The Empire of Japan financed itself partly by flooding the Chinese market with drugs

Imperial […] subjects began to smuggle opium in China as early as the 1890s. What is more, activities changed decisively in nature and in scale during the 1930s and 1940s. In decades, the zaibatsu became involved and the imperial government itself began to and sell hard narcotics—not just opium—in contempt of international treaties domestic Chinese law.

Related to this last point, a sea change in normative attitudes toward the use of opium and drugs derived from opium had taken place by the early twentieth century. Even in the second half of the nineteenth century, moderate consumption of opium viewed in many quarters—Western and Chinese alike—as little different from that of alcohol.

Régimes of various sorts—from the worldwide British Empire to local Chinese warlords—embraced opium as a legitimate source of revenue. But with the later manufacture of far more potent narcotics such as morphine and heroin, consumption perforce rose beyond moderation, and by the 1910s and 1920s, individuals and régimes that relied on such addictive drugs to gain revenue did so in the face of mounting moral censure.

Imperial […] opium operations sprang from three motives. Above all was the need to finance collaborator states such as the Manchu, Mengjiang, East Hebei, North China Provisional, Reformed, and Wang Jingwei régimes. According to the restored Manchu emperor, Puyi, for example, the Manchu empire garnered 300 million yuan, or about one-sixth of its total revenues, from opium.³

Second, opium funded undercover operations that facilitated [Imperial] aggression. Third, opium profits went to rightwing societies in Japan, and there is even some evidence to link laundered wartime opium monies with early postwar conservative parties.⁴ Wartime GMD propaganda averred that [I]mperial Japan used drugs to poison China into submission, and some [Axis] war criminals detained in the PRC testified to that effect in the 1950s.⁵

But it is probably more correct to say that opium raised sorely needed revenue for [Imperial] aggressors—just as it continued to do so for Chinese warlords, criminal elements, the GMD, and [purportedly] even the Chinese Communist Party (CCP). Twentieth-century Japan lacked the wherewithal to be an imperial power, so its leaders latched on to opium as a poor man’s fiscal panacea.⁶ Yet Tokugawa and Meiji Japan had virtually no drug problem at home and had never relied on opium as a form of government revenue. Only the will to empire created this fiscal need.

Opium operations took place in three overlapping stages. Stage one lasted from the 1890s through the Manchurian Incident which ended with the Tanggu Truce in May 1933. Stage two began in June 1933 with the creation of a demilitarized zone (DMZ) in east Hebei as stipulated by those Accords, and ended with the establishment of the Kô-Ain (Asia Development Board) in December 1938. Stage three began in December 1938 and ended in August 1945.

In stage one imperial subjects smuggled drugs in Chinese treaty ports under the protection of extraterritoriality. These riff-raff carpetbaggers or tairiku rônin enjoyed support from consular authorities in treaty port concessions and from imperial armed forces in colonial areas such as the Guandong Leased Territories. For instance, Consul (and postwar Prime Minister) Yoshida Shigeru described the situation in Tianjin in December 1922 as follows:

Of the 5000 Japanese residents in Tianjin, seventy percent deal in morphine or other illegal substances. Almost all businesses traffic in these goods, even eateries and general stores, not just medicinal firms. […] Police crackdowns here are not as strict as in Dalian, and the Consulate’s policy is to arraign only the most flagrant violators. We prosecute only those caught by [Chinese] customs authorities or those uncovered in other crimes. We don’t arrest criminals or investigate crimes on our own. If we did so thoroughly, no Japanese would be left in Tianjin.⁷

In stage two, trafficking by carpetbaggers continued with connivance from consular officials. However, it also expanded south of the Wall in the eastern Hebei DMZ created by the 1933 truce. Under the terms of that truce, only Chinese units were actually forced to leave the DMZ whereas [Imperial] forces could enter at will. This DMZ fell under the control of Yin Rugeng’s “Regime for East Hebei Autonomy and the Containment of Communism” set up at Tongzhou in November 1935, and imperial subjects sold opium with impunity in this area.

Furthermore, zaibatsu such as Mitsubishi shôji and Mitsui bussan liberally interpreted provisions in the Accords to extend the DMZ out to sea and smuggle Iranian opium into north China under formal Foreign Ministry supervision.⁸ Thus imperial […] trafficking in stage two was no longer confined to individuals in Guandong or the treaty ports; the zaibatsu now operated in China proper with government backing.

Finally, stage three lasted from late-1938 to August of 1945. In December 1938 [the Imperialists] created the Kô-Ain—headed by the prime minister plus his army, navy, foreign, and finance ministers—a body that later became the Greater East Asia Ministry. It ran opium operations through a Kalgan branch office that worked hand-in-glove with the Mengjiang régime, created in 1939, which also was headquartered in Kalgan.

Historian Eguchi Keiichi shows that [Imperial] officials controlling this collaborator régime encouraged local consumption of the drug and taxed profits from it. They set up an opium monopoly, got farmers to grow poppies on a large scale, bought up the harvests, processed these into raw opium, refined that into heroin and morphine, and exported these narcotics to other parts of China and to Southeast Asia (see chart).

To sum up, then, in stage one, individual imperial subjects trafficked in [Imperial] treaty port concessions and colonies under the protection of extraterritoriality. In stage two, zaibatsu under Foreign Ministry direction extended smuggling south of the Wall by exploiting provisions of the Tanggu Truce. In stage three, the imperial […] government manufactured and exported narcotics from Mengjiang.

Further reading: Opium Regimes: China, Britain, and Japan, 1839–1952

The Opium Empire: Japanese Imperialism and Drug Trafficking in Asia, 1895–1945