  We investigate the relationship between market efficiency of rice futures
transaction in Osaka and the Japanese government intervention in rice
distributions by directly buying and selling rice during the interwar period,
from the middle 1910s to 1939, considering the context of "discretion versus
rules." We use a time-varying VAR model to compare market efficiency and the
government's actions over time. We found the two facts by featuring the
time-varying nature of the market efficiency. First, the intervention with
discretionary power disrupted the rice market and reduced market efficiency in
the exchange. Second, the market efficiency improved in accordance with
reduction in the government's discretionary power to operate the rice policy.
When the government obtained the discretionary power to operate the policy
regarding commodity market, the market efficiency often reduced. Conversely,
even if the government implemented a large-scale intervention, the market
efficiency improved when the government chose a systematic rule-like behavior
following the law.
