Sign up to access the complete lesson and track your progress!
Unlock This CourseDuring the First World War Japan's factories, shipyards and silk mills sold goods to a world at war, and the economy boomed. The boom did not last. When European industries started up again, Japanese exports fell. In 1920 share prices crashed and the prices of goods, including raw silk, dropped sharply. Many firms could not pay their debts, and the banks that had lent to them were left holding loans that might never be repaid.
So Japan entered the 1920s with a weak economy, even before the earthquake struck. Large zaibatsu such as Mitsui and Mitsubishi could ride out the slump. Smaller firms and smaller banks found it much harder.
Key terms:
At two minutes to noon on 1 September 1923 a very strong earthquake, centred in Sagami Bay, shook the Kanto plain. Tokyo and Yokohama were full of wooden houses, and many families were cooking lunch over open flames. Fires spread across both cities. In one open space in Tokyo, about 38,000 people who had gathered to escape were killed when a firestorm swept through. More than 100,000 people died in total.
Hundreds of thousands of homes were destroyed. Most of Yokohama, Japan's chief port for silk exports, was ruined, and so were its warehouses and offices. Large parts of Tokyo, the capital and centre of business, were burned. Factories, shops, schools and railways were wrecked, and many businesses lost their buildings, stock and records.
The earthquake hit the heart of Japanese trade and industry. Silk exports had to be rebuilt through a damaged port. Firms lost goods and had to borrow to start again.
The government declared martial law in and around Tokyo the next day. In the panic, false rumours spread that Koreans, who lived and worked in Japan, were poisoning wells and starting fires. Local vigilante groups, and in some cases police and soldiers, attacked and killed many Koreans. Some Chinese people and some Japanese people mistaken for Koreans were also killed. Estimates of the number of Korean victims range from several hundred to several thousand. In the following weeks military police also murdered Osugi Sakae, a well-known anarchist, together with his partner and young nephew. The violence showed how fear and suspicion could take hold of Japanese society when authority broke down, and how readily the state blamed outsiders and radicals.
Goto Shinpei, a minister in charge of rebuilding, drew up a bold plan for a new Tokyo with wide roads, parks and modern bridges. Politicians cut it back because it would cost too much. Even so, rebuilding was very expensive, and it came at a time when the government and businesses were already short of money.
The government also had to keep firms and banks from collapsing. It ordered a short delay on debt payments at first. Then the Bank of Japan agreed to buy the earthquake bills held by banks, which came to more than 400 million yen. This kept the banks open in 1923. But many firms were in no position to repay, because the slump continued. Years later, a large amount of earthquake bills was still unpaid. They sat in the banks' accounts as bad debts, and the banks that held the most were in danger.
In early 1927 the government asked the Diet to pass laws to deal with the unpaid earthquake bills and to help the banks. During the debate, on 14 March, the finance minister, Katayama Naotoshi, said by mistake that the Tokyo Watanabe Bank had failed. The bank had not yet closed, but customers heard the news and rushed to take their money out. The Watanabe Bank then did close, and bank runs spread to other banks.
In April the large trading company Suzuki Shoten collapsed after the Bank of Taiwan, its main lender, stopped lending to it. The Bank of Taiwan was now in danger too. Prime Minister Wakatsuki Reijiro tried to rescue it with an emergency order, but the Privy Council, which advised the emperor, refused, and Wakatsuki's government resigned on 17 April. The next government, led by Tanaka Giichi, closed the banks for three weeks and the Bank of Japan lent huge sums to keep them going. Calm returned.
Many small banks failed or merged. A Banking Law passed in March 1927 (in force from 1928) had set stricter standards for banks, and the crisis forced weak small banks to close or merge. The large zaibatsu banks, such as those of Mitsui and Mitsubishi, ended up even stronger, because frightened savers moved their money to them. Ordinary people lost savings and trust in the banks.
Change: The wartime boom became a slump. Tokyo and Yokohama were destroyed and rebuilt. The Banking Law of 1927 set stricter rules, and by the end of the crisis many small banks were gone.
Continuity: The zaibatsu stayed at the centre of the economy and grew more powerful. Japan still depended on silk exports, and its economy stayed weak, which left it with little protection when the world Depression arrived in 1929 (see the lesson called "The World Depression Hits Japan").
Explain TWO causes of the bank crisis in Japan in 1927. [8 marks]
Remember: one cause on its own cannot score more than half marks. For each cause, give precise facts and show how it led to the crisis.
One cause was the Great Kanto Earthquake of 1923 and the earthquake bills that followed. The earthquake ruined many businesses in Tokyo and Yokohama, and the Bank of Japan bought more than 400 million yen of their bills so that banks would not collapse. Many firms, already weakened by the slump, could not repay, so the banks kept large unpaid debts. This left some banks too weak to survive a loss of confidence in 1927.
Another cause was the panic that began in March 1927. During a debate on the unpaid bills, the finance minister, Katayama Naotoshi, said by mistake that the Tokyo Watanabe Bank had failed. Customers rushed to withdraw their savings. Because the banks were already short of money, bank runs spread, and the collapse of Suzuki Shoten and the danger to the Bank of Taiwan followed in April.
What lifts this to the top level: each paragraph names a cause, gives precise facts, and shows how the cause led to the crisis.
Link each cause to the outcome with a word such as "so" or "because", and do not just describe what happened in 1927.