Japan defeated Russia in 1905 — and spent a decade paying for the victory

In February 1904 Japan attacked the Russian fleet at Port Arthur, launching a war that would make it the first non-Western power to defeat a European great power in modern warfare. The Japanese army took Port Arthur after a gruelling siege, destroyed the Russian Baltic Fleet at Tsushima, and won the largest land battle of the era at Mukden. Russia sued for peace, and the Treaty of Portsmouth (September 1905) gave Japan southern Sakhalin, the lease of the Liaodong Peninsula, and recognition of its primacy in Korea.

The victory was historically unprecedented and domestically popular. The financial cost was staggering: approximately 1.7 billion yen, equal to roughly four years of the national income. Of that total, about 82% was raised through borrowing. Japan negotiated four foreign loans from British, American, French and German banks totalling £67 million, marking the first time Japan borrowed on international capital markets at scale. The national debt exploded from 260 million yen in 1903 to 2.25 billion yen in 1905 — an increase of nearly 900%.

The debt burden weighed on Japan for the next decade. Debt service consumed over 30% of the government budget annually. The Economist observed in 1910 that 'Japan has bought her victory at a cost which will cripple her finances for a generation.' By 1914 Japan had only almost recovered from the war's financial effects. The real economic boom came with the First World War, which finally pulled Japan out of the fiscal hole. The victory was real and the strategic gain significant, but the financial hangover lasted until the 1920s.