SUMMARY Inflation is a condition in which prices rise generally and substantially as a result of demands for goods and services in excess of quantities available. The present inflation in Japan started in 1937, after Japan had made a remarkable recovery from the world depression, reaching virtually full employment of her productive capacity. During the China War Period, July 1937 to December 1941, prices in Japan rose rapidly at first, the rise being checked in the summer of 1940 when price control and rationing reached a point of considerable effectiveness. The Japanese attack on Pearl Harbor in December 1941 found Japan's economic controls, including inflation control, incomplete but sufficiently effective to keep the rise in the price level, as indicated by published statistics, very moderate indeed during 1942 and 1943. During these two years the total increase in cost of living was 14 per cent and in Tokyo retail prices, 11 percent. During 1944 the price rise accelerated, and by November Tokyo retail prices had risen an additional 17 percent. By the end of 1944 Japan was no longer fighting the "Greater East Asia War" but was attempting to defend her home islands. As the war went progres sively against Japan, control over inflation declined in effectiveness, and it is estimated that by the time of Japanese surrender in August 1945 actual prices in Japan, as contrasted with official prices, may have been as high as five times their July 1937 level. The basic cause of inflation in Japan is the unbalanced budget of the national government. Deficits have existed during most of the years of modern government in Japan, but since 1937 these deficits have grown continuously and rapidly. Since 1941 the rate of increase of government RESTRICTED deficits has been roughly 50 percent a year. National debt rose corres pondingly, reaching a figure estimated at 125 billion yen in June 1945. Deficits have been financed mostly by means of inflationary expansions of bank credit. Bank credit has been expanded not only for the purchase of government securities but also for production and other private purposes, all largely inflationary in that the increases in bank credit outstanding have not been accomparied by increases in goods and services available for purchase. All the inflationary pressures in Japan accelerated after the start of devastating air raids in March 1945. Government expenses leaped upward, especially because of payments such as war insurance and relief. Tax receipts and savings declined and rationing and price controls deteriorated with the disruption of normal procedures. If prices in Japan at the time of surrender were correctly estimated at some five times their July 1937 level, then inflation in Japan was still moderate. Such a level of prices is far from what would exist in a runaway inflation. With runaway inflation, prices run to hundreds, thousands, millions or more times their normal levels. Savings campaigns have been a major instrument of inflation control in Japan and have been so highly organized as to appear virtually compulsory. Savings are put into government bonds to a considerable extent, but the emphasis on individual purchases of war bonds has been less in Japan than in the United States. In Japan there are various forms of bank deposits which cannot normally be withdrawn on demand, and public policy has approved depositing savings in such accounts as well as |