
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Notes
- 1.
Historians consider that the Japanese ‘modern’ period began in 1868 with a new government inaugurated by the Meiji Restoration.
- 2.
The nominal and real GNE and GNE deflator for 1945, not reported by the Economic Planning Agency (EPA, 1964), are estimated in Sect. 4.2 in chapter “Central Banknotes and Black Markets: The Case of the Japanese Economy During and Immediately After World War II”.
- 3.
Oi et al. (2004) provide rigorous statistical tests of the long-run stability of the Japanese money demand.
- 4.
Most historians consider that World War II began in September 1939 when Germany invaded Poland and ended in August 1945 with the surrender of Japan. However, Japanese historians include the Second Sino-Japanese War , which started in July 1937, in World War II, even though, at its start, the then Japanese government referred to it not as a war, but an incident.
- 5.
As discussed in Sect. 2 in chapter “Long-Run Mild Deflation Under Fiscal Unsustainability in Contemporary Japan”, if the price path is viewed in terms of the period starting not from 1980, but from 1955, the price level started to stagnate relative to the quantity of money from the mid-1980s.
- 6.
The decrease in the debt–output ratio from 1944 to 1945 was due to an accounting manipulation by the Overseas Funds Bank (OFB). The OFB, founded in February 1945, took over the government liabilities underwritten by reserve banks in north/central China and southeast Asia, and put them outside the special account for extraordinary military expenses. Thus, these public liabilities were not included in the formal government accounts. See Sect. 1 in chapter “On Large-Scale Monetary Operations in the Japanese Occupied Territories During the Pacific War”.
- 7.
In April 1938, the Ministry of Finance set up the National Savings Promotion Bureau. This bureau encouraged (and even forced) people to make deposits (particularly government postal savings) and to buy public bonds.
- 8.
According to Koike (2019), the estimation of wartime private consumption, including EPA (1964), is heavily overestimated. Thus, the estimation of private saving by EPA (1964) may be seriously underestimated.
- 9.
More precisely, as discussed in Sect. 2 in chapter “On Large-Scale Monetary Operations in the Japanese Occupied Territories During the Pacific War”, the government’s deals with the reserve and central banks in the occupied territories were intermediated by the Bank of Chosen and the Yokohama Specie Bank.
- 10.
Rigorously, real money demand \({m}^{d}\) is decreasing in \(i-{i}^{c}\), but here assumed to be inelastic with respect to \(i-{i}^{c}\) unless \(i-{i}^{c}\) is close to zero.
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Saito, M. (2021). Introduction: Toward a Monetary and Fiscal Theory of the Price Level. In: Strong Money Demand in Financing War and Peace. Advances in Japanese Business and Economics, vol 28. Springer, Singapore. https://doi.org/10.1007/978-981-16-2446-9_1
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DOI: https://doi.org/10.1007/978-981-16-2446-9_1
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