As with other major powers in WWII, the Japanese government employed debt financing to mobilise the nation’s wealth in order to cover the ever-increasing demand for military and war production expenditures. The government continuously issued an immense amount of unsecured credit, including government bonds and unbacked paper currency (such as Bank of Japan banknotes, as well as military scrip and scrip-like currencies in the colonies). What were the consequences of this expansionary fiscal and monetary policy? This research uses the role of Hong Kong in the wartime Japanese Empire to illustrate the adverse effects of debt financing, namely: the diversion of colonial hyperinflationary pressures back to Japan’s home islands, and also the collapse of the yen bloc soon after the implementation of rigorous currency controls between Japan and its colonies. Parliamentary records and other official documents demonstrate that officials in Tokyo were cognizant of the inflationary risks associated with the significant budgetary increases. Thus, the government opted to transfer inflationary pressures to its colonies by remunerating military expenditures in local currencies, particularly those issued by the Wang Jingwei regime. However, due to the lack of robust and comprehensive currency controls between the home islands and its colonies, these unbacked and worthless colonial currencies were transferred back to Japan through the colonial banks in Hong Kong, notably the Yokohama Specie Bank. Hong Kong became the empire’s currency exchange hub, particularly for the Japanese in occupied China, as almost half of all business organisations in wartime Hong Kong had branches in Guangdong or other major cities under Wang’s regime. As late as January 1945, the Japanese government finally introduced stringent currency controls that effectively prevented the influx of colonial currencies into Japan, as well as all financial transactions. This resulted in the collapse of the yen bloc. The case of wartime Hong Kong shows the interconnectedness of different polities in the yen bloc, but also the fragility of the empire’s economic order and monetary system.
Brian Tsz Ho Wong is a third-year PhD student at the University of Edinburgh. His dissertation examines the economic and financial mobilisation of the Japanese Empire during WWII, as well as the empire's monetary policies and their consequences, such as hyperinflation. He is interested in the history of modern East Asia and digital humanities. Outside of his PhD project, he is a Training Fellow at the University of Edinburgh's Centre for Data, Culture & Society and a contributor to the 'Digital Orientalist'. He is also a member of the CARE International Project affiliated to the Wilson Centre, a working group that studies the activities of CARE – an American humanitarian organisation – in Japan and other parts of the world during the Cold War.
