When the First World War erupted in July 1914, its consequence on the Japanese economy was at first uncertain. As the European major powers began to fight each other, their international trade was suspended, which meant that Europe could no longer supply textiles, machinery and chemicals to the rest of the world. It was feared that Japanese investment would be adversely affected. In reality, Japan did experience severe shortage of high-quality machines and industrial inputs while their domestic demand surged.
But very soon, it became clear that WW1 would bring a huge bonanza to the Japanese economy (at least in the short run) because of the sudden increase in global demand for Japanese products. An enormous export-led boom was generated because (i) global demand shifted from Europe to Japan; and (ii) the US economy was expanding. Japan's manufactured products were still of inferior quality but could substitute for European products which were now unavailable.
The macroeconomy, previously suffering from trade deficits and gold reserve losses, was greatly stimulated by a sharp rise in foreign demand. During WW1, the domestic price level more than doubled and real GNP surged (estimated annual growth of close to 10%--see handout no.4). In terms of GNP expenditure composition, exports rose, imports were slightly suppressed, investment was only moderately increased and with a lag (shortage of machinery !), and private consumption fell. What happened was a sharp rise in output without a corresponding capital stock increase (thus, the operation ratio and "efficiency" shot up). Domestic consumption was crowded out by foreign demand (forced saving through inflation). Naturally, business profits jumped and gold reserves accumulated. This is how Japan got out of the pre-WW1 balance-of-payments crisis: thanks to a foreign war and a sharp rise in export demand, not by macroeconomic austerity. (A similar situation would occur again later, in 1950).
The export-led boom was broad-based. All industries benefited. Among them, marine transportation and shipbuilding were extremely profitable and expanded most strongly. Between 1913 and 1919, total manufacturing output rose 1.65 times while individual industries enjoyed the following output increases: machinery (3.1 times), steel (1.8 times), chemicals (1.6 times) and textile (1.6 times).
Clearly, this export-led boom was temporary (only as long as WW1 continued, which meant about 4 years). Japanese manufacturing was still internationally uncompetitive in cost and quality. Japan was capturing overseas markets under the special condition of the European war, which artificially boosted both the demand for and the prices of Japanese exports. Domestically, too, quick import substitution was possible because European goods did not arrive. In retrospect, most of the business expansion during WW1 was inefficient, excessive and unsustainable.
Because of the unprecedented boom, mediocre merchants and producers became suddenly rich and greatly expanded their enterprises. A class of nouveau riche called narikin emerged (in Japanese chess, narikin means a pawn becoming a gold general). They were often without culture or taste and fond of showing off their material wealth.
WW1 required very little military operation from Japan. Japan did not engage in any serious combat. But Japan had a military alliance treaty with the UK (1902-1923, with Russia as the potential enemy), so the government used this treaty as an excuse for capturing German-occupied territories in Jiaozhou Wan (around Qingdao) in China and islands in the Southern Pacific.