  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.

Statistical Finance;General Finance