NRI Papers
No.90 June 1, 2005
  Japanese Government Bonds 100 Years Ago  
Toshiki TOMITA
      Today, capital can be moved internationally on an unrestricted basis. Despite this free movement of capital, overseas investment by the private sector in Japan has been extremely subdued, creating a huge amount of excessive savings. Partly because of this, we are insensitive to the fact that a risk premium is required for Japanese government bonds.
      One hundred years ago, the savings of each country were freely exchanged across country borders. An amount of foreign bonds three to four times the amount of British bonds was traded on the London Stock Exchange, and the interest rate was determined according to the risk involved in each country. In order to enable the issue of government bonds with a lower risk premium, countries imposed restrictions on their economic policies and pursued adoption of the gold standard.
       The Meiji government continued an environment of austerity finance to control inflation caused by the Seinan War. Government notes were redeemed by a fiscal surplus, and the price of government bonds was directed towards the recovery of face value from early 1881. The conversion of government notes to silver coins started in 1885. In 1886, high-interest government bonds started to be converted into low-interest (5-percent) government bonds. In 1897, Japan adopted the gold standard based on reparations received as a result of the Sino-Japanese War.
      Through the adoption of the gold standard, the credit rating of Japanese government bonds improved on the London capital market. In 1899, 4-percent interest-bearing government bonds with a maturity period of 55 years were issued in London. This was Japan's first issue of foreign bonds in 26 years since the issue of 7-percent interest-bearing government bonds in 1873. Following this, even though investors in London had a favorable impression to the Anglo-Japanese Alliance, the spread (risk premium) between Japanese government bonds and British government bonds at the end of January 1902 was 1.86 percent, largely exceeding 0.75 percent, which was applied to Russian government bonds.
      During the Russo-Japanese War, 40 percent of war expenditures were financed by issuing foreign bonds. Until Japan gained victory in the Battle of the Japan Sea, a large risk premium was required for Japanese government bonds. Through the efforts made by Korekiyo Takahashi, a government representative on a special mission, Japanese government bonds were issued not only in London but also in New York, Paris and Hamburg. After the war, 4-percent interest-bearing government bonds were offered in London and Paris in order to convert 5-percent interest-bearing government bonds issued in Japan during the war.
I Credit Rating of Japanese Government Bonds in the London Market
  1 Why We Study Japanese Government Bonds Issued 100 Years Ago
  2 British Government Bonds as a Benchmark throughout the World
  3 Susceptible Government Bonds of Peripheral Countries
  4 Risk Premium Required for Japanese Government Bonds
  5 A Reduction of Risk Premium on Japanese Government Bonds
II Path towards the Adoption of the Gold Standard
  1 Confrontation Concerning the Issue of Foreign Bonds
  2 Paper Money Reform and Accumulation of Specie
  3 Conversion of Government Bonds to Silver Coins
  4 Conversion into Lower Interest Rate Government Bonds
  5 Shift to the Gold Standard by Reparations from China
III Russo-Japanese War and Issue of Foreign Bonds
  1 Selling 5-Percent Interest Bonds and Issuing 4-Percent Bonds in London
  2 Using Foreign Bonds to Finance the Russo-Japanese War
  3 Consolidation of Government Bonds Also Relied on the Issue of Foreign Bonds
  4 Confrontation after 40 Years over the Japanese Government Bonds in Francs
  5 Changing to a Capital Export Country after World War I


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