HIGH INFLATION IN JAPAN'S EARLY POSTWAR PERIOD

Inflation is defined as the percentage rate of increase in the aggregate price level—usually measured through the consumer price index, or CPI. The chart below plots Japan's history of both inflation and high inflation in the 20th century. In contrast to the hyperinflationary levels of some Latin American countries in the late 1980s and early 1990s (sometimes reaching 1000 % p.a.), Japan experienced a bout of rapid price increases in the early postwar period (1945-1949) ranging from 50%-365%. 

The proximate cause of high inflationary pressure is always massive growth in the money supply. This high money growth, in turn, usually stems from countries suffering from large budget deficits. In Japan's case, the origin of budget deficit was wartime spending, which generated large national postwar debts that also uprooted the tax-gathering apparatus.  To finance the budget deficit, the government increased bond issuance paid by central bank monetization. Consequently, as the chart below indicates, the monetary base increased from its average 34% p.a. range (1937-1944)  to 212% p.a. by 1945. In 1946, Japan's price index rose by 365% p.a. before the central bank brought inflation back under control.

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