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Modern Japanese Financial History as Seen Through Its Currency

3-2 Establishment of the Gold Standard

Shin-kinka gold coin under the Coinage Law (1897) First gold coin convertible note (1899) In 1897, Japan adopted the gold standard and enacted the Coinage Law, which valued one yen at 0.75 gram of gold. The one-yen and two-yen gold coins were not produced, however, as they were too small and therefore difficult to circulate. This brought about the issue of the Bank of Japan convertible note, which could be exchanged for gold coins. The character for "silver" disappeared from the note and it simply read "convertible note."

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Attempts to adopt the gold standard in Japan date back to the promulgation in 1871 of the New Currency Act. At the time, the denomination "yen" was first used and gold coins were set as standard currency (at the rate of 1.5 gram of gold to one yen).      Under the New Currency Act, not only was the standard gold coin introduced but the newly cast one-yen silver coin (Boeki-gin) was also introduced for unlimited use at open ports in Japan. In general commercial transactions, however, both parties had to agree on the use of the coin as a precondition. Looking at the volume of currency distributed among the public, however, silver coins overtook gold coins after 1877, and in 1878 unlimited use of the Boeki-gin in Japan was allowed in the same way as the standard gold coins. Bank of Japan notes, which were issued in 1885, also became convertible into the Boeki-gin. From 1878, when the unlimited use in Japan of the Boeki-gin became allowed, until 1896, Japan effectively had gold and silver standards that existed side by side. However, most domestic and overseas transactions took place in silver denominations, and in that sense Japan had a de facto silver standard in place.      Internationally, while in Asia the Mexican dollar silver coin was widely used as a trading currency, the United States and major European countries shifted from either a gold and silver standard or a silver standard to the gold standard (England in 1816, Germany in 1871, the United States in 1873, and France in 1876). This trend established an international gold standard. As the value of silver continued to fall along with the shift in the United States and Europe away from the silver standard, so too did the exchange rate in Japan, which leaned toward a silver standard. Therefore, while the silver standard was useful in promoting exports, it was also the cause of a rise in prices in Japan.      In 1896, the position of Prime Minister and Minister of Finance was taken up by Matsukata Masayoshi, who already viewed Japan's participation in the international gold standard as a key policy objective. His appointment therefore significantly accelerated the move toward establishing the gold standard in Japan. In order to build up Japan's shokin (specie) reserves, reparations from the Sino-Japanese War that were originally to be received in silver denominations were collected in British pounds. The pounds were used to purchase gold, which was shipped to Japan. This was to be the preparatory stage leading up to the promulgation in 1897 of the Coinage Law, which stipulated that only gold coins could be used as the country's standard currency.      Under the Coinage Law, one yen was valued at 0.75 gram of gold, which was half the value established under the New Currency Act. This step confirmed the changes in the relative value of gold to silver that accompanied the drop in the value of silver since the establishment of the New Currency Act. It allowed Japan to avoid any significant economic impact from the shift from the silver to the gold standard.      According to a report created in 1899 by the Minister of Finance on the shift to the gold standard, the adoption of the gold standard stabilized domestic prices and the exchange rate, which in turn helped develop credit transactions domestically, stimulated trade, and allowed for a smooth influx of capital from the United States and major European countries.      Under the Coinage Law, five-yen, 10-yen, and 20-yen gold coins were created. In 1899, Bank of Japan notes were issued as gold coin convertible notes, in place of the silver coin convertible notes of the past. Once the Coinage Law was introduced, gold coins that were issued under the New Currency Act began to be accepted at twice their original face value.

Mari Ohnuki, Research Division 3, Institute for Monetary and Economic Studies, Bank of Japan Monetary and Economic Studies 19(2), Bank of Japan, 2001

References Akashi, Teruo, and Suzuki, Norihisa, Nihon Kin'yu-shi (Monetary History of Japan), Vol. 1, Toyo Keizai Shimposha, 1958 (in Japanese). Asakura, Kokichi, Nihon Kin'yu Tsu-shi (1) Meiji Taishohen (Financial History of Japan [1] Meiji and Taisho Periods), Nihon Keizai Hyoronsha, 1978 (in Japanese). ----, Shimpen: Nihon Kin'yu-shi (Revised Monetary History of Japan) , Nihon Keizai Hyoronsha, 1988 (in Japanese). Bank of Japan, Centennial History Editing Board, Nihon Ginko Hyakunen-shi (The Bank of Japan: The First Hundred Years), Vols. 1 and 2, 1982, 1983 (in Japanese). Kojima, Hitoshi, Nihon no Kin'hon'i Taisei Jidai (The Era of Japan's Gold Standard), Nihon Keizai Hyoronsha, 1981 (in Japanese). Mint Bureau of the Ministry of Finance, Zohei Kyoku Hyakunen-shi (A Hundred-Year History of the Mint Bureau of the Ministry of Finance), 1974 (in Japanese). Tamaki, Norio, Nihon Kin'yu-shi (Monetary History of Japan), Yihikaku Sensho, 1994 (in Japanese). Yoshino, Toshihiko, En to Doru (The Yen and the Dollar), Nippon Hoso Shuppan Kyokai, 1987 (in Japanese). ----, Nihon Ginko-shi (History of the Bank of Japan), Vols. 1 and 2, Shunjusha, 1975, 1976 (in Japanese).