Shihei seiri (paper money readjustment) (紙幣整理)

Shihei seiri (paper money readjustment) was a policy of seeking to recover the public trust in the currency system and the credit system by readjusting and reducing the amount of the notes that were issued by the Meiji government and the National Bank (in the Meiji period) and first went into circulation in the early Meiji period, and by converting the notes into the convertible paper money issued by the Bank of Japan.


After the Meiji Restoration, the Meiji government continued to issue non-convertible paper money such as Dajokan-satsu (notes of the Great Council of State) or Minbusho-satsu (Civil Department notes) to compensate for the lack of financial resources. However, the government printed more notes to deal with Shizoku-no-Hanran (rebellion of warrior class) such as the Seinan War (a local war by Satsuma ex-samurai against the Meiji government), which led to a rapid inflation. For this reason, the Japanese economy shifted its focus from the steady accumulation of capital to the speculation, which ended up hindering Japan from establishing itself as a modern capitalistic nation.

In 1879, Shigenobu OKUMA, who served as Okura-kyo (minister of the treasury), proposed that a large amount of government bonds be issued and used for readjusting paper money all at once. However, the fact the bonds included up to \50 million of foreign bonds created a sense of discomfort among the Emperor Meiji and conservatives close to him, who all distrusted the allied Western powers, and it eventually led to the abandonment of the plan to raise foreign loans. As a result, paper money was progressively readjusted by converting it into public bonds with the use of Kinsatsu hikikae kosai (the Bonds Issued in Exchange for Kinsatsu [notes issued by "Ishin" government]) which is the national bonds. Later, Okuma lost his position due to the political turmoil in 1881.

Okuma was replaced as Okura-kyo by Masayoshi MATSUKATA, who had been ousted from his post as Okuranotaifu (administrative vice finance minister) and turned Naimukyo (minister of interior) because he had been at odds with Okuma over the policies for adjusting paper money. Matsukata established the Bank of Japan, and at the same time, he progressively moved forward with the incineration of paper money, setting a policy of converting the paper money into the convertible paper money when the paper money supply reached the level equal to the specie holdings. To do this, however, Matsukata had to prepare himself for a drastically austere budget to come up with the finances needed for moving forward with the incineration of paper money and for a possible outbreak of deflation, for which he sought the approval of the senior government officials including Hirobumi ITO and the Emperor Meiji.

First, he proposed that the government held the expenditures expected during the three years starting in 1882 at the level of the previous year (1881), and that at the same time it raised taxes on cigarettes and brewery and evenly divided the excess of revenue from those taxes so that it could spend half of the excess on the incineration of paper money and hold the other half in the form of specie to keep as reserves for the future when it would be converted into convertible paper money. However, the deflation caused by the budget austerity led to a decrease in tax revenue, and he was at a loss over how to cope with such a vicious circle (the Matsukata deflation). In addition, unexpected expenses primarily for the occurrence of the Koshin seihen (Gapsin Coup in Korea) and the cholera outbreak made it extremely difficult to maintain the austere budget. Still, Matsukata made efforts to keep the original plan as unchanged as possible by securing revenue raised primarily from the introduction of new taxes. Furthermore, he established the idea of the nation's central bank as the Bank of Japan Act was promulgated in 1882, and in 1883, after the revision of the National Bank Act, he announced the policy of readjusting and abolishing the paper money issued by the national banks. He also provided Yokohama Shokin Ginko (Yokohama Specie Bank) with the funds for direct export documentary bills, made the bank receive the export proceeds in the form of specie outside Japan which it earned from the funds, and introduced the proceeds into the country. In this way, the proceeds were increased by utilizing the small amount of the reserves in the form of specie.

Thanks in part to this, paper money worth \13.64 million was successfully readjusted and collected before 1885. When the amount of the paper money exchanged for Kinsatsu hikikae kosai was added to this collected amount, the amount of government-issued paper money decreased from \118.9 million to \88.34 million, and the amount of the paper money issued by the national bank decreased from \34.39 million to \30.15 million over the period from 1881 to the end of 1885. By contrast, the national treasury reserves in specie increased from \12.7 million to \42.27 million, and since \ 1 in specie, which had been equivalent to a \1.80 note, came to \1.008 in the financial market, which meant that, with the specie money and the paper money being almost equal in value, conditions for issuing convertible paper money were established by then.

Thus, financial stability was achieved, and then Matsukata had the Bank of Japan issue convertible paper money on May 9, 1885, which replaced the government-issued paper money and the paper money issued by the national bank starting in the following year. In 1893, he established the funds for exchange of paper money, which accelerated the collection of the government-issued paper money and the paper money issued by the national bank. On March 9, 1896, 'Act on the Currency of and the Expiration Date for Exchange of Paper Money Issued by the National Bank' (Act No.8 of 1896) was promulgated, and on June 11, 1898, 'Act on the Abolition of the Currency of Government-Issued Paper Money' (Act No.6 of 1898) was promulgated; consequently, both the government-issued paper money and the paper money issued by the national bank were withdrawn from circulation as of the end of 1899. Based on a series of these Acts, the government-issued paper money and the paper money issued by the national bank that were left for the public to use for a limited period of five years from early 1900 (to 1904) were replaced, and the collection of these notes in circulation was completed.

[Original Japanese]