Shukan Bunshun, 7 June 2001, Tokyo

By Takashi Tachibana, Best-selling Author of Non-Fiction Books

Bunshun Book Review: On the Bank of Japan...

In his book "Princes of the Yen", Richard A. Werner makes the bold, almost unbelievable statement that the bubble economy and its collpse were caused by the intentional financial manipulation of Bank of Japan executives.

So what did they do it for? In order to implement thorough structural reform of the Japanese economy. Without such a major crisis, neither politicians nor the people will understand the necessity for structural reforms. That is why they dared to do it, he states.

Which part of the Japanese economy did they think should be reformed? The whole structure of Japan's society, encompassing politics and economics.

Until just recently, the so-called "1940 System" formed the principal framework for the Japanese nation. It is the wartime system for the general mobilization of the nation. With regard to economics, it a regulatory economic system, controlling everything according to a plan made by the bureaucrats. The miraculous success of the Japanese economy has been achieved by Japan continuing to apply this system even after the war. It is a special kind of national capitalism, an economy of a different nature to the free-market economies of the Western world. Since Japan was in alliance with the US during the cold war, the different Japanese economic system was tolerated. But once - due to its exceptional success - Japanese money looked strong enough to buy up the whole world, the US began to make forceful demands that Japan adjust its economy. This can be seen in the cries to open up Japan's markets and deregulate, which have grown ever stronger since the 1980s. Japan's leaders swallowed these demands, fearing that the Japanese economy would not be able to stand shoulder to shoulder with the rest of international society in the future unless Japan carried out fundamental reforms (i.e. adjust to global standards). Hence, in 1986, the so-called 'Maekawa report' - a plan to remodel the economy - authored mainly by the Bank of Japan's former president Haruo Maekawa. It was Bank of Japan executives who felt most acutely the need for reform and, within the Bank of Japan, called the Maekawa report the "10-Year Plan (to remodel Japan)", implying they would try to carry it out within 10 years.

For the Bank of Japan, another important factor in the structural reforms to the Japanese economy was to overthrow the Ministry of Finance -which had exercised control over the Japanese economy under the 1940 System - and achieve independence from it (the Bank of Japan was under the control of the Ministry of Finance). All they had to do was to purposely create a bubble, burst it and thus reveal the Ministry of Finance's bureaucrats' incompetence at running the economy. The plan worked out; the Ministry of Finance has been broken up, the Bank of Japan gained independence (the Bank of Japan Law was amended) and deregulation and structural reform progress steadily.

However, can the Bank of Japan really create booms and busts intentionally? And did it really do that? Werner says the BoJ did it through its skillful use of 'window guidance'.

The most important function of the Bank of Japan is the creation and allocation of money - the lifeblood of economic activity - throughout the Japanese economy. It does this through 'credit creation', over which it exerts quantitative controls. The most important policy tool by which to achieve this credit control is 'window guidance'. While the Ministry of Finance could intervene in the Bank of Japan's interest rate policy, it hardly knew anything about the 'window guidance' credit controls, much less has it been aware of its importance. Private economists and economic analysts have not comprehended its importance, either. That is why the creation and bursting of the bubble by the Bank of Japan turned out to be the perfect crime.

Richard A. Werner studied in Oxford University and the Graduate School of Tokyo University before working as a researcher in the Bank of Japan's Institute for Monetary and Economic Studies, as well as at the Ministry of Finance's Institute for Monetary and Fiscal Policy. The topic of his research on the Japanese financial system has precisely been the role of 'window guidance' in the Bank of Japan's credit creation policy and the formation of the bubble economy. That is why he could see through the Bank of Japan's secret. The process of disclosing all these facts step by step is as gripping as in a suspense novel. His analysis of the bubble has been appraised highly internationally; the well-known English magazine "Economist" presented it broadly. The chairman of the American FRB, Alan Greenspan, is also said to have ordered for Werner's paper and to have read it carefully twice.

This is no ordinary economics book. For newcomers to economics, there may be parts they tend towards disbelieving, but readers with more than intermediate economic knowledge will find the curtains pulled away from their eyes and will be saying to themselves, "Now I see. So, that's what happened!" (There are very few points of contention).

Some arguments could be backed up with more evidence. But in the light of the time scale covered - overlooking the whole of the 20th century - and in the light of its broad scope - looking at central banker's actions worldwide - this superb book will make you marvel at how fascinating economics actually is.