In prewar Japan, the 1920s witnessed a significant surge of default on corporate bonds. To cope with this problem, Japan promoted collaterization of bond issues. This movement, implemented by the banking sector led by Industrial Bank of Japan and Bank of Japan, stands in close contrast with the policy adopted in the US, where a similar problem was addressed by the strengthening of information disclosure requirement for issuing firms. Conventional views ascribe the reason for the Japan's policy response either to the intention of credit rationing of bonds by the planning-oriented government or to the special interest politics between the banks with vested interests in the suppression of bond markets and the security companies. This paper examines and denies both of these conventional views. As an alternative hypothesis, the paper suggests that Japan's policy was implemented so as to reduce the costs caused by defaults in terms of time and negotiation costs. Imminent policy by the government to return to the Gold Standard was expected to cause significant deflation impacts including a drastic increase in bond defaults. This is why Junnosuke Inoue, the chief proponent of the gold embargo policy, was so ardent to promote the bond collaterization movement.
