Once thought to be the next superpower economy, Japan is an extremely interesting case of a country that utilised its war economy to its advantage and is a textbook example of a successful export-led economy. Through the many phases the economy has been through, the central bank has been instrumental in dictating major aspects of the country’s profile and the lived experiences of ordinary people. A significant amount of information in the article has been taken from Werner’s ‘The Princes of the Yen’ a book I would highly recommend due to its questioning of the unaccountable nature of central banks around the world and the manufacturing of the bubble and the resulting crisis. Nevertheless, examining the Japanese Miracle and the following 3 Lost Decades provides us with timely insights, especially regarding the role of central banks and monetary institutions. Starting off by providing historical context for the post-war economy and the peak during the 1980s, I will examine the influence of institutions in shaping the nature of the country. Further, I shall examine the extent to which Japan and the UK are comparable and possible lessons to be had.
After the end of WW2, the Japanese government and the BoJ (Bank of Japan) effectively used State-Assisted Capitalism to achieve growth rates averaging 10% year-on-year.
This was mainly through a policy called Window Guidance which essentially allowed the BoJ to control credit allocation to commercial banks and meant that they - on a quarterly basis - chose how much and to which industries loans were given to. This was particularly effective in terms of the egalitarian distribution of wealth increases and most regular Japanese people experienced raised living standards and high income growth.
Calls for reform were relatively slow to actualise as can be seen by the 1986 10 Year Reform Plan proposed by Maekawa (the former central bank chief) which called for a shift from export-led growth to a deregulated and open market. Plans to deregulate the economy have been varied in success with there usually being the intention for reform but questionable consequences, especially with Hosokawa and Koizumi.
More controversially, the Ministry of Finance had a lot of unofficial control over the BoJ and their priorities began to diverge. The reluctance of the Ministry of Finance to accept and push through reforms led to the creation of a bubble by the BoJ. Increasing the window guidance loan quotas led to a 240% increase in stock prices and 245% increase in land prices between 1985-89. More problematically, however, was the expansion of non-productive lending which, essentially, increased lending to certain industries where there was not an increasing demand. Further, since currency dealers mainly looked at measures involving trade surpluses, Japan’s currency did not devalue, allowing it to buy 75% of all US Treasury bonds issued in 1986.
In terms of risk indicators, it is useful to look at the ratio of non-GDP based loans as a percentage of all loans. Non-GDP based loans are ones which are not used in the production of goods and services, and the ratio of this increased in the late 1980s.
Following the crash, window guidance was abolished leading to investors and regular people not being lent money. Furthermore, the social impact is not to be understated as approximately 5 million people lost their job, in a culture where people are most likely to work with the same company for the majority of their working life. Suicides also became the leading cause of death in men aged 25-44, an indicator of the breakdown of the social fabric. What makes this ordeal even worse, is the fact that the crisis was not a result of mismanagement. Deliberate actions from a group of few executives in institutions manufactured the bubble and the crisis to ensure long-term structural changes.
Facing a situation of low inflation and low growth rates, the BoJ chose to bail out the banking sector instead of increasing the money supply, much to the anger of politicians and the Ministry of Finance. Bailing banks out was similar to the post-war situation where assets plunged due to it being held in war bonds and destroyed industries, and eventually led to the BoJ creating new reserves. However, this created a moral hazard as banks who benefitted from unsustainable investments faced no consequence. The other option would have been to increase the money supply by printing more money to then buy certain goods which would help regular people. A widely suggested option was to buy parks to help with worker satisfaction and alleviate health issues, for example.
By choosing to bail out the banks, the BoJ increased tensions with the Ministry of Finance and politicians.
More recently, Shinzo Abe - who was elected in 2012 - and his new brand of ‘Abenomics’ were relatively popular through a three pronged approach: solving the problem of low inflation, decreased worker productivity and demographic issues caused by an ageing population.
For years, Japan struggled to reinflate its economy, something Werner did not predict. Instead, he suggested that the BoJ would have easily been able to increase inflation levels through its control of credit allowances. Instead, target inflation was only met due to supply side issues and still remains lower than most developed economies. Nevertheless, the next few months might be crucial in predicting the future of the Japanese economy due to opportunities for wage growth.
Along with fears concerning an ageing and declining population, a key measure is wage growth, which might also be the key to maintaining the level of inflation and to kickstart demand-led inflation. This might be likely as the Japanese Trade Union Confederation is asking for a 5% increase in wages for the spring negotiations, their highest demand since 1995. The BoJ is unlikely to reign in monetary policy measures until they have a better indication of what inflation levels will look like next year, which is significantly dependent on the spring negotiations. Kuroda (Current Governor of the BoJ), whose term also ends in April, has argued against hastily suspending the QQE narrative (Qualitative and Quantitative Easing) as Japan’s core inflation is expected to drop below its target of 2% by next year. The precedent for wage growth can possibly break the cycle of disinflation that has plagued Japan for the past decade.
A lot of the evidence in this article has been from Richard Werner’s ‘The Princes of the Yen’ where he postulates that the central banks in Japan and other countries have manufactured crises to change the economic structure of the country. This view has some credence, especially when considering the lack of accountability faced by those in charge of the bubble. Toshihiko Fukui was the Head of the Banking Departments at the Bank of Japan (1986-89) which was responsible for the window allocations and he later became the governor. Similarly to Mieno and Maekawa, all three have stated that they saw monetary policy as a way to change the economic structure of Japan through crises that they manufactured or exacerbated. These 3 individuals are some of the ‘Princes’ who have succeeded in their goals for the Ministry of Finance to be dissolved, the formation of an independent central bank and the desire for structural changes. The extent to which this level of top-down paradigm shifts can occur in different countries is questionable, however. It was only in 1997 when all economic policy initiatives came from politicians instead of Japanese bureaucrats lending itself to a very different political culture than in the UK or USA.
Evidence of the obscurity of central banks all over the world should also be questioned. For example, even the evidence for an independent central bank (the primary evidence behind Maastricht) was based on a single study commissioned by the European Commission in 1992. This study has since been proven to have been manipulated to get the desired result that ‘proved’ that independent central banks lead to lower interest rates.
Werner perhaps overestimated the power of these ‘Princes’, however, as can be seen by Japanese institutions struggling to cause inflation increases and the relative failure of economic policy in causing demand-side changes. However, he is extremely successful in demonstrating the influence of the BoJ and other institutions in shaping the economy and culture of Japan, especially when considering the manufacturing crises and institutional practices.
In conclusion, this analysis goes to show the instrumental nature of central banks and the power and influence they hold. However, and more worryingly, their practices and decisions are shrouded in unaccountability and secrecy. Whilst it's convenient - and perhaps a bit histrionic - to paint a picture of a few people at the top controlling whole countries, it is undeniable that a lack of public knowledge and scrutiny allows for whole structures to change without our consent, or even awareness.