The Japan Times, 27 July 2001

by Hiroshi Yamagiwa

BOJ planned bubble, decade of misery: Werner
German economist says central bank figures plotted collapse to provoke crusade for reform

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It's simple. Print more money and the stagnant economy will certainly pick up. So argues Richard Werner, the Tokyo-based German economist who authored the controversial best seller "En-no Shihaisha" ("Princes of the Yen").

Actually, printing more money so it can circulate in the economy is not a novel idea. Believing that the method will encourage people to increase spending, some politicians and private-sector economists have been urging the Bank of Japan to do so for the past few years.

What makes the book controversial is its claim that the BOJ created the economic bubble in the late 1980s, burst it in 1990 and has since been keeping the economy from recovering -- all intentionally. The purpose, the book argues, was to promote wholesale deregulation -- by making people believe structural reforms would be the only way out -- and make the economy more like that of the United States.

The book also claims two BOJ "princes" were taking control of the nation's economy during the period, naming former Gov. Yasushi Mieno and Toshihiko Fukui, former deputy governor and current chairman of Fujitsu Research Institute, a private think tank.

All this may sound totally far-fetched. Even rave reviews of the book express a degree of surprise, because it is widely believed the Finance Ministry or politicians have been responsible for the economic mess.

Whether true or not, Werner says he has heard no counterarguments from the central bank. BOJ officials "are not saying anything in public," he said in a recent interview, adding that some officials privately made derogatory comments behind his back. "If they disagree, then they should tell me where they disagree." Tomohiko Sakamoto, chief spokesman at the BOJ, said the bank would not comment on individual publications.

After studying economics at Oxford and Tokyo universities, Werner spent nine months at the BOJ Institute for Monetary and Economic Studies as a visiting researcher from 1992. He began wondering why the bank would not print more money to prop up the economy, until a BOJ official, who was quoted anonymously, told him, "If we create more money, the economy would recover. But . . . it won't solve Japan's structural problems." To write the book, Werner conducted "hundreds of interviews" with BOJ officials and commercial bank employees, in addition to reading publicly available documents. He then analyzed the nation's total amount of credit creation -- money printed by the BOJ and lending by banks -- in the past decades.

Asked how he came to lift the lid on the BOJ, he playfully likened himself to the child in the Hans Christian Andersen fable "The Emperor's New Clothes," who looks at the naked emperor and says he is naked, although all the adults pretend he is clothed.

"(That child) wasn't afraid of speaking up for the truth," the economist said.

About 150,000 copies have been sold since May, according to the publishing firm. The book's argument mainly rests on a theory that the state of the economy is not determined by interest rates, but by the amount of credit creation, which does not necessarily go hand in hand with interest rates. The BOJ's official policies, including the "zero-interest-rate" policy in 1999 and 2000, have thus been a "smoke-screen" to distract public attention from the "real action," or money creation, he said.

Even the ongoing quantitative easing policy means little, he said, because it only increases the amount of banks' deposits at the BOJ and does not increase the amount of money in the entire economy. Since he believes credit creation is the only key to economic recovery, he does not buy the structural reforms pledged by Prime Minister Junichiro Koizumi.

"It's neither necessary nor sufficient to get a recovery," said Werner, who is also chief economist at Profit Research Center Ltd., a Tokyo investment advisory firm, and an assistant professor at Sophia University in Tokyo.

Until the bubble burst, the BOJ was instructing banks to increase lending to specific industries, according to the book. At the moment, banks appear reluctant to increase lending under a huge pile of bad loans. Yet the author says the BOJ can print money and buy what it likes, such as corporate bonds and government bonds, adding it can do so at no cost. BOJ Gov. Masaru Hayami, for his part, insists that progress in structural reforms is necessary if the economy is to recover and grow steadily.

Despite the BOJ's official stance, Werner said he thinks the economy will probably recover early next year, judging from the latest expansion of credit creation. "This is something that's totally under control of the Bank of Japan," he said, "because it can add more money to the economy or take money out from the economy."