By Shinichi Kishima

A possible successor to Bank of Japan Governor Masaru Hayami, whose future has been a hot topic of discussion, may be one of the culprits behind Japan's decade-long economic misery, a former BOJ researcher said on Tuesday. Toshihiko Fukui, now chairman of Fujitsu Research Institute and the front-runner to replace Hayami, belonged to an elite group of BOJ aristocrats who caused the "bubble economy" excesses of the 1980s and a backlash slump in the 1990s, said economist Richard Werner, the author of "Princes of the Yen". "They caused the economic deterioration in the 1990s and they prolonged it as well," said Werner, who was a visiting researcher at the BOJ Monetary Research Centre in the early 1990s. "If Fukui became governor, it would be just as they planned more than 30 years ago." It is fairly well known that a handful of BOJ officials who had been called "princes" by their peers early in their careers have gone on to become chief. Fukui had been seen as the next prince to head the bank until he resigned in 1998 to take responsibility for a corruption scandal involving a BOJ official. And for such BOJ elites, the 76-year-old Hayami may seem like a stop-gap outsider who is overstaying his welcome. After a storm of media reports in late April saying he would step down as early as this month, Hayami denied he had any intention of quitting as long as his health permitted.

DESIGNED ECONOMIC CRISIS?

Werner's view is that the BOJ "princes" - former students of economic theories based on Western economies - orchestrated an economic crisis so that the Japanese would feel the need for a structural change towards economic models they preferred. The princes used the central bank's clout in controlling bank lending growth to create the asset-price inflation in the 1980s and prolonged the 1990s deflationary environment by quantitatively tightening monetary conditions despite cutting interest rates on the surface, Werner said. Fukui and then-vice governor Yasushi Mieno - another prince - were in charge of setting lending growth targets, to which banks strictly adhered, in the late 1980s. Mieno became BOJ governor in 1989 and Fukui became vice governor in 1994. During the 1990s, even as the Ministry of Finance tried to prevent the yen from appreciating by selling yen for dollars through BOJ foreign exchange intervention to support Japanese exporters, the central bank kept "sabotaging" the government's pro-growth efforts, Werner said. The central bank would drain liquidity from the banking system in so-called "sterilisation" of intervention, which in effect was a tightening of monetary conditions, Werner said. "They wanted a crisis so that we would feel that things had to change structurally, and now we do," Werner, a managing director of Tokyo-based think tank Profit Research Center, told Reuters after a news conference announcing the publication of his new book in Japan. To a certain extent, the fact that the conservative ruling Liberal Democratic Party had to choose Junichiro Koizumi, who has pledged to pursue structural reforms, as the country's new prime minister meant the BOJ princes had achieved their aim, he added.

(c) 2001 Reuters