August 10, 2003

THE ASIAN BOOKSHELF

Pulling away the curtains from the 'Princes of the Yen'
They are not elected, yet they control the country's financial destiny

by Bill Totten

PRINCES OF THE YEN: Central Bankers and the Transformation of the Economy, by Richard A. Werner. London: M.E. Sharpe, 2003, 362 pp., $27.95, (paper).


Richard A. Werner has written a rare book. "The Princes of the Yen" is a scholarly, thoroughly researched treatise on economics that reads like a detective novel. The 248 pages of text are such a fast read that one might think the book a work of fiction if it weren't for the logic of Werner's arguments -- as well as the 48 pages of footnotes, 19 pages of bibliography and 30-page technical appendix that provide the evidence to support those arguments.

The book is about the autocrats who run the Bank of Japan, how they operate and what they have been trying to achieve. In the process, many puzzles about Japan's economy are solved. These "princes" are neither elected by Japanese citizens nor held accountable to their elected officials. Presiding princes choose their successors who, in turn, seem to be accountable only to their benefactors.

Werner, a German economist who has studied and worked in Tokyo, names them, reveals their suspiciously close relations with the United States, describes the tool they use to control Japan's economy, and tells how they have used that tool to grow the economy when they sought growth and to cripple the economy when that served their own aims.

Werner specifically accuses the princes of surreptitiously using their control over Japan's supply of credit to prevent an economic recovery for the past decade. Why? In order to achieve the "reform" or transformation of Japan's economy into a carbon copy of today's U.S. economy that the princes deemed necessary for Japan.

Werner alleges that they wreaked this havoc on the nation, causing immense suffering to its citizenry -- including record levels of unemployment, bankruptcies and suicides -- to cow the nation's politicians, bureaucrats and citizens into accepting reforms the princes knew were too contrary to special and general interests to be accepted other than in the wake of such havoc.

At first glance this accusation may seem far-fetched. But what makes this book special is how, like a skilled courtroom prosecutor working a jury, Werner carefully and thoroughly lays out the evidence to persuade his readers that his allegations are true.

Window guidance

Werner begins by pointing out something rarely discussed in Japan: that the "traditional" Japanese economic model -- widely considered responsible for the "economic miracle" that built the world's second-largest economy from the bombed-out ruins of World War II in just 30 years -- isn't traditional at all.
Company unions, lifetime employment, government regulation and a business ethos favoring cooperation over competition and customers and employees over stockholders were consciously introduced during World War II. With the approval of the U.S., Japan retained its wartime economic system and kept its bureaucratic elite in power. This enabled Japan's "economic miracle" and conquest of world markets after the war.

Werner says money was the main tool bureaucrats used to control Japan's economy during and after the war. The credit controls survived largely unchanged into the postwar era, taking the form of the extralegal and secretive "window guidance" operated by the BOJ. According to Werner, "guiding" credit to selected industries and preventing others, such as consumers, from obtaining it, was at the core of Japan's postwar success.

Who are these "princes"?

Law limits the tenure of the governor of the BOJ to five years. For decades, the Ministry of Finance and the BOJ have alternately supplied the candidate for governor. However, Werner found that whenever a Ministry of Finance man became governor, he would be excluded systematically from key discussions, namely those involving the quantity of credit. Real authority resided in his deputy, always be the born-and-bred BOJ man who became the next official governor. Thus, throughout the postwar history, the trueborn BOJ governors had control all of the time -- first as deputy governor, then as governor.
Werner also finds the selection of these princes, the rulers over Japan's economy, similar to how dictators tend to choose their successors. Instead of merit and ability, the primary criteria are loyalty and the sharing of common goals. To cultivate his loyalty, the successor is nominated early on so that he will feel indebted to his mentor and repay him by following his policies.

This puts the actions of Prime Minister Junichiro Koizumi into perspective. Perhaps he thought he had chosen Toshihiko Fukui in February this year as central bank governor. Actually Fukui had been chosen in the late 1960s as today's governor of the BOJ (with everyone in between fixed as well). That's why he has been known as "prince" since his early 30s.

Werner next examines why these "princes of the yen" crippled Japan's economy from the mid-1980s. Werner uses the princes' own utterances, together with an analysis of their actual but little-known credit policies, to reveal their goals. These were never secret, but plain for all to see. The princes have consistently argued for the need to "reform" or "transform" Japan's economy, through structural changes, into the type of deregulated and liberalized system demanded by U.S. trade negotiators.

If the BOJ has no mandate and no regulatory power to directly implement structural reform, how can it achieve a structural transformation of the "systems that supported the postwar development of Japan's economy"? And how can current monetary policy be helpful in achieving this long-term goal of structural reform?

The answer is revealed in the official statements by BOJ executives that Werner cites: The BOJ can be helpful by not being helpful. The princes recognized that such structural change was so opposed to the special and general interests of most Japanese -- citizens, businessmen, bureaucrats and politicians -- that it could be achieved only by crippling the economy and preventing its recovery.

Werner traces the origin of this reform movement, now mostly associated with Koizumi and Finance Minister Heizo Takenaka, back to 1983 when "prince" Tadashi Sasaki called for a transformation and liberalization of the Japanese economy.

The better-known report issued in 1986 by his successor Haruo Maekawa (and to which "prince" Yasushi Mieno also contributed) stated that "the time has thus come for Japan to make a historical transformation of its traditional policies on economic management and the nation's lifestyle. . . . there is an urgent need for Japan to implement drastic policies for structural adjustment and to seek to transform the Japanese economic structure into one oriented toward international cooperation."

Echoing U.S. trade negotiators, it called for administrative reform, deregulation, import expansion and greater market access for foreigners. In short, the "transformation" of the entire body politic, the abolition of the war economy system, and the introduction of a U.S.-style free market economy. The Maekawa report and its updates of 1987 and 1988 are known inside the BOJ simply as the "ten-year plan."

BOJ, Reichsbank and the ECB

In a thrilling who-dunnit, Werner uncovers the full story of the creation of the Japanese bubble economy of the 1980s and identifies the key decision-makers. He warns that the BOJ has acted like a "second government" in the pursuit of a political agenda. The princes got what they wanted, including legal independence and the long-sought dismantling of the hitherto dominant Ministry of Finance. Today, Werner warns, they are even less accountable for its actions.
There is good news for investors in all this: Artificially created recession can also be ended on short notice when it has served its purpose. Many of the goals have been achieved. Governor Fukui might well end the long slump.

In the meantime, Werner's marvelous book is a must-read for anyone interested in Japan or, for that matter, how central banks work in many other countries, such as in Asia or Europe. His final chapter on the European Central Bank and its connection to Adolf Hitler's Reichsbank (a connection shared with the BOJ) should come as a wake-up call to many European observers who have failed to recognize the role of the ECB's credit creation policy in the propagation of Germany's slump.

Drawing parallels between Germany's recession and Japan's deflation has become popular. But the recent statements by ECB leaders -- that Germany must fundamentally change its economic structure -- indicate that the similarities may be far closer than we would wish.