Please enable JavaScript.
Coggle requires JavaScript to display documents.
Japan's Victory: Overseas Financing of the Russo-Japanese War - Coggle…
Japan's Victory: Overseas Financing of the Russo-Japanese War
Background (before the war)
1859-1881: Financial challenges
1859: Japan had no creditworthiness and national currency
Fukoku kyohei (“rich country, strong army”) policy depended heavily on foreign materials, machinery, and weapons,
Could only export green tea, fish, silkworm cocoons
Severe trade deficit
Attempt to borrow abroad
1872: A loan of USD 5 million in sterling from London to build the Tokyo–Yokohama railway
From 9% nominal interest rate to 11.2% effective cost due to high issuance expenses
1875: A loan of USD 11 million in sterling to pay samurai stipends
Nominal interest rate was 7%, but the effective cost was 9.75%
Aka junk bonds
underscored Japan’s weak position
1881, interest and principal payments had exceeded the amounts borrowed
Depleted about 90% of the gold and silver accumulated over centuries
After 1881 (recovery)
Three main factors
Matsukata Reform
Silk Export Boom
American demand for taffeta fabric fueled Japan’s raw silk exports
Decline in Silver Prices
making Japanese exports cheaper and imports more expensive, which helping balance trade.
The Sino-Japanese War
forced China to pay Japan a massive war indemnity of USD 185 million in gold
Benefits
Offset 60% of the precious metals Japan had lost
Fixing the yen value
Allowed Japan to fund a large-scale military modernization program
1899: Japanese government issued USD 43 million in sterling-denominated bonds in London on very favorable terms: an effective interest rate of 5.2% and a 55-year maturity
The rise of Wall Street
Initial Crisis and the Role of Jacob Schiff
Crisis: War costs were expected to reach nearly USD 1 billion, while Japan held only USD 40 million in foreign reserves
Financial envoy Takahashi Korekiyo was dispatched abroad to raise USD 50 million
Began disappointingly in New York and London
Takahashi encountered Jacob H. Schiff
Schiff viewed blocking Russia’s access to American capital as a personal mission
Offered to raise half of the USD 50 million Japan needed in the US
Japan successfully carried out a remarkable international financing campaign, issuing four tranches of war bonds worth a total of USD 408 million in face value, yielding USD 343 million in net proceeds after discounts
Success Factors
Victories News
excited investors, who became willing to lend unprecedented sums
American Leadership
Kuhn, Loeb, and Schiff set the pace, forcing London banks to follow.
Favorable market reception to each bond laid the groundwork for the next
Impact on Strategy, speed of fundrasing
Treaty of Portsmouth
Japan's demands
Territorial concessions (Korea, Port Arthur, and the Manchurian railway)
USD 1 billion war indemnity
Rejected by Russia
Financial Pressure and American Intervention
Roosevelt feared that Japan might challenge American interests
Financial pressure
Schiff’s Warning (25/8/1905)
Warning investors would refuse new bond issues and Japanese bond prices would collapse if the war continued
Cabinet Concerns in Japan
Worried that monetary instability and heavy postwar interest burdens could soon force Japan to seek peace
Final terms: Japan received no war indemnity.
Result and legacy
Wall Street’s emergence
Baron Kaneko Kentaro praised “this triumphant entrance of the United States as a world power into international finance.”
Japan turns away from the American Market
Raised USD 107 million in Europe—48% from France and only 13% from New York 3 months after the treaty
Returned to the U.S. market only after the devastating Great Kantō Earthquake of 1923
This relationship ended again in 1931 due to the invasion of Manchuria