1 East Asian Economic Development in Historical Perspective Workshop IER, Hitotsubashi University, Tokyo July 3 rd, 2009 Market Disintegration in Post WWII Japan Evidences from Black Market Regional Prices Jean-Pascal Bassino Faculty of Mathematics and Social Sciences Paul Valéry University, Montpellier, France

2 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) Japans 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

3 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.

4 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

5 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

6 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 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).

7 The collapse of living standards (2) ___________________________ Table 1. Average body height of mal students in cm (year of measurement; sample size problems in )

8 The collapse of living standards (3) ___________________________ Table 2. Average per capita daily caloric intake

9 Price data and descriptive statistics ___________________________ Black market prices currently available: - Agricultural monthly prices in 8 prefectures from Sept to Dec (rice and others) - Monthly retail prices of rice and 4 other staples (barley, wheat flour, sweet potatoes, white potatoes) in Tokyo and Osaka 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)

10 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)

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

12 Rice black market prices in Tokyo and Osaka ___________________________ Figure 4: Rice black market monthly prices (yen per kg)

13 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)

14 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)

15 Tokyo-Osaka price linkages (1) ___________________________ Attempt to uncover causality between price variations (5 items) in Tokyo and Osaka using a VAR (1, 2, 3-month lag; Granger causality Wald Test) logP i,Tyo, t = logP i, Tyo, t- logP i, Osk, t- P i,Tyo, t : price of item i in Tokyo in t Rice: 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

16 Tokyo-Osaka price linkages (2) ___________________________ Error Correction Model Price of item i in Tokyo and Osaka (5 staples) logP i,Tyo,t = +. logP i, Osk,t +.(logP i,Tyo – logP i,Osk ) t-1 + Short term adjustment coefficient Long 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

17 Nominal convergence in the 1950s ___________________________ CV of regional unit prices: - Rice, meat, eggs: back to less than 0.1 in 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

18 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?)