The Futures Premium and Rice Market Efficiency in Prewar Japan

TL;DR

This study analyzes the efficiency of prewar Japan's rice markets by examining spot and futures prices, revealing how government and colonial interventions impacted market dynamics and efficiency over time.

Contribution

It introduces a non-Bayesian time-varying model to detect efficiency changes and assesses the effects of government and colonial policies on rice market structure.

Findings

Market efficiency decreased during specific periods due to imported rice disruptions.

Government interventions did not restore market efficiency effectively.

Colonial rice policies improved market stability and unification.

Abstract

This paper studies the interrelation between spot and futures prices in the two major rice markets in prewar Japan from the perspective of market efficiency. Applying a non-Bayesian time-varying model approach to the fundamental equation for spot returns and the futures premium, we detect when efficiency reductions in the two major rice markets occurred. We also examine how government interventions affected the rice markets in Japan, which colonized Taiwan and Korea before World War II, and argue that the function of rice futures markets crucially depended on the differences in rice spot market's structure. The increased volume of imported rice of a different variety from domestic rice first disrupted the rice futures. Then, government intervention in the rice futures markets failed to improve the disruption. Changes in colonial rice cropping successfully improved the disruption, and colonial rice was promoted to unify the different varieties of inland and colonial rice.