Denki Shimbun, 13 June 2001, Tokyo

By Yoichi Masuzoe, Member of the House of Councilors and Professor of International Politics

The Bank of Japan that chose to create bubble and recession



In order to stimulate an economic recovery there are two possible policies, monetary policy and fiscal policy. The latter, for example is a method of creating demand by carrying out public works on a grand scale.

Regarding monetary policy, up to now we have been focusing solely on interest rate movements, yet what is really important is the money supply. This argument is gaining strength thanks to the efforts and persuasive powers of monetarists. This book covers Japanese economic theory, focusing on monetary policy.

We are all baffled at why on earth Japan's recession has continued for over 10 years. And countless scholars have come and gone explaining the causes and remedies for the recession. But as implied in the term 'complex recession' there are many factors to a recession and solutions require something resembling a complex simultaneous equation. And this in turn brings complexity to policy-making. For example, it is not easy to judge whether it is best to act fiscally, pouring in money to stimulate a recovery or to think of fiscal reconstruction and carry out structural reforms.

The author of this book is a German economist and he is declaring the fault of the prolonged recession lies not with the government or even the Ministry of Finance but with the Bank of Japan. His central point is that the Bank of Japan has been controlling the amount of credit creation (the money supply), using window guidance, to the commercial banks.

When commercial banks expanded their loan quotas under orders by the Bank of Japan, any outstanding funds end up going to investments like real estate. And this created the bubble. Next, when they tightened the tap the bubble burst. Using this mechanism, the Bank of Japan has purposely created the bubble and then, having burst it, has again intentionally been prolonging the recession.

This sums up the diagnosis made by the author. So, why has the BoJ intentionally been trying to prolong the recession? The post-war Japanese economy, known as the 1940 system, is, as seen from the name, a continuation of the old wartime economic system. However, the Bank of Japan elite is convinced that this system must be reformed.

In 1985, the Plaza Accord was signed, and a report named after former Bank of Japan Governor Haruo Maekawa was published. This report includes in it proposals for structural reforms that the current Koizumi Administration is intent on carrying out today.

But in order to realise these proposals, it was understood there would be much opposition from current power groups with vested interests. The author believes that the Bank of Japan elite chose the creation of the bubble and the consequent deep recession as the means to overcome this opposition.

A Bank of Japan-bred elite 'prince' and Ministry of Finance officials have taken turns in occupying the seat of Governor of the Bank of Japan. Yet the latter are apparently mere puppets and when a MoF man is acting as Governor, there is without fail a Bank of Japan elite member under him acting as Deputy Governor but who holds the real authority. What's more, MoF-born Governors are removed from the decision-making process of that vital policy tool, window guidance.

We should seriously heed the author's warnings that the current independence of the Bank of Japan, which is not elected into power by the public, is a very grave problem indeed.