Voice, August 2001, Tokyo

By Prof. Kazuo Ijiri, Director, Research Institute of Japanese Culture, Takushoku University, Sapporo

Legitimate criticism of the Bank of Japan: Richard Werner, Princes of the Yen

Economic measures and structural reforms are two different matters.

The term "structural reform" can be found in the media every day. Junichiro Koizumi's cabinet talks about "carrying out painful structural reforms". But will we really create a better society after the reforms? This is the concern nationwide. It does not make sense to simply install American-style market competition. In fact, was the Japanese economic system such a bad thing? And how about the European-style system?

Once you start reading Richard A. Werner's bestseller, "Princes of the Yen" (translated by Toshiko Yoshida, published in Japanese by Soshisha, Tokyo) you will feel the European point of view right away. Take the following from the preface for example: "The recession had produced the general conviction that Japan's old economic system did not work any more, and thus had to be reformed drastically. Most commentators now claim that structural changes are 'badly needed'. Senior members of the Japanese central bank have been calling for structural reform almost on a daily basis. They say that the introduction of US-style capitalism is necessary. However, is it really necessary to abandon Japanese-style capitalism? The only evidence supporting this claim is the recession of the 1990s. But Japan's economic system was far more closed, cartelised and controlled in the 1980s, yet nobody says that its economy grew too slowly at that time. The same applies to the 1950s and 1960s. Clearly, this means the same economic structure can deliver high or low growth."

This is a very important point. Politicians and intellectuals are saying that structural reforms have to be carried out in order to improve the economy. If American-style capitalism is not introduced, growth cannot be hoped for. But the author's standpoint is different. He thinks that economic measures and the economic system are different problems. Even within American-style capitalism there are times of strong economic growth and times of recession. So, introducing the American style doesn't necessarily guarantee economic growth, either. This debate points out the cause of ignorance and unhappiness of the Japanese people during the last 10 years, namely thinking of economic measures and structural reform as one and the same thing. Of course, American politicians and intellectuals want Japan to hurry up with the structural reforms - this has been the basis of their policy towards Japan for the last 20 years.

Richard A. Werner, author of "Princes of the Yen", is from Germany. He was born in 1967 in Bavaria, enrolled in the doctoral course at Oxford University, and majored in economics at the Graduate School of Tokyo University. From 1991 to 1993 he continued his studies at the Institute for Monetary and Economic Studies of the Bank of Japan and the Institute Fiscal and Monetary Policy at the Ministry of Finance. As you can guess from his research career, the theme woven into the book is the feud between the Bank of Japan and the Ministry of Finance. Werner criticizes the Bank of Japan's attitude and decisions in the following example: "At any time during the 1990s, economic recovery could have been possible if the Central Bank had increased the amount of credit creation." In general, most Japanese blame the Ministry of Finance for the long-lasting recession. But Werner rather shows sympathy for the Ministry of Finance. Instead, he insists that when the government and the Ministry of Finance were desperate for economic measures, the Bank of Japan was not only uncooperative but also intentionally contracted credit.

A home-made "crisis"?

"Princes of the Yen" legitimately criticizes the Bank of Japan. The 'princes' in the title refer to those who control the Yen. The book focuses on the former president of the Bank of Japan, Haruo Maekawa, and the so-called "Maekawa Report" he issued in 1986. The report from a research group Maekawa presided over during the times of Yasuhiro Nakasone's cabinet later became the basis for the theory of the structural reforms. Needless to say, the "expansion of domestic demand" as written in the report became the trigger for the bubble economy.

Werner directly concludes that "the Maekawa Report was like a list of the wishes of representatives of the American Commerce Department. An overwhelming number of Japanese people felt the same way at the time. But before people knew it, the structural reforms stated there became national policy, under the name of the so-called "Conservative Revolution".

The author sees the Japanese-style economic system as an extension of the "wartime economic system". Until about 1920 Japan was governed by cold capitalism. But, through the Great Depression, the wartime economic system and the post-war reform, the Japanese-style economic system was created. Whilst the author is a follower of the "1940 System" school of thought, he is not simply criticising the Japanese-style society. This is built on the awareness that, in Germany, too, there are critical views to American-style capitalism. For European intellectuals, this is natural. That is why the author says the following: "It is one of the laws of history that there is only one set of circumstances, under which countries ever change in a fundamental way. In fact, there is not one country in the world that has changed its economic, social and political systems in a significant way - without a crisis."

No further words are necessary. It is impossible to start sweeping reforms just because the economic situation worsened. Still, if one is intent on implementing reforms, then one has to arrange a "crisis".

Werner harbors the suspicion that the Bank of Japan may have been creating the crisis in order to realise the structural reforms it desires. He suggests that those thinking in a Macchiavellian way would be happy to create a crisis in order to implement reforms that they truly believe to be justified. Wasn't - and isn't still - the "Maekawa Report" called the "Ten Year Plan" for remodeling Japan?

Certainly, the longer the recession lasts, the more important become economic measures as well as structural reforms. Even if people essentially understand that economic measures and structural reforms are two different things, once a recession lasts for over 10 years, they start believing that the economy cannot recover without structural reforms.

Whether or not the Bank of Japan consciously created the crisis or neglected it is likely to be a point for contention. But it is no doubt true that Japan is plunging headlong into a place without historical precedent.