Central bank notes and black markets: the case of the Japanese economy during and immediately after World War IICentral bank notes and black markets: the case of the Japanese economy during and immediately after World War II
2017-08 , Graduate School of Economics, Hitotsubashi University
The Title of the First Version: On large-scale money finance in the presence of black markets: the case of the Japanese economy during and after World War II First Version: January 2017, This Version: August 2017 Employing the Japanese case of large-scale black markets under extensive price controls in the years 1937 to 1949, this paper investigates how much income leaked out of the formal economy into the black markets, and the extent to which the circulation of Bank of Japan (BoJ) notes helped the leaked income to flow back into the formal economy when the notes were eventually held as an instrument to conceal illicit income by the black marketers. According to our estimates, 6% to 30% of national income leaked into the black markets in the above period, while more than 40% of the leaked income returned to the treasury as massive seigniorage revenues in the last years of the war. Thanks to strong money demand from the black marketers, inflations were not too high during the war. After the war, however, the black marketers shifted their portfolios from BoJ notes to physical assets, thereby reducing money demand and accelerating inflations. This paper also demonstrates that the black markets helped to reserve physical resources for the post-control economy starting from the early 1950s.