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Modern Japanese Financial History as Seen Through Its Currency

3-1 Establishment of the Bank of Japan

Bank of Japan note From May 9, 1885, the Bank of Japan started issuing notes in denominations of 100 yen, 10 yen, and 1 yen. The photograph shows a 10-yen note. The engraving was done by the Italian artist Chiossone, who also engraved the National Bank Notes (new notes) and the Jingu Kogosatsu note.      This Bank of Japan note was known popularly as "Daikokusatsu note" because of the Daikoku deity on the face. The Bank took steps to discourage forgeries by the note in light blue ink, which was hard to photograph, and by using konnyaku flour to strengthen the paper. There were, however, clear defects to this strategy. The lead in the blue in reacted which hydrogen sulfide at hot springs areas and turned black; the konnyaku flour was a favorite of insects and rats. In 1888, new notes were issued.

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In 1868, immediately after the restoration of the Imperial rule, the Meiji Government issued its first Government Notes, which were called Dajokansatsu notes and retained the units of the Edo Period, the ryo, bu, and shu. The Dajokansatsu notes were nonconvertible notes (notes not issued under the promise of conversion to "specie" such as gold or silver), and their circulation was repeatedly increased, not only to provide for industrial funding (their initial purpose), but also to finance the government spending with few other measures of funding. In 1871, Japan passed the New Currency Act to establish the gold standard and reform currency units into yen, sen, and rin. Lack of specie, however, required that the new notes (Meiji Tsuhosatsu note) also be nonconvertible. In 1872, the National Bank Act was passed for the purpose of establishing the gold standard and providing for industrial financing. The national banks established under the ordinance issued "National Bank Notes," but only very small amounts were in circulation. National Bank Notes subsequently became essentially nonconvertible, and the outbreak of the Seinan Civil War in 1877 brought rampant inflation as Government Notes were also issued in large quantities to raise funds for the war.       It was within this context that Matsukata Masayoshi was installed as Minister of Finance in 1881. Matsukata embarked upon a fiscal austerity program in order to quell inflation and accumulate specie. The Bank of Japan was established in 1882 to launch the convertible note system and a modern credit system. At the time of its establishment, the Bank of Japan was not issuing bank notes and the Bank's initial priority was on collecting and resolving the large volumes of nonconvertible Government Notes and National Bank Notes that were still in circulation. The "Explanation of the Establishment of the Bank of Japan" maintained that (1) it was impossible to issue convertible notes due to lack of specie, and (2) the Bank should not be allowed to issue notes backed by bonds in order to avoid the overissuance of nonconvertible notes. As exports expanded and specie accumulated, the resolution of nonconvertible notes was in sight, and in 1885 the Bank of Japan issued its first bank notes. Convertible bank notes with guaranteed exchange for silver, they were called Daikokusatsu notes because the design was based upon the Daikoku deity.       Amendments to the National Bank Act of 1883 curtailed national banks' right to issue notes and converted such banks into ordinary banks. The Bank of Japan became the sole issuing institution as a result. In 1899, circulation of Government Notes and National Bank Notes was suspended, and Bank of Japan Notes became the only notes to circulate in Japan.

Mari Ohnuki, Research Division 3, Institute for Monetary and Economic Studies, Bank of Japan Monetary and Economic Studies 19(1), Bank of Japan, 2001

References Asakura, Kokichi, Shimpen: Nihon Kin'yu-shi (Revised Monetary History of Japan) , Nihon Keizai Hyoronsha, 1988 (in Japanese). Bank of Japan, Atarashii Nihon Ginko-Sono Kino to Gyomu (The Bank of Japan Purposes and Functions), 2000 (in Japanese). Bank of Japan Centennial History Editing Board, Nihon Ginko Hyakunen-shi (The Bank of Japan: The First Hundred Years), 1982 (in Japanese). ----, Nihon Ginko Hyakunen-shi, Shiryohen (The Bank of Japan: The First Hundred Years, Reference Volume), 1986 (in Japanese). Teranishi, Juro, Nihon no Keizaihatten to Kin'yu (Japanese Economic Development and Finance), Iwanami Shoten, 1982 (in Japanese).