The depression of the 1930s in Japan has not been studied intensively. It is generally believed, however, that, despite the difficulties in certain sectors, the macro performance of the economy was better than in most other countries. This view will be confirmed in this chapter.

First a brief account of the deflationary process before 1929. Return to the gold standard at the old parity rate of $US497/8 = 100 yen was one of the major policy objectives of the Japanese Government during the 1920s. The actual yen rate was generally lower after the disastrous Kanto earthquake in 1923. Hence, the Government sought to deflate the economy to bring prices down and move the yen rate in the desired direction. However, while Japanese prices fell throughout the 1920s, so too did foreign prices; as a result overvaluation of the yen persisted. While the actual exchange rate (46.07) was lower than the old parity rate, a simple purchasing-power parity theory suggests that it should have been lower still.

Nevertheless, in 1930 Japan returned to the gold standard at the prewar parity rate, neglecting the realities of the economic situation. The Japanese Government presumably chose this particular rate/parity through a desire to maintain national prestige and partly with the object of letting the resulting tighter economy weed out those unhealthy firms which had been unable to continue in business thanks to the previous lenient policy. Another possible reason was the Government's hope of being able to re-borrow 230m yen of foreign bonds maturing shortly. It was believed that Japan should show its strength by going back to the gold standard at the old parity rate.