The expenses being £51,500,000, there would thus remain a surplus of nearly £500,000, thanks to the favourable result of the fiscal year 1896–97.

Apart from this financial scheme, however, there was still a war charge which had not been foreseen. It had at first been believed that the island of Formosa would be self-supporting, an illusion which was soon dispelled, and the Government had therefore to grant this new acquisition for a period of years a subvention from the Imperial Treasury of about £600,000, to obtain which various receipts officially described as extraordinary, such as voluntary contributions and restitutions, sales of State lands, and interest on divers funds had to be drawn upon. These receipts generally averaged £200,000, and by the year 1905–6, the time fixed for the conclusion of the expansion programme, will have furnished between £1,500,000 and £1,800,000; for the remainder it will be necessary to have recourse to a loan, and supposing that during this period the subvention of the Japanese Budget to Formosa, which must necessarily diminish year by year, rises to about £4,000,000, another loan of between £2,000,000 and £2,500,000 will have to be raised. Japan would therefore have to borrow about £24,000,000 from 1896–97 to meet the extraordinary expenses she had undertaken. On the other hand, when these were met, her ordinary Budget still remained greatly augmented by the necessity of maintaining an army and navy double what they were before the war.

This being the case, two important questions presented themselves. In the first place, was it possible to raise without difficulty a loan of £24,000,000, and from whence was it to be obtained? In the second, was the country sufficiently rich, once the scheme was executed, to maintain this increased expenditure, and by what means would it be able to obtain fresh resources to pay current expenses? The first question contained the principal difficulty. Not only did Japan need to borrow £24,000,000, but she had to borrow most of this without loss of time. Naturally, the Administration decided to carry out with the least possible delay the essential parts of the programme already determined upon, especially those connected with the national defence, and the Budgets of 1896, 1897, and 1898 were therefore most heavily charged with the extraordinary expenses. The extraordinary Budget of the first year reached £10,300,000, that of the second £14,200,000, that of the third £6,000,000. In no case, however, could the surpluses of the previous Budgets and the part already paid out of the indemnity (which was £20,600,000, of which £8,000,000 had been handed over to the War Office) have sufficed to provide such large amounts. It was therefore necessary to borrow in 1896–97 £1,830,000, in 1897–98 £6,880,000, while in 1898–99 a further issue of £4,500,000 had to be made. Now the grave situation which arose was this: the issues of 1896–97 were readily taken up by the public, but in 1897–98 only a third of the sum needed could be obtained, because the conditions of the market were too unfavourable and disposable capital was lacking. Whereas in the summer of 1897 £4,000,000 of a 5 per cent. Japanese loan was floated on the London market at par, the Government offered the Japanese people bonds bearing the same interest at 94, but they were not placed without much difficulty.

All the capital in Japan is locked up either in previously contracted State loans or in the innumerable commercial enterprises which have sprung up in the country during the past few years. When we remember that nine-tenths of the £40,000,000, at which the National Debt stood after the war, is in Japanese hands, and that it is with their own money that they have constructed railways and established new industries, there is no ground for surprise at this lack of ready capital. In view, however, of the evident impossibility of placing a domestic loan for the sum required, two alternatives remained: a foreign loan, or a reduction to more modest proportion of the programme of expansion.

The result of an appeal to foreign capitalists would no doubt have proved successful if the attractive interest of from 5 to 5¼ per cent. had been offered. Japan offers excellent security. Her finances have hitherto been admirably managed, and her liabilities do not appear to be in excess of the capabilities of her people. Nevertheless, the project of a foreign loan seems to have met with serious opposition from many eminent people in Japan, which arose from a twofold cause: first, fear of compromising the independence of the country by supplying foreigners with a pretext for interfering in the internal affairs of the Empire, in case there was any difficulty in fulfilling obligations; and, secondly, the national pride, which regarded it as humiliating for Japan to become indebted to Europe. This latter motive was doubtless the most powerful, but it rested upon an altogether exaggerated notion of national dignity. What all the great Powers of the world, except, perhaps, France and England, have done, Japan might do without sacrificing her dignity. The Japanese Government, after long hesitation, in which it perhaps missed the most favourable opportunity, decided in June, 1899, to issue a 4 per cent. loan on the London market at the rate of 90 francs. The high rate of issue did not greatly tempt the public, but that part of the loan not then subscribed will be gradually issued and advanced by the banks which undertook the issue, and thus the Japanese Treasury will find itself in possession of sufficient funds to proceed with its programme until money is more plentiful at home. In the meantime, so far as concerns the honourable intentions of the Japanese to fulfil their obligations, we may rely with safety upon their natural high sense of honour, and rest assured that they will do everything in their power to meet their obligations. Moreover, the resources of Japan, which I will briefly analyze, appear sufficient to enable the country to meet without much difficulty the interest on the loans as well as the permanent expenditure resulting from its greater national importance.

Let us, to begin with, review the principal items in the revenue as tabulated in the Budget of 1897–98:

Land tax£3,870,000
Income tax190,000
Tax on drinks2,990,000
Tax on tobacco310,000
Registration750,000
Tax on sales, contracts, etc.590,000
Customs660,000
Various duties490,000
Posts and telegraph1,210,000
Profits of the State railways540,000
Crown land products290,000
Other items250,000
Receipts from Formosa810,000
Total£12,950,000

This Budget is higher by one-half than that of 1893–94, the total of which we have already given, and whose ordinary receipts did not quite reach £8,600,000. This increase results from four causes: (1) better returns from the public services—railways and posts; (2) a slight increase in the revenue from taxes whose rate has not changed, and also in the Crown lands; (3) the establishment of two new taxes on registrations and sales, contracts, and other commercial deeds, the aggregate value of which increased the revenue by about £1,200,000; (4) the reorganization of the tax on drink, increased by £1,150,000, and of that on tobacco, in consequence of this product having been converted into a monopoly, the effects, however, of which were not felt in 1897–98, for it only came into force in January, 1898. To these we must add the receipts from Formosa, which, unfortunately, are not net receipts. The total revenue for the fiscal year 1897–98 was £12,950,000, and exceeded ordinary expenses by £600,000; but these figures will undoubtedly be greatly augmented when the programme of expansion is completed. It is calculated that by the year 1904–5 the ordinary expenses will stand as high as £17,300,000, in order to meet which it will be necessary to raise another £4,400,000 by increased taxation.

Taxation in Japan has a natural tendency to increase. During the years 1887–94 the annual rise was between 1¼ and 1½ per cent. at a time, when it was not affected by any unusual excitement. This was before the war. Assuming that it only advances at the rate of ¾ per cent., it is expected that by the year 1904–5 the increase will add £500,000 to the £9,800,000 of 1897–98. On the other hand, the Customs tariff, which was kept exceedingly low by the treaties with foreign Powers, has risen in consequence of the revision of these treaties, and, it is hoped, will produce an increase of £600,000. The tobacco monopoly will also, it is anticipated, produce £800,000 per annum, an absolute increase of £500,000 on the existing returns. There remains, therefore, £2,800,000 to find, which will doubtlessly be obtained from the increased receipts of the posts, telegraph, and telephones, and by the extension of the State railways now in existence, and the exploitation of those in process of construction.

The recent excessive activity in commercial circles has suffered a check of late, a halt not very surprising after such a forced march. In the meantime, there is some risk that the returns of the posts and railways may not increase as rapidly as the more sanguine anticipate, for the new railways are not likely to prove as profitable as those already in existence, which pass through richer regions. During the interval 1892–96 the net railway returns to the State, without including any remarkable increase in the lengths of their lines, was doubled. By the year 1904 it is calculated that there will be 1,250 miles of rail instead of the 600 in 1897, which it is estimated will yield an increase of £550,000 upon the present returns. As to the posts, telegraph, and telephones, whose rough receipts were augmented by about 80 per cent. during the last four years, there is every reason to believe that they will in 1904–5 be £850,000 above what they are at present. Thus we have £1,400,000 added to the necessary £2,800,000. The remaining £1,400,000 will have to be taken from various other sources of taxation. The question now arises: Will the country stand further taxation without protest? The answer seems to me reassuring. The land tax before the Restoration and even to the close of the seventeenth century, as can be verified by reference to many important historical documents, was seven times more burdensome than it is at present, and was paid in kind—in rice, or other kindred products—and yielded to the daimios and the Central Government 147,000,000 bushels of rice per annum. At the price fetched by rice in 1897, when the harvest returned a fair average, the land tax should now represent about a sixth of this amount, and the total Budget of £17,300,000 anticipated for the year 1894–95 only claimed 93,100,000 bushels. If we add to these all the provincial and communal Budgets, we find not more than 127,400,000 bushels of rice. It is therefore untrue that the Japanese are not better off to-day than they were under the old regime. Since the introduction of the present financial conditions and the abolition of the feudal system, prices have increased enormously. From 1887 to 1897, according to the Monthly Returns published by the Bank of Japan, on the returns of about forty principal products of the Empire, we find that they have increased in value by no less than 73 per cent. Salaries have augmented even to a greater extent, and the population has risen 4,000,000, so that an addition of 45 per cent. upon the taxes leaves the taxpayer less heavily burdened than before. The most important of all these taxes may strike us as distinctly heavy, but we must not forget that in former times it was the only form of taxation. In those good old days nine-tenths of the population lived in the country, which was divided up among the daimios, the peasantry being their tenants; but at the abolition of the feudal system the peasants, under the new law, became proprietors, without having to pay a fraction either to their former masters or to the Government.