The Daily Yomiuri, Tuesday, April 6 1999
By Yumiko Miyai
Independent BoJ Fails Democracy, Economist Says
Richard Werner, chief economist and managing director of Profit Research Center, a Tokyo-based financial think-tank, is challenging conventional wisdom about the Bank of Japan. The German-born, Oxford-educated economist, who was visiting researcher at the central bank from 1992 to 1993, said that independence granted to the Bank of Japan one year ago was not democratic or in the public interest. According to Werner, the Bank of Japan makes crucial monetary decisions at its own discretion without the scrutiny of politicians - democratically elected representatives of the people. He said the Bank of Japan had used a secret monetary policy tool - the quantity of credit - to manipulate the economy, which resulted in a prolonged recession. During an interview with The Daily Yomiuri, Werner warned against excessive independence of the Bank of Japan and urged that it be more transparent and accountable to the public, particularly regarding the quantitative monetary policy.
Daily Yomiuri: It has been one year since the Bank of Japan Law was revised to grant more independence to the central bank. Do you think the BoJ has gained true independence from the Finance Ministry and politicians?
Werner: Yes, unfortunately. According to the new BoJ Law, the BoJ is basically not accountable to anybody for what it is doing. But that is actually nothing new. It is a little-known fact that even before the BoJ Law changed, the Japanese central bank already enjoyed complete independence. Not in terms of setting interest rates, but in terms of a much more powerful, yet secret monetary policy tool, namely the quantity of credit creation. By pretending to use interest rates as a policy tool, the BoJ has never been held accountable for its actual monetary policy.
What monetary policy can the central bank take to overcome the recession?
The Japanese recession is due to a credit crunch. In this situation, lowering interest rates does not help, as it is no use to small firms to be told that we have zero interest rates when they cannot borrow at any rate. Fiscal stimulus packages do not work either. Why does fiscal policy not work? They issue bonds and they put them in the bond market (to finance fiscal packages). That means they take the money out of the bond market, which means (they take money) out of the economy. What we need is the quantitative expansion of purchasing power - what is called credit creation. Finally, politicians are realising this is what we need. The key way of doing it is to ask the BoJ to create money or print money. That is why we had this discussion about direct underwriting of government bonds by the BoJ. Unfortunately, the politicians are too late - they have changed the BoJ Law so that the BoJ can do what it wants - and for seven years, the BoJ has refused to create a recovery by printing money and buying bonds.
Do such BoJ operations inevitably trigger inflation?
Inflation happens when you boost the economy above the maximum potential economic growth rate. Japan's actual growth rate is actually negative. Japan's maximum, noninflationary, potential growth rate is around 4 percent. We can print money for many years without inflation. To keep the economy steadily at 4 percent, there would be no inflation. Of course, you should bail out banks and have banks create more money. The other way to increase credit creation would be for the government to fund fiscal spending not by issuing bonds, but by borrowing directly form banks. The Finance Ministry does not know this because it does not understand the credit creation process. The BoJ knows this, but it has no interest in telling the Finance Ministry. The irony is that more people understand this now - politicians from the prime minister, the finance minister to Liberal Democratic Party politicians are calling on the BoJ to buy more bonds and print more money - but it is too late because the BoJ is now independent.
Politicians, democratically elected representatives of the Japanese population, have no control over the number one economic tool of the country's monetary policy. The bank can do what it wants with monetary policy.
Are you saying that granting independence to the Bank of Japan works against public interests?
It is against the Japanese people and it is against democracy, and real decisions are going to be made by people who are not elected, in some meeting rooms of the bank.
Could you explain how the Bank of Japan created the bubble economy?
The bubble was due to excess credit creation by banks for lending for speculative purposes. Why did banks lend so much? The answer is that the BoJ forced banks to lend through a mechanism that the BoJ has always kept secret from the public. I got all the proof that this is what the bank did through direct credit controls, which took the form of informal guidance. This was an extralegal form of forcing banks to lend more.
Why did the Bank of Japan force banks to lend so much money?
Before answering that question, let's look at what else the BoJ did. Perhaps we can piece it together. Each time, every month or every quarter, when someone at the bank loan and planning departments of the BoJ told banks to lend more - by 10 percent or 15 percent - bankers were quite scared at that time. They told me that they did not understand why they had to lend so much. Even BoJ officials who had given orders to the banks also told me this was crazy. They were told by people high up at the BoJ to do this. The Finance Ministry has nothing to do with the credit controls of the BoJ. Credit controls started during the war as part of controls on the economy and they continued throughout the postwar era. The BoJ in its official statement said that they were abolished in 1981, but it is not true.
Why did the Bank of Japan force banks to lend more?
One explanation would be that the BoJ is simply not capable and what has happened in the past 15 years is a string of policy mistakes. If that explanation is true, then the conclusion is that the BoJ must be stripped of its power because it is totally incompetent. There is another explanation: The BoJ knew what it was doing. That explanation could follow from an observation of who was actually benefiting from what is now happening in Japan. In the last 50 or 60 years, the Finance Ministry has been the most powerful force in Japan, with its power base being regulations. The BoJ has lobbied a long time for deregulation and an economy with very little bureaucratic interference. Who is in control in such an economy? The central bank is in control, because that is the only institution that is left in which power can be wielded by creating and allocating money. The Finance Ministry in three years will be nothing but a tax, budget and fiscal office. That is the end of the Finance Ministry. The BoJ has won its secret war with the ministry and is completely in control of the country, at the incredible cost of 5 million unemployed - and to the detriment of democracy.