Opinion | The Bank That Broke an Empire: How a 1927 Financial Panic Fueled Japan’s Path to War

Ninety-nine years ago, on March 14, 1927, Japanese Finance Minister Naoharu Kataoka  stood before parliament and made a declaration that would alter the course of history: "Tokyo's Watanabe Bank has collapsed."

Though the bank was merely struggling and had not actually failed, the minister's words triggered an immediate panic. The next day, terrified crowds rushed to withdraw their deposits, forcing Watanabe Bank and several affiliated institutions to suspend operations. The ensuing chaos plunged both Japan and its colony, Taiwan, into a devastating economic crisis known as the Showa Financial Panic.

Yet, the true architect of this disaster was not Watanabe Bank. The crisis was engineered by the reckless lending practices of the Bank of Taiwan—a deeply dishonorable chapter in the institution's history whose far-reaching consequences contributed to the rise of Japanese militarism and, ultimately, the outbreak of the Greater East Asia War.

The 'Organ Bank' of a Trading Giant

The roots of the crisis lay in a fundamental violation of modern banking principles: the failure to diversify risk. （Related： US ‘Hellscape’ Drone Strategy Faces Taiwanese Legislature ｜ Latest ）

Under Japanese colonial administration, the Bank of Taiwan functioned much like a central bank, issuing the circulating currency known as "Taiwan Bank Notes." However, it also conducted aggressive commercial lending operations through an extensive international network. Its footprint spanned the globe, boasting four branches in Japan, seven in China, and outposts in New York, London, Hong Kong, Singapore, and Mumbai.

The bank developed dangerously deep ties with Suzuki Shoten, a massive trading house originally focused on rice and sugar in Kobe. Led by the legendary manager Naokichi Kaneko, the company secured exclusive rights to Taiwan's lucrative camphor trade in 1899, heavily financed by the Bank of Taiwan.

During World War I, Suzuki Shoten profited enormously from international speculation, growing so large that its operations eclipsed major zaibatsu (industrial conglomerates) like Mitsui and Mitsubishi. The Bank of Taiwan fueled this hyper-expansion. By 1926, the bank's total loan portfolio reached 494 million yen. A staggering 357 million yen—72% of the total—was concentrated entirely in Suzuki Shoten.

Such concentration would be illegal today, but it was common in Imperial Japan. Enterprises routinely operated "organ banks" as subsidiaries, taking public deposits at the front counter and funneling the money to parent companies out the back. While the Bank of Taiwan wasn't technically owned by Suzuki Shoten, its massive loan concentration earned it the reputation of being Suzuki's de facto organ bank. （Related： US ‘Hellscape’ Drone Strategy Faces Taiwanese Legislature ｜ Latest ）

Too Big to Save

When World War I ended, global demand plummeted, plunging Japan into a severe recession. Suzuki Shoten faced a financial crisis in 1921, rendering most of the Bank of Taiwan's loans unrecoverable.

The situation deteriorated further following the devastating Great Kanto Earthquake of 1923. In the aftermath, the emperor ordered commercial banks to provide corporate relief, backed by the Bank of Japan. Recognizing a loophole, the Bank of Taiwan essentially transferred its pre-existing bad Suzuki loans to the central bank under the guise of earthquake relief.

The Japanese government subsequently attempted to pass these losses onto taxpayers through the "Earthquake Bills Loss Compensation Bond Act." However, in March 1927, the House of Peers held secret meetings investigating the Bank of Taiwan's relationship with Suzuki Shoten. When the details leaked, public outrage erupted.

Under enormous political pressure, the Bank of Taiwan was forced to announce on March 26 that it would cease financing Suzuki. Other banks immediately followed suit.

Facing ruin, Suzuki's manager Kaneko boldly declared: "If Suzuki Shoten collapses, Japan's entire financial sector will collapse with it, so the government will absolutely not let Suzuki fail!"

Kaneko believed his company was "too big to fail" — the same logic applied to Lehman Brothers 81 years later. In both cases, the assumption proved fatal. The Japanese authorities refused a bailout, and on April 8, 1927, Suzuki Shoten declared bankruptcy.

Kaneko's prophecy about systemic collapse, however, proved accurate. When Suzuki fell, banks immediately demanded repayment of interbank loans from the Bank of Taiwan. Its liquidity evaporated overnight. Interbank lending ceased completely, Tokyo's short-term money markets froze, and the entire banking sector suffered a massive credit crunch.

The Panic Spreads to Taiwan

The Showa Financial Panic resulted in nationwide bank runs. On April 21, the aristocratic Fifteenth Bank collapsed. Desperate, the Japanese government ordered all national banks to close for two days and decreed a three-week period where depositors could only withdraw small amounts for living expenses.

In Taiwan, the colonial Governor-General attempted to suppress the panic by imposing strict media controls, censoring all local and imported news regarding the financial collapse in Japan. （Related： US ‘Hellscape’ Drone Strategy Faces Taiwanese Legislature ｜ Latest ）

Anticipating a massive bank run, the Governor-General estimated Taiwanese banks would lose approximately 10 million yen in liquidity. On April 18, facing a 28 million yen funding gap in Japan, the Bank of Taiwan suspended operations for three weeks at most of its branches.

That same day, rumors spread across Taiwan that local branches would also close. The Bank of Taiwan lost 2 million yen in deposits in a single day. In Tokyo, authorities prepared to dispatch 30 staff members carrying 20 million yen in Bank of Japan notes to Taipei, fearing a total collapse of public confidence in Taiwan Bank Notes.

Taiwan Governor-General Mitsunojin Uyama urgently cabled Tokyo to stop the intervention, arguing that introducing central bank notes without consultation would only escalate local panic — much as Beijing unilaterally replacing the Hong Kong dollar with the renminbi would today. The Bank of Japan relented, allowing Taiwan Bank Notes to survive.

To calm the crowds, the Governor-General employed psychological tactics, instructing banks to stack unissued notes prominently at front counters to project an illusion of abundant capital reserves.

The Path to War

The acute phase of the panic in Taiwan lasted just four days, subsiding after the Japanese government mandated the two-day national bank holiday and later injected 200 million yen into Taiwan's banking system.

However, the political and economic fallout permanently altered world history.

Japanese Prime Minister Reijiro Wakatsuki's cabinet collapsed under the weight of the crisis. He was succeeded by Giichi Tanaka, who subsequently steered Japan onto a path of aggressive militaristic expansion. Within a decade, Japan would orchestrate the Huanggutun Incident, the invasion of Manchuria, and the Marco Polo Bridge Incident, plunging Asia into war.

Domestically, Japan ruthlessly consolidated its financial sector. The era of "organ banks" ended, with the total number of banks shrinking from over 2,000 to just 625 by 1932. Depositors paid a devastating price, losing between 35% and 50% of their savings during the liquidations. The Bank of Taiwan was forced to close its Japanese branches and did not return to Tokyo until the late 1980s.

In the aftermath, Japanese banking law added a crucial, blood-bought regulation: "Banks' credit exposure to the same industry or same client cannot exceed certain limits."

Ninety-nine years later, the Showa Financial Panic remains a stark historical lesson on the catastrophic dangers of concentrated financial risk—a lesson modern central banks continue to enforce today through strict credit controls.

*The author is an Academia Sinica adjunct researcher, former Vice Premier, former Taiwan Stock Exchange Chairman, and former Financial Supervisory Commission Chairman. （Related： US ‘Hellscape’ Drone Strategy Faces Taiwanese Legislature ｜ Latest ）