Richard A. Werner (Sophia University and Profit Research Center, Ltd.)
The review of 'Princes of the Yen' by Mr Kubota, a former high-ranking Ministry of Finance official, shares several features with reviews written by other ex-MoF officials, namely Mr 'Yen' Eisuke Sakakibara and Mr Yoshimasa Nishimura. The first feature is that they tend to classify me as a 'monetarist'. While monetarism was right to remind us of the importance of the quantity of purchasing power in an economy, it placed too much emphasis on money and too little on credit.*1 This is precisely where I beg to differ - as should be clear from reading my book. To measure the net increase in effective purchasing power that is a necessary condition for a net increase in growth we have to look at how money comes about. And that is through the process of credit creation. This allows new insights that the monetarist focus on such measures of the savings supply as the deposit aggregates M1, M2 or M3 kept from us.
The second feature that Mr Kubota shares with his former MoF colleagues is that he 'cannot agree' with my view that key insiders at the Bank of Japan have deliberately prolonged the recession in the pursuit of their own agendas (namely, to bring down Okurasho, obtain independence for the BoJ, and trigger far-reaching structural changes to the economy - all of which they did indeed achieve). I understand that this finding is hard to swallow for some - I myself, for instance, also started out with the working hypothesis that incompetence explains both the behaviour of MoF and the BoJ over the past two decades of extraordinary macroeconomic policies. As is practice in the social sciences, I then proceeded to collect as much relevant data as possible - such as statistics, econometric tests, institutional analyses and wide-ranging eye-witness testimonials. I failed to reject the hypothesis in the case of the Ministry of Finance (which is probably why ex-MoF officials often 'cannot agree'). However, overwhelming evidence forced me to reject the incompetence hypothesis in the case of the Bank of Japan. While we can easily compile rich evidence that MoF was seriously trying to create a recovery, this becomes much harder in the case of the BoJ. In terms of motivation, we also find that the BoJ had far fewer incentives than MoF to try hard.
If research is meant to have any meaning, then we must be prepared to accept conclusions that turn out to be true, even if we might not like them for whatever reason. So why can Mr Kubota not agree with my conclusion that the BoJ acted deliberately? He does not tell us. Where is my evidence flawed or insufficient? Mr Kubota keeps politely quiet about it. But never mind the evidence – Mr Kubota has a 'longstanding suspicion' that the BoJ was incompetent, and hence he must be right ...
Meanwhile, it is heartening to find that Mr Kubota seems to agree that monetary policy has been in the hands of the BoJ. Many MoF officials have found this implication of my book also hard to accept. Basically, the BoJ successfully deceived MoF (an action that I do not condone and that was in breach of the BoJ Law). While MoF was legally in charge (and also in practice exerted influence over the setting of interest rates), the BoJ actually did what it wanted through its secret credit control mechanism ('window guidance'), which it claimed was irrelevant, but which I show to be of great importance. Incidentally, my findings concerning the role of window guidance, published in academic publications since 1998, are not disputed by anyone.
However, unlike Mr Kubota, I would not wish to call the BoJ's monetary policy 'wise' - its extremely selfish and disingenuous policy has been highly costly for Japan's population. That is why instead, I call for a parliamentary inquiry into the BoJ's actions and its decision-making process over the past twenty years concerning the crucial quantity of credit. From this it should follow that a change in the Bank of Japan Law is necessary to make the central bank result-oriented and accountable to the people. Indeed, this conclusion would stand, no matter whether the BoJ's policies were intentional or the result of blatant incompetence.
Nevertheless, it is relevant to try to answer the question why the BoJ forced the banks to increase credit creation dramatically during the 1980s through its window guidance (banks were punished severely for not using up the outlandishly large loan increase quotas imposed by the central bank and to be fulfilled in the following quarter) and then prolonged the recession of the 1990s by failing to create sufficient amounts of credit. To do this, we need to determine just who took the key decisions. As it turns out – and this is also not challenged by Mr Kubota or anyone else - the key decisions during the 1990s were made by Mr Mieno (governor from 1989 until 1994) and Mr Fukui (deputy governor from 1994 to 1998). The key decisions during the 1980s' bubble period were made by Mr Mieno (as deputy governor from 1984 to 1989) and Mr Fukui (as head of the banking department of the BoJ from 1986 to 1989, where he enforced the window guidance).
The undisputed fact is therefore that these two individuals were jointly responsible for both the creation of the bubble and the recession of the 1990s. MoF had no input in the determination of credit creation. Nobody put a gun at Fukui's and Mieno's heads. It is apparent that they acted voluntarily. In this case we must assume culpability, as is legal practice, unless there is evidence for insanity - and I have seen no such evidence. Next is the issue of intent or mere recklessness. There is overwhelming evidence that Mssrs Fukui and Mieno were the unrivalled experts in the control and manipulation of credit creation and in understanding its economic implications. They knew what they were doing. And they had a motive. The case for reckless behaviour is weak - and the burden of proof is on the defense.
Ultimately, only God and Mssrs Fukui and Mieno know the full truth of their inner motivations. While we are awaiting the full story on Judgment Day, their former positions in high public offices morally oblige them to tell us a little more about just what they have been up to. Their silence concerning my conclusions is one form of evidence. A parliamentary inquiry should probe the issue further.
But they have not been totally silent. Actually, they have already told us quite a lot about their motivations. During the past decade, they and their senior colleagues at the Bank of Japan have repeatedly argued that structural change was "badly needed" and more important than creating an economic recovery. The constant call for structural change, and the positive effect the recession has on triggering that change has really let the cat out of the bag: Today I am by far not the only researcher who is convinced that the BoJ intentionally prolonged the recession of the 1990s. To the contrary, it has become something of a consensus view among Japan researchers.
Early this year, a Japanese fund manager, based in New York, testified as follows: "It's an open secret. People at the Bank of Japan talk about this privately, but of course they can't say it in public: the Bank of Japan, including its governor, is fully committed to changing Japan's economic structure. They know that no such change would take place without a recession. If the BoJ printed more money, then nothing would change".*2
Adam Posen, Senior Economist at the Washington-based Institute for International Ecnomics is noted for his analyses of the BoJ's monetary policy. The conclusion of his sound research on the Bank of Japan: "So what ultimately is the motivation for the BoJ to pursue the policies it has in the past several years? ... The BoJ wants to use monetary policy to induce structural reforms." Like me, he disapproves, noting that the costs have clearly outweighed potential benefits of structural change and that nobody gave the BoJ a mandate to implement structural change or promote "creative destruction".*3 Mr Kubota seems to share this view.
There are also those who recognize the BoJ's policy intention, but agree with it. Robert Feldman, another experienced and respected Japan economist who has spent some time working at the Bank of Japan, has on many occasions defended the Bank of Japan's monetary policies of the 1990s. In July 2000 he explained: "... I think we should go through hardships first before reaching a comfortable situation. ... I'm of the opinion that economic stimulant measures should not really be continued. In a sense, I regard economic recovery as a hazard for structural reforms. We should reduce the effort to stimulate the economy. ... This will gradually increase the pressure for reform in every field, including labour and the public and private sectors".*4
These were precisely the words I had already heard myself nine years earlier, from a staff member at the Bank of Japan. At the time I could not believe that the Bank of Japan would on purpose create a recession, just to change Japan's economic system. But it is now painfully obvious that this is exactly what happened. Meanwhile, the same insiders, Mr Fukui and his anointed successor Mr Masubuchi, are still at the levers of power at the BoJ; there is no evidence that the Policy Board is little more than a rubber-stamp institution; and the untransparent, unaccountable and unsavoury personnel and monetary policies of the BoJ continue. Given the severity of the situation I would like to suggest to all current and former MoF officials to put aside squabbles and instead join in the struggle to make Japan's central bank accountable and oriented towards the benefit of the people.
*1 The so-called quantity theory of money is still the most widely accepted description of the link between the economy and the monetary sector, adhered to by classical, Keynesian and monetarist economists alike. It is still the standard work-horse in empirical macroeconomic models. The reason for this unanimity is that the original equation of exchange is an accounting truth that cannot be doubted - it simply states the obvious fact that the total value of transactions taking place during a time period must be equal to the amount of money that changed hands/was transferred to settle these transactions. Net new economic transactions (and thus economic growth) can by definition only take place if there is an increase in the amount of money that is used for these transactions. Merely acknowledging an obvious truth, as I do, should not make anyone a 'monetarist' or follower of any particular economic camp. Monetarism includes other arguments that I do not necessarily subscribe to and hence do not deserve to be criticized for.
*2 Telephone interview, February 2001.
*3 Adam S. Posen, The Political Economy of Deflationary Monetary Policy, in: Ryoichi Mikitani and Adam S. Posen (eds.) in: Japan's financial crisis and its parallels to US experience, Institute for International Economics, Special Report 13, September 2000
*4 Robert A. Feldman, as quoted in the Daily Yomiuri (2000), Is Japan on the threshold of fiscal breakdown?, 20 July 2000, p. 20. Of course, in 1999, the BoJ had reflated temporarily. But its governor was also worried that the reflation might now reduce the pace of restructuring. Governor Hayami said in May 2000: "When the economy recovers, as is now happening, it might well be the case that efforts for structural reform might be neglected due to a sense of security." M. Hayami (2000a), Rivitalisation of Japan's Economy, Speech given by Mr. Hayami, governor of the Bank of Japan, at the Japanese Economic Research Center on May 29, 2000, p. 8. Available from Bank of Japan's web site: www.boj.or.jp/en/press/press_f.htm.