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“East Asian Economic Development in Historical Perspective” Workshop

IER, Hitotsubashi University, Tokyo July 3rd, 2009

Market Disintegration in Post WWII Japan

Evidences from Black Market Regional Prices

Jean-Pascal BassinoFaculty of Mathematics and Social Sciences Paul Valéry University, Montpellier, France

E-mail: jean-pascal.bassino@univ-montp3.fr

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Motivation(s) ___________________________

Recent experiences of market failures (and/or supervision failure) and of dramatic social consequences of erratic price movements (e.g. cereals, raw material, real estate, and others)

Japan’s immediate post WWII experience:Severe impact on markets of supply shocks,

economic chaos, and the disruption of transportation and commerce networks

- Hyperinflation- Collapse of living standards- Regional market disintegration -> this paper

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Research questions and tentative responses

___________________________1. Did regional markets totally disintegrate in post

WWII Japan?- Yes, almost completely; but the Tokyo-Osaka rice

price linkage prevailed.2. Did the economic system quickly revert to initial

conditions?- No; probably more akin to a Markov switch. 3. How long did disintegration last?- Several years; close to a decade.4. What were the driving forces leading toward

regional market reintegration in the 1950s?- Unclear; it might be that price-fixing played an

important role.

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Outline ___________________________

1. Economic chaos and the collapse of living standards

2. Black market price data and descriptive statistics

3. The prevalence of Tokyo-Osaka price linkages: VAR and ECM

4. Nominal regional price convergence in the 1950s

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Economic chaos and SCAP reforms___________________________

Economic chaos: - Siamese twin governments (SCAP + Jap. Gov.) - Shortage of raw materials and intermediate goods- Natural hazards and floods - Repatriation of soldiers and overseas Japanese - Paramount logistic problems (lack of rolling stock

and merchant fleet)3 main reforms under the SCAP supervision:- Education reform: teenagers not on the street- “Dissolution” of zaibatsu: adding to the mess- Land reform: enhancing the purchasing power of

rural folks, but also their bargaining position

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The collapse of living standards (1)

___________________________“O my daughter, you should marry a peasant”Recurrent complaint among urban Japanese poor folks after WWII.

“He decided to abide to the law, never resorting to black market. He survived on ration tickets, and finally died of starvation.”

Popular story about judge Yamaguchi who died in October 1947.

Prevalence of malnutrition dystrophia (MD) estimated at 15% in 1945 (Aoki 2008) and 5% of total population in 1947 (Omori 1947).

Number of deaths due to MD: 7476 in 1947, 3474 in 1948, 2723 in 1949, 4680 in 1950, 2299 in 1951, 1767, in 1952, 1782 in 1953, 1491 in 1954, 1117 in 1955 (Aoki 2008).

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The collapse of living standards (2)

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Table 1. Average body height of mal students in cm (year of measurement; sample size problems in 1940-46)

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The collapse of living standards (3)

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Table 2. Average per capita daily caloric intake

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Price data and descriptive statistics

___________________________Black market prices currently available:- Agricultural monthly prices in 8 prefectures

from Sept. 1946 to Dec. 1947 (rice and others)

- Monthly retail prices of rice and 4 other staples (barley, wheat flour, sweet potatoes, white potatoes) in Tokyo and Osaka 1947-1950

Comparison with Meiji-Taisho and the 1950s:- CV of prefecture-level prices (yearly averages)- Monthly price movements of staples in Tokyo

and Osaka (error correction arbitrage)

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The extent of market disintegration

___________________________- Huge regional price gaps: in 1947, factor of 2.1

to 3.3 between the lowest and the highest in the case of rice producers’ prices ; CV in a range between 0.24 and 0.37 (<0.1 since late Meiji)

- Large retail price gaps between Tokyo and Osaka (between 30 and 100%): much higher than in late-Meiji (in a range of + or - 10%).

- Erratic movement of the price of staples relative to rice, both in Tokyo and Osaka: coefficients of correlation in Tokyo in a range between 0.59 (wheat flour/sweet pot.) and 0.93 (rice/barley); in Osaka, 0.29 (barley/sweet pot.) to 0.84 (wheat flour/barley)

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The disintegration of regional markets

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Figure 3: regional agricultural black market rice prices(yen per sho; around 1.8 l per sho, i.e. 1.5 kg rice)

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Rice black market prices in Tokyo and

Osaka ___________________________

Figure 4: Rice black market monthly prices (yen per kg)

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Non-rice staples’ black market prices in

Tokyo ___________________________

Figure 5: Black market prices relative to rice (rice=1;

barley and wheat flour, left scale; potatoes, right scale)

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Non-rice staples’ black market prices in

Osaka ___________________________

Figure 5: Black market prices relative to rice (rice=1;

barley and wheat flour, left scale; potatoes, right scale)

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Tokyo-Osaka price linkages (1) ___________________________

Attempt to uncover causality between pricevariations (5 items) in Tokyo and Osaka using a VAR(1, 2, 3-month lag; Granger causality Wald Test)

logPi,Tyo, t = logPi, Tyo, t-logPi, Osk, t-

Pi,Tyo, t : price of item i in Tokyo in tRice: Tokyo as leading market (Tokyo was also the

leading market before WWII)Sweet potatoes: Tokyo as leading market (no

information on preWWII)Potatoes and wheat flour: Osaka as leading market

(no information on preWWII)Barley: not significant

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Tokyo-Osaka price linkages (2) ___________________________

Error Correction ModelPrice of item i in Tokyo and Osaka (5 staples)logPi,Tyo,t = + . logPi, Osk,t + .(logPi,Tyo – logPi,Osk)t-1 +

Short term adjustment coefficientLong term adjustment coefficient (error correction)Critical values for based on Ericsson&MacKinnon (2002)

Results:is significant and of the expected sign (-0.43) for rice - Comparable to the conditions in late Meiji-early Taisho (significant for rice; -0.35)- also significant for potatoes (but with low R-squared)- But not significant for barley and wheat

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Nominal convergence in the 1950s___________________________

CV of regional unit prices:- Rice, meat, eggs: back to less than 0.1 in 1960- Fish, services: only limited convergence

Driving forces of nominal convergence:- Rice: administrative prices- Manufactured goods: price setting by oligopolies (nationwide identical prices for beer, pencils, pommade; similar prices for sugar, nylon stockings, and electric bulbs in a large number of prefectures)

Administrative and nationwide fixed-prices generating rent-seeking behavior: peasants and wholesalers

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Conclusion ___________________________

Regional market disintegration BUT market integration preserved between Tokyo and Osaka -> Enhancing the geographical concentration of economic activities in the Tokaido region

Research agenda: (1) Non-food items black market prices (2) Exchange rates of food and non-food items (barter trade); was rice used as currency?(3) Adjustment of regional prices to changes in Tokyo and Osaka (ECM) (4) Process of nominal convergence in the 1950s (hard evidence of price fixing?)