13 14

The Princes of the Yen

It was the Bank of Japan that ended the bubble by suddenly tightening window guidance in June 1989 and then created the recession of the 1990s.1 It was the Bank of Japan that prolonged the recession, for although it could have ended it as early as 1992 or 1993, the appropriate reflationary policies were not taken for a decade. We have also found the ultimate cause of the crisis of the 1990s—the window guidance credit control mechanism, which created the bubble of the 1980s. Once again, it was controlled by the Bank of Japan. Thus Bank of Japan policy was the cause of bank lending, GDP growth, and asset price movements over the past two decades.2 But who decided Bank of Japan credit policy?
The Bank of Japan has done little to illuminate this point. To the contrary, it has made misleading statements about the role of window guidance in the 1980s. Moreover, it implemented several reorganizations of its bureaus. In 1997, the Credit and Market Management Department was split into the Financial Market Operations and Surveillance Department. Another reorganization took place in April 1998. By this time, the tasks of the former Banking Department had been split between the Operations Department, the Financial Markets Department, the Financial and Payment System Office and the Bank Supervision Department. It had become a little harder to locate the center of the credit control policies.
MoF Had No Influence over Window Guidance

Sometimes observers suggest that the banks had such a strong lobby that they could influence, if not dictate, the window guidance loan quotas.3 But in our interviews Bank of Japan officials were adamant that the banks were on the receiving end of window guidance and did not determine the window guidance loan quotas among themselves. “I have no knowledge of banks deciding [their loan quota] by themselves” (Bank of Japan official 3). Bank of Japan officials were unanimous in their opinion that window guidance quotas were set in a “one-way” process that did not involve the banks. It was “like an order,” and the decision was made exclusively by the Bank of Japan (Bank of Japan official 7). Who gave the orders?
Many observers of postwar Japan are convinced that the Ministry of Finance not only was legally in charge of all economic affairs, but also made all key decisions. They therefore feel that even credit controls must ultimately have been under MoF’s supervision. This is certainly what the old Bank of Japan Law, in force until April 1998, would suggest. It has been established by many researchers, however, that this was not the case in the 1960s and 1970s. Although the Bank of Japan lost the first power struggle with MoF in the 1950s and early 1960s, it retained actual power over the economy thanks to its control over window guidance. But what was the situation in the crucial 1980s?
The Bank of Japan officials I interviewed said that the decision on the official discount rate (ODR) was indeed influenced by the Ministry of Finance: “The official discount rate … is decided by the Planning Department [of the Bank of Japan] after collecting information from the Research and Statistics Department and the Banking Department. Then the Ministry of Finance is consulted…. Its influence is very strong…. Sometimes the Ministry of Finance canceled [a change in] the discount rate. There is also a policy board [at the Bank of Japan], but in reality it is [decided by] the Bank of Japan Planning Department and the Ministry of Finance Banking Bureau together. But this is all quite secret” (Bank of Japan official 7).
However, we know that interest rates, including the official discount rate, were not important in the creation of the bubble. Window guidance is a different matter. Concerning window guidance, Bank of Japan officials said that “the decision… is totally different [from the decision about the official discount rate]” (Bank of Japan official 7). “The total loan increase was decided by the kyokuchō [the chief of the Banking Department of the Bank of Japan], who also decided the warifuri [allocation among banks]. The decision about the official discount rate is different, as here the Ministry of Finance may intervene, sometimes delaying or canceling an ODR move attempted by the Bank of Japan” (Bank of Japan official 6).
The commercial bank staff who were on the receiving end of window guidance also felt that the Ministry of Finance was not involved: “We don’t know how the window guidance ceilings are decided. But we did not have the impression that the Ministry of Finance was behind this” (bank officer 4). Interviews with Ministry of Finance officials confirmed this finding, which is also supported by the literature on the pre-1980s era.4
The Bank of Japan Lets MoF Reign, Not Rule

Even before the 1980s, authors agreed that window guidance “is rather free of Ministry of Finance interference because the process of establishing ceilings poses a number of technical problems and because the details of the operations are kept quite secret.”5 Another researcher concluded: “Whereas MoF can by law determine the central bank’s discount rates, it cannot determine the content of window guidance. Nor can politicians or business executives easily intervene. Secrecy, which the bank invokes in the exercise of both window guidance and penalty rates until some months after policy is implemented, also keeps MoF at arm’s length.”6
It is therefore not surprising that by the 1980s, MoF’s awareness of even the role of window guidance had further dimmed. As we have seen in chapter 6, the central bank used several smoke screens to distract critics and rivals from its true control tool. It argued that it undertook no credit allocation, that window guidance was merely an informal and voluntary consultation process with the banks, that window guidance was not an effective tool, and (since 1982) that it had practically been abolished and had become irrelevant. In its official publications, the BoJ has for the past two decades claimed that its policy is conducted by targeting interest rates.7 As a result, during the 1980s the Ministry of Finance never even attempted to take hold of the most important control tool over Japan’s economy.
MoF did have influence over interest rates and thus erroneously believed itself to be in control of monetary policy. Had it known the truth about window guidance, it could have usurped this power tool. The Bank of Japan apparently played its part well, since any Ministry of Finance influence over interest rates was commented on bitterly as unjustified interference. In reality, the central bank must have been happy to cede control of rates to MoF while maintaining control over the economy through window guidance. This is why a high-ranking BoJ official could state truthfully that despite the old Bank of Japan Law that gave the government and its Ministry of Finance supervisory authority over the central bank, “the powers of order [of the Ministry of Finance] have never in fact been used. In reality, the management of monetary policy is carried out under the responsibility of the Bank of Japan from an independent point of view.”8 Even in the 1980s and 1990s, the central bank let MoF reign. But the Bank of Japan ruled.
So Who Exactly Created the Bubble?

If the decision concerning the window guidance loan quota was made at the Bank of Japan, then who exactly made it? The window guidance loan quota had an impact on everyone in Japan and on many more people all over the world. Whoever decided window guidance was effectively in control of Japan’s economy, as much as Hjalmar Schacht ruled over Germany’s economy for much of the 1920s and 1930s. Who, then, was this credit dictator?
The window guidance officers often had great discretion in setting the loan quota for specific banks. This was especially the case in the regions: “For the secondary regional banks, the window guidance officers in the branches have to decide which specific bank lends how much” (Bank of Japan official 6). However, “the loan growth increase quota handed out in the branches came from the BoJ headquarters, although that is not very detailed. For the city banks it is split up by bank [already from the beginning]” (Bank of Japan official 6). So, while BoJ staff had some leeway in deciding loan growth targets of specific, smaller banks, they had to work within a given total loan growth quota for each bank type. Moreover, for city banks, the loan growth quota had already been determined and the window guidance officers merely handed down the orders given to them by their superiors in the Banking Department.
Who decided the overall loan growth quotas for the various bank types and city banks? And who decided the single most important variable for Japan, the countrywide overall loan growth quota? “First it was decided by what percentage the total loan volume in the country should rise…. The kyokuchō [director of the Banking Department] decides the total increase…. Then this was divided among the different types of banks and individual banks [warifuri]…. The city banks are decided first” (Bank of Japan official 7).
We find that the head of the Banking Department was responsible. But how did he make that fateful decision? Bank of Japan officials were at a loss to explain the precise process. “It is not quite clear how the total countrywide loan growth increase is decided. They look at money supply, GNP, prices. But I don’t know what they use. There is no decided formula. I can imagine that they decide how much the money supply should change” (Bank of Japan official 5). Furthermore, did the director of the Banking Department make the decision himself, or did he merely receive orders from the top ranks of the Bank of Japan, such as the governor?
Did Governor Sumita Create the Bubble?

The person officially responsible for the central bank’s policies is, of course, the governor. During the vital years from December 1984 to December 1989, when the bubble was created by window guidance, Satoshi Sumita was the governor of the Bank of Japan. Sumita had not risen from the ranks of the Bank of Japan to this position. He was one of those amakudari—a senior Ministry of Finance official who had retired from the top career post at the ministry. It is tempting to blame Sumita for the creation of the bubble. Indeed, when Sumita stepped down in December 1989 and Yasushi Mieno took over, the Japanese press told the story that Mieno, the “trueborn” central banker who had risen through the ranks of the Bank of Japan, disliked the policies of his predecessor and thus implemented a radical U-turn in monetary policy. In fact, in his first press conference as the twenty-sixth BoJ governor, Mieno said that since the previous policy of monetary easing had caused the land price rise problem, real estate-related lending would now be restricted.9 In an interview with the Nikkei Financial Daily three days after becoming governor, Mieno stated, “It can be said that financial institutions should not lend strength to land speculation. Besides, such activities lead to the loss of soundness of the banking system. Although we have already asked financial institutions to strongly control and restrict themselves, I think that I would like to request further self-control and self-restriction also from now on.”10
The Myth: Change of Governor, Change of Policy

The media certainly had a good story: Mieno, newly in charge of the economy, resented the easy money policy of his MoF predecessor and the rapid appreciation of land prices it had produced. Once in power, he acted swiftly, making him a legend in his lifetime. Mieno, the warrior against asset inflation, a modern-day Robin Hood and hero of the underdog, was on a mission to burst the bubble and bring down the greedy real estate speculators who had split the nation into the haves and the have-nots (one of Mieno’s own phrases). Then, in 1990, Mieno surprised the establishment by engaging in a rare high-profile disagreement with the Finance Ministry over monetary policy. The ministry opposed monetary tightening, but he stuck to his tight money guns throughout his time as BoJ governor. So, when his five-year term was up in December 1994, MoF installed another of its alumni, Matsushita, as the new governor.
So far the legend. But was Sumita really in control of BoJ monetary policy, when he was governor during the bubble years? Did Matsushita, another MoF alumnus, really make BoJ policy during his term as governor from 1994 to 1998? This can easily be found out by establishing whether Sumita and Matsushita were in charge of the credit creation policies of the Bank of Japan. First, Sumita’s case; here, the key question is whether he was in charge of the window guidance loan quota.
Window Guidance Not Decided by Sumita

Two regular meetings were convened at the Bank of Japan at which, at least officially, central bank policy was made: the Policy Board meeting and the Executive Board meeting. The Policy Board has always rubber-stamped what had previously been decided at the more important Executive Board meetings. At these, the executive directors of the Bank of Japan convened with the governor and vice-governor. In February 1987, the Executive Board decided, under MoF pressure, to reduce the ODR to the low rate of 2.5 percent. One would therefore assume that it would also decide the more important window guidance loan quotas. I investigated by interviewing a senior individual who was a member of the BoJ Executive Board during the all-important years from 1984 to 1989.11 I asked him whether the window guidance loan quotas were discussed or decided at the Executive Board meetings. He told me that the meetings revolved around setting the official discount rate and the call rate in the short-term money markets. Window guidance loan growth quotas were never decided at those meetings, and they were hardly ever mentioned.
Could Governor Sumita have made the decision about the window guidance loan quota outside the meeting? Hardly. From my interviews I found that Sumita was not even remotely aware of the role and importance of window guidance policies during the 1980s, nor did Bank of Japan staff brief him about it. Sumita, although officially governor of the Bank of Japan, was not party to the key decision, namely, the determination of window guidance.12 While he is often blamed for the bubble, and has himself been willing to accept responsibility for keeping interest rates too low, no BoJ staff member had ever explained to him why window guidance was set at such high growth rates during the late 1980s.
MoF Governors Excluded from Decision Making

Sumita turns out to be not an exception but the rule. We saw that in early 1995 the Ministry of Finance was desperately trying to stimulate the economy, yet the Bank of Japan reduced its credit creation, thus worsening the recession and sending the yen to ¥80/$. However, at the time the governor of the Bank of Japan was also an “old boy” from MoF—Matsushita. I have gathered testimony from a close associate and confidante of Matsushita, who handed on some of my research reports on credit creation to the governor. He later reported back to me that the governor had read them and, since he had noticed that staff would never brief him about the quantity of credit creation, had subsequently inquired with Bank of Japan staff about the “quantitative policy” and how the quantity of money could be increased. BoJ staff had argued that the central bank could not control the quantity of money and directed the discussion to the topic of interest rates. Further inquiries were rebuffed with technical jargon and the hint that such matters were complicated and needed to be left in the hands of the expert (trueborn BoJ) officers.
If Sumita did not decide window guidance, and the BoJ did not tell Matsushita about the amount of credit creation, then neither of those two actually controlled the Bank of Japan or determined Japan’s monetary policy. Researching further into previous ex-MoF officials who had become governors of the Bank of Japan, a consistent pattern could be established. The finding: Whenever a Ministry of Finance man was appointed governor of the Bank of Japan, he was excluded from the key control mechanism—the quantity of credit creation. That was decided by junior trueborn Bank of Japan staff who did not report to the governor. The public has been misled about who really governs the Bank of Japan.13
Yes, Mr. Governor

Who, then, was actually in control? Who decided the window guidance of the 1980s and the restrictive credit policies of the 1990s? It is well known that the Ministry of Finance and the Bank of Japan have been alternately putting forward their candidate for central bank governorship. This tradition started in 1974, when trueborn BoJ governor Sasaki was succeeded by the ex-MoF man Morinaga. Upon completion of his five years in 1979, another BoJ man became governor: Maekawa. In 1984, when his five years were up, the ex-MoF man Sumita became governor. His successor in 1989 was the trueborn BoJ man Mieno, who in 1994 was succeeded by the ex-MoF man Matsushita. This system had appeased the Ministry of Finance, as it seemed to suggest some kind of power balance in monetary policy making between MoF and the BoJ. Together with MoF’s influence over the official discount rate, this arrangement appeared to give MoF plenty of control over monetary policy.
Many observers therefore felt that BoJ policies were a reflection of whether a MoF or a BoJ man was governor: MoF is known to advocate tight fiscal policy and thus prefers monetary stimuli. Trueborn BoJ governors would adopt tight money policies and advocate fiscal stimulation. Indeed, without the alternating switch in governors, it seemed impossible to explain the roller-coaster monetary policy of the 1980s and 1990s, that featured the most dramatic reversals in postwar history. MoF man Sumita appeared to have created the bubble, while BoJ man Mieno burst it.
However, the real story is different. Whenever a Ministry of Finance man become governor, we found that he would be systematically excluded from the key discussions, those involving the quantity of credit creation. A BoJ officer would be appointed whose sole job was to “assist” the ex-MoF governor, who was not familiar with central bank operations. This assistant would give the governor the feeling of being in charge. In actual fact, his job was to shield the governor from the vital credit information.
A well-informed Nikkei reporter once explained: “The key person besides the deputy governor is the manager of the governor’s office [sōsai hissho yaku]. He goes wherever the governor goes, whether inside or outside the Bank of Japan and, as ‘stage prompter,’ judges all the affairs of the governor. This even includes the personal affairs of the governor…. What is noteworthy about the manager of the governor’s office is especially his role when someone who is not a trueborn BoJ man becomes governor. Then, although the Bank of Japan denies this, there is indication that he takes on the role of ‘watcher,’ who sees to it that the governor does not deviate from BoJ policy…. For instance, Iwane Maru, who was manager of the governor’s office when the ex-Ministry of Finance official Satoshi Sumita was governor … took a liking to Sumita, did not fully carry out his ‘duty’ of keeping him under close surveillance, and it is thus said that he was replaced. Whether true or not, this position is so sensitive that rumors such as these circulate.”14
Table 13.1 lists the governors and deputy governors (as well as a few additional relevant appointments). What is not immediately visible when reading this list of alternating MoF and BoJ governors is that there is far greater consistency in personnel. When Masamichi Yamagiwa from MoF was governor in the early 1960s, his deputy governor from 1962 was Tadashi Sasaki, a BoJ insider. In 1964, the governor was replaced by another outsider, Makoto Usami. The deputy governor, however, remained Tadashi Sasaki, who kept this job for seven years. Then when Governor Usami resigned in December 1969, the new governor was Tadashi Sasaki.
In December 1974, after another five years as governor, Sasaki handed over the governorship to MoF man Morinaga. The deputy governor during this time was Haruo Maekawa, a BoJ insider. When Morinaga’s time was up, the new governor was Haruo Maekawa. In December 1984, Maekawa handed over the governorship to MoF man Sumita. His deputy was Yasushi Mieno. After five years, Sumita handed over his governorship to the same Yasushi Mieno. In 1994, Governor Mieno was followed by MoF man Matsushita. The deputy position went to BoJ insider Toshihiko Fukui.
Table 13.1

Bank of Japan Governors and Deputy Governors

Governor Deputy Governor Banking Department Head
Mar 1944 Keizo Shibusawa
Aug 1945 Eikichi Araki (BoJ)
Oct 1945 Eikichi Araki (BoJ)
Jun 1946 Hisato Ichimada (BoJ)
May 1947           “ ” Teiichi Kawakita
Jun 1949           “ ” Kichio Futami
Jun 1954           “ ” Toshio Inoue Tadashi Sasaki (Apr 51–Sept 54)
Dec 1954 Eikichi Araki (BoJ)
[Jul 1957–Jun 1958 Ichimada Finance Minister]
Nov 1956 Masamichi Yamagiwa (MoF)
Jun 1959           “ ” Tsutomu Taniguchi (BoJ)
Apr 1962           “ ” Tadashi Sasaki (BoJ)
Dec 1964 Makoto Usami (Mitsubishi)           “ ”
Dec 1969 Tadashi Sasaki (BoJ) Tsuichi Kono
Dec 1974 Teiichiro Morinaga (MoF) Haruo Maekawa (BoJ) Yasushi Mieno (Apr 75–Feb 78)
Dec 1979 Haruo Maekawa (BoJ) Satoshi Sumita (MoF)
Dec 1984 Satoshi Sumita (MoF) Yasushi Mieno (BoJ) Toshihiko Fukui (Sept 86–May 89)
Dec 1989 Yasushi Mieno (BoJ) Hiroshi Yoshimoto (MoF)
Dec 1994 Yasuo Matsushita (MoF) Toshihiko Fukui (BoJ)
April 1998 Masaru Hayami (BoJ) Yutaka Yamaguchi (BoJ)
What we learn from this chronology is that a governor hailing from MoF stayed only for five years. And during his tenure, his deputy would always be a born-and-bred BoJ man, who then happened to become the next official governor. A deputy governor hailing from the BoJ would always become the next governor. If we now add our finding that governors coming from MoF were shielded from the key decision making, we arrive at a momentous conclusion. Although the Bank of Japan Law limits the tenure of the governor to five years, throughout the postwar history, the trueborn Bank of Japan governors had control for at least ten years each; first as deputy governor, then as governor. And after the end of the ten-year term of the BoJ insider, another BoJ man would take over, for another ten years. Born-and-bred BoJ governors were in charge all the time. For sake of public appearance, a MoF man would be invited in intervals as official figurehead.
Sasaki, Maekawa, and Mieno all followed up their five-year tenure as deputy governor with another five years as governors. Thus tidying up the table by dropping the figurehead governors that hailed from outside the BoJ, we quickly see the key decision makers of postwar monetary policy in Japan (we have also included the unusual period where Ichimada was even minister of finance; see Table 13.2).
Table 13.2

The Six Postwar “Princes”

Time Period “Trueborn” BoJ Staff as Governor/Deputy Governor
Aug 1945 — Jun 1946 Eikichi Araki
Jun 1946 — Dec 1954 Hisato Ichimada
Dec 1954 — Dec 1956 Eikichi Araki
[Dec 1954 — Dec 1956, Jul 57–Jun 58 Hisato Ichimada (Minister of Finance)]
Apr 1962 — Dec 1974 Tadashi Sasaki
Dec 1974 — Dec 1984 Haruo Maekawa
Dec 1984 — Dec 1994 Yasushi Mieno
Dec 1994 — Feb 1998 Toshihiko Fukui
We found that the actual BoJ leaders ruled for at least ten years each. So the number of people who controlled Japan’s money in the postwar era is truly a small one. Since Japan’s capitulation and until early 1998, twenty-four different individuals have held the office of prime minister. But over the same time span, Japan’s money was controlled by only six: Araki, Ichimada, Sasaki, Maekawa, Mieno, and Fukui. Since Araki’s tenure basically overlaps with Ichimada’s (Governor Araki sparred with Ichimada during the latter’s time as minister of finance), one could perhaps say that five people controlled Japan’s money. If we focus on the crucial time period from 1962 to 1994, we find that over those thirty-two years only three people had held the control levers in their hands: Sasaki, Maekawa, and Mieno. The public was kept busy voting politicians in or out of power. Meanwhile, those who determined the state of the economy remained firmly in control. They decided, without democratic checks and balances, who would get money and who would not, whether the economy would move into recession or recovery, and essentially how many people would be unemployed and how many would have jobs.
How Are Japan’s Rulers Selected?

Politicians are voted into power through elections. But how are the rulers over Japan’s economy selected? We know that a trueborn BoJ governor has previously been deputy governor. Several other common features can be found. Before becoming deputy governor, he holds the position of executive director. There are only six executive directors from the BoJ at any moment in time.15 This means that among the fewer than fifty or sixty university graduates accepted by the BoJ on the career track each year, only around one can hope to be appointed executive director. The odds of becoming deputy governor (and therefore automatically governor) are much smaller, of course, since only one person takes the job in a decade. If, over ten years, say, five hundred new staff are employed by the BoJ, only one of them will be able to advance to the top job more than thirty years later.
Given such odds, one would assume that fierce competition during the years between entering the Bank of Japan and becoming governor would ensure a fair and objective selection procedure. Having proven themselves over the years through outstanding ability, a number of potential candidates would emerge. As they moved up the hierarchy and more competitors were eliminated, their number would fall until a handful of candidates remained as potential governors—those who had consistently demonstrated superior intellectual qualities and outstanding job performance. From this short list, a final choice could then be made when the time arrived to appoint the governor. Such a selection procedure would be considered suitable and fair for most businesses and bureaucracies.
Not so at the Bank of Japan. The ruler over Japan’s economy was not determined according to any such procedure. We should not be surprised. Given the far-reaching power of the top BoJ man, the selection procedure was more likely to be similar to how dictators tend to choose their successors. The ruling dictator would want to hand over power only to somebody loyal to him and in agreement with his goals and aims. Instead of merit and ability, the primary criteria for selecting a successor would be loyalty and the sharing of common goals. To cultivate his loyalty, the successor would have to be nominated fairly early on as the heir to the throne, so that he would in turn feel indebted to his mentor and repay him by following his policies.
Of Popes and Princes

That is how Japan’s monetary rulers were appointed. Since Japan capitulated and did not have sovereign rule over its country until 1952, the first two central bank chiefs were virtually nominated by the U.S. occupation. The first of America’s men on the BoJ throne was Eikichi Araki, who had been head of the crucial Banking Department during the establishment of the wartime system from 1939 to 1942. Immediately following Japan’s defeat in August 1945, he was appointed deputy governor of the Bank of Japan. Two months later, he was appointed governor. However, as with many members of the Manchurian elite, in June 1946 he was indicted by the war crimes prosecutors and had to resign. General MacArthur successfully used the threat of severe punishment (including the death penalty) to turn the majority of the Manchurian war economy elite into lifelong friends of the United States.16 In 1951, the prohibition on suspected war criminals filling public offices was removed. Only a year later, Araki reemerged, among a large crowd of colleagues from the total war economy era, to take up one of the highest positions available in public office at the time—in 1952, Araki was appointed ambassador to the United States, almost straight from being under investigation for war crimes. This move was extraordinary also for another reason: It was obviously the most important diplomatic post. It is telling, then, that it went not to a trained Foreign Ministry official or politician, but to a central banker. Clearly, America placed highest importance on its close connection to the central bank.
When Araki left for Washington, another trueborn BoJ man was appointed to take over from him: the next in the line of succession, Hisato Ichimada. As we saw, he had already proven his mettle during the era of the National Financial Control Association. We have heard already in chapter 6 why he was known as “the Pope.” His “infallible” decrees about who would or would not receive money ruthlessly controlled the economy for eight and a half years, from June 1946 to December 1954, while his mentor Araki oiled the communications pipeline from Washington. In 1954, as the U.S. occupation administration had only recently ended, the United States apparently thought it wise to send their man back to Tokyo. There he was put straight into the driver’s seat: Araki switched surprisingly smoothly back from U.S. ambassador to central banker and controlled Japan’s economy again as BoJ governor from 1954 to 1956.
Meanwhile, Ichimada had done good work and was rewarded by the equally surprising appointment as minister of finance—the only trueborn BoJ man to take this job in the postwar era. As finance minister from December 1954 to December 1956 and again from July 1957 to June 1958, Ichimada led the first, unsuccessful campaign by the BoJ to change the central bank law and gain full legal independence from the Ministry of Finance.
After this attempted coup d’état by the Bank of Japan had failed and MoF had reasserted itself, the BoJ temporarily lost the upper hand on the political level. The “compromise” of alternating governors from MoF and the BoJ suited the BoJ insiders, as it minimized MoF’s influence on monetary policy, while it provided a democratic fig leaf.
Thanks to this system, Araki and Ichimada could put forward their chosen successor. That was not somebody who had been selected through years of fair and open competition among Bank of Japan staff. It was somebody who had been loyal to Araki and Ichimada and their ideas: Tadashi Sasaki. Ichimada had let it be known early on in Sasaki’s career that he was their chosen heir. Thus he was known as “the Prince” from a young age, “so much so that there was nobody who doubted that he would become governor,” said a former Bank of Japan staffer who worked with him.17 Even when he was a young Bank of Japan staffer, Sasaki’s colleagues would whisper in awe about him that he was waiting in the wings to become governor of the Bank of Japan. Such early selection did not give others a chance to move to the top job based on merit.
Prince Sasaki Begets Prince Mieno

Sasaki’s career, as so many postwar careers in Japan, received a boost during wartime. Just before the outbreak of war, the government summoned a group of young elite bureaucrats and businesspeople to form the “Total War Research Institute,” whose purpose was to create a “mock cabinet” to simulate the various policy options during the looming war. Already then young Sasaki represented the Bank of Japan by playing the “mock central bank governor.”18 Araki and Ichimada had taken note of this young man during the war, and in the postwar era they swiftly moved him up the ranks to the key posts. His contemporaries at the Bank of Japan could see from this special treatment that he had been anointed for a higher calling. After heading the Planning and Personnel Departments, the prince was introduced to the secrets of window guidance as head of the Banking Department. He held that key post for three and a half years, from April 1951 to September 1954, longer than anyone before or after him in the postwar era. In this function, he administered Ichimada’s strict credit allocation regime and worked as his right-hand man. This was also the time when the modern-day window guidance mechanism received its final shape.19 After this, Sasaki was appointed executive director and, in 1962, became the de facto head of the Bank of Japan as deputy governor and then governor.
Sasaki’s rule was as ruthless as that of Ichimada. He adopted the autocratic decision-making style of his mentor, and it seems that he was feared even by his trusted followers.20 Although on paper all executive directors had some say in monetary policy, in practice no member of the Executive Board could raise an opinion that differed from Sasaki’s without the risk of damage to their career or their chances of securing a good retirement job. This was not to say, however, that Sasaki did not discuss his policies with anybody; his mentor Ichimada was still alive and acted as éminence grise in the background. Moreover, Araki and Ichimada had also chosen Sasaki’s successor, who looked up to Sasaki as his senior and was his close and trusted ally. That was someone called Haruo Maekawa.21
When Sasaki was head of the Personnel Department, he was in charge of selecting applicants to join the Bank of Japan. As the anointed heir to the throne, Prince Sasaki was given the chance to select a future governor of the Bank of Japan, in succession to Prince Maekawa. Among the intake of the year 1947, there was a young fellow who stood out: Yasushi Mieno. He stood out not because he had the obligatory qualifications of having graduated from the First Higher School and the Law Department of Tokyo University. Until entering Tokyo’s top high school, Yasushi Mieno had been raised in Manchuria, where his father was a top bureaucrat in the Manchurian Railways, the center of the wartime economic system set up and run by the Japanese. These were good credentials for any war economy bureaucrat such as Sasaki, and at the Bank of Japan the right family background has always been an important selection criterion.
Young Mieno appeared ambitious and keen to rise to the top. However, he was not familiar with the true power structure of Japan and naively believed that the top job could be obtained by joining the Ministry of Finance. When asked by Sasaki about his career preference, Mieno apparently put the Bank of Japan second, after the Ministry of Finance. We don’t know what Sasaki told Mieno, but we do know that he managed to convince him to join the Bank of Japan instead. Sasaki soon made up his mind that he would anoint Mieno as the next prince, who would, like himself in his early years at the central bank, rise through the ranks on the fast track.22
When Ichimada was minister of finance, Mieno was sent abroad to be closer to the most powerful central bank of the world: From 1958 to 1960 he was posted in New York. There, as a young staffer in the small BoJ office, he could not fail to become close to his boss, the head of the BoJ New York mission. That was none other than Haruo Maekawa, the next in line after Sasaki to “run” Japan. No doubt, Maekawa used this opportunity to introduce Mieno to the important people, such as the head of the New York Federal Reserve, the U.S. Treasury, and key Wall Street figures.
Mieno’s first big challenge upon his return to Nihonbashi, the Tokyo quarter where the central bank is located, arrived with the stock market slump of the 1960s. That slump of course did not take the Bank of Japan by surprise, since it had triggered it through its sudden tightening of the window guidance loan quotas. Mieno was appointed section head at the planning department and was involved in organizing the unprecedented direct liquidity injections to bail out the troubled Yamaichi Securities.23
Sasaki’s Exclusive Circle

The exclusive group surrounding Sasaki consisted of his predecessor and his two successors Maekawa and Mieno—the princes of the yen. The decision-making circle was so small that even other executive directors would often be excluded from consultations. They were not the only ones left out of the loop: During Sasaki’s first seven years in charge, his official title was only deputy. The governors were ex-MoF man Yamagiwa and his successor Usami, who hailed from the private sector. Despite being governors, they were not part of Sasaki’s circle. This exclusivity was so obvious that many members of the executive board resented it and one of them even criticized it in public—an unprecedented step.24
After five years as deputy governor, Sasaki added another five years of rule as the official governor, controlling the fate of Japan’s economy for a full twelve years. After this, he handed over the reigns to Prince Maekawa, as had been planned. But apparently he was not keen to give up power. During his entire first term from 1974 to 1979, Deputy Governor Maekawa had to consult with Sasaki about the credit policies to be taken.25 Sasaki’s influence remained large. Takeshita, the leading LDP power broker who retired only in 2000, would, in his time as finance minister, hold three-person meetings to discuss monetary policy; the three were Takeshita, ex-MoF man Morinaga, who was the official Bank of Japan governor, and Tadashi Sasaki, the former Bank of Japan chief.26 Yet the real decisions were taken by Sasaki together with his princes, Maekawa and Mieno. From April 1975 to February 1978, the latter implemented them directly as head of the Banking Department, in charge of window guidance.
After Maekawa’s ten years as governor, from 1974 to 1984, Mieno took the helm of the Bank of Japan. He ruled for the first five years, from December 1984 to December 1989, as deputy governor. After that, he continued his rule, but with the official title of governor. Meanwhile, Maekawa and Mieno had long been grooming the next heir to the throne: While Mieno was running the Bank of Japan as deputy governor, the new prince was earning his spurs as the administrator of the credit control mechanism, in charge of the Banking Department: From September 1986 to May 1989, longer than average, the head of the Banking Department was Toshihiko Fukui. As planned, when Mieno’s ten-year term ended, Fukui duly took over the helm of the BoJ in December 1994, when he was appointed deputy governor.27
No Public Scrutiny for BoJ Men

The ease with which the BoJ men were appointed de facto heads of the Bank of Japan according to succession plans that had stretched over decades was telling. The decisions on the BoJ appointments were made so far in advance that no informed observer was ever left in the dark. Before Mieno was appointed deputy governor in 1984, there was no debate about who would get the job. It was clear to everybody that Mieno was the handpicked successor. Again, when he was appointed governor, there was also no debate, not even behind the scenes. The Nikkei wrote as early as October 1988 that upon completion of his term as governor in December 1989, Sumita was likely to be succeeded by Mieno.28 A few months later, in January 1989, the Nikkei reported that “it seems now confirmed that Mieno will become the governor of the BoJ in December.” In June, the Nikkei reported that it had become “official” that Mieno would succeed Sumita. MoF and BoJ sources had already confirmed, in June 1989, that “the system won’t change,” indicating that the BoJ deputy governor would become the next governor.29 The unsettled question was the secondary issue of who would be his deputy.30 Since it would be a MoF man, he had to suffer the indignity of a public debate. Similarly, before MoF man Matsushita was appointed official governor in December 1994, there was a long debate about who would be governor. But there was no debate about the apparently more important job of who was going to be deputy governor—the media and informed observers already knew it would be Fukui.
The Kwantung Army Rules

To most Bank of Japan staff, it was quite apparent that there was an elite within the elite at the central bank: The small group of insiders that determined the credit controls would fiercely guard their power over window guidance and not allow anyone else to have a say. Not only did they handpick their successors, they also only allowed a select number of loyal followers to take the key position of head of the Banking Department. Since the Banking Department implemented the window guidance policies, it had become so powerful and so independent from the rest of the Bank of Japan that other Bank of Japan staff called it the “Kwantung Army.”31
The comparison with the Kwantung Army may be apt. This unit of the Japanese army was stationed in Manchuria. It acted almost independently from military headquarters in Tokyo and managed to pursue an aggressive and largely unchecked policy of expanding the Japanese sphere of influence into China. The result was disastrous. Similarly, the window guidance loan quota was decided by a small group of people within the Bank of Japan, who acted independently and were not accountable for their actions. Even alert bankers were aware of this fact, but since their business future depended on good relations with the central bank, there was nothing they could do. Bank officer 2 testified: “Window guidance is decided by the Business Department head [eigyōkyokuchō], who is the strongest man at the Bank of Japan and usually would become governor at one stage. In the bubble period it was Fukui; twenty years ago it was Mieno.”
The Man Who Created the Bubble

Window guidance was already tightening in 1988 and 1989, well before Mieno became official governor.32 Yet Sumita, then governor, knew little about this policy reversal. He also knew next to nothing about the credit guidance that created the bubble.33 Poor Sumita has been getting the blame for the bubble—and has indeed apologized in public for it—while the trueborn BoJ staff have had much better press as fighters against asset inflation and guardians of monetary virtue.
The best press was received by Mieno when he became governor in 1989. He was acting as innocent bystander to the policies of the bubble era, criticizing them and suggesting that he would implement different policies. An interview with the press in late December 1989 was characteristic. The journalist was well informed and brought up the sensitive issue of window guidance. Mieno responded: “Until now, the framework of us respecting the lending plans of the private sector has continued, and I don’t think this basic framework will change. However, when [banks] put together the lending plans, [the Bank of Japan], I think, will ask in earnest penetrating questions during the hearings and, as the case may be, I think that there will be cases where we will tell them our thinking in detail. Especially concerning the land price rises, we must increase our attention a step further. Of course, there are many complicated reasons why land prices have risen so much, such as the legal system, the tax system, and so on, but funding has also had something to do with it. Therefore, it is a problem if banks that also have a public goods character lend for speculation purposes or continue to push loans and thus damage the soundness of the financial system. Until now we have asked the banks for self-control, but with this interest rate rise I would like banks to consider self-control a little more.”34
Mieno could hardly have been talking straight. When Sumita was governor from 1984 to 1989, the crucial decisions about the credit controls were made by the deputy governor. The person responsible for setting the high loan quotas in the 1980s and thus responsible for the creation of the bubble was none other than Yasushi Mieno himself. Many observers had already acknowledged that at the time. The Nikkei Financial Daily reported, for instance, that during Sumita’s governorship, Mieno “has turned out to play an important role as advisor to Sumita about the determination of monetary policy.”35 Mieno, who was making the real decisions, was sometimes called Sumita’s “wife,” in allusion to the Japanese tradition of reigning husbands but ruling wives.36 The Nikkei Financial Daily wrote in 1987 that Mieno “is the one who, as BoJ trueborn, is doing the work in the team with the MoF old boy Sumita.”37 He was seen as the monetary policy “pivot” (nemawashi yaku) under Sumita.38
This is indeed why many experienced investors and Bank of Japan watchers, aware of Mieno’s role before 1989, had been convinced in December 1989 that the newly appointed Governor Mieno could not possibly introduce any sharp policy changes; these experts knew that, after all, it was he who had been making policy all along under Sumita. The general manager of the investment department of a major Japanese life insurance company—whose interpretation of the implications of the new appointment was not an academic issue, but would directly affect fund performance—made the following assessment upon Mieno’s appointment: “When reflecting on the fact that Mieno has been managing monetary policy until now as the powerful deputy of Sumita, there is absolutely no need to think that in the new [Mieno] system the policy will change.”39
It must have come as a surprise to the market watchers that Mieno performed a dramatic U-turn and quickly distanced himself from his past policies by pretending not to have anything to do with them. Mieno played his role well. He had also created an alibi for himself early on. Already in 1986, when the bubble was started by Mieno’s window guidance, Deputy Governor Mieno testified to the Diet that he was worried about the problem of excess money in the economy (kane amari).40 If he was truly worried, why then did he set such high window guidance loan growth quotas for the banks? He stated in July 1987 in the Diet Budget committee, “The loose monetary policy will continue as until now.”41
In his speeches as official governor, when he had already ended the speculative excess, Mieno placed the blame for the bubble on the private sector, real estate speculators and banks.42 But the real estate speculators were lured by banks with irresistible offers of virtually free money. And the banks were forced by Mieno’s window guidance to expand their lending to the real estate sector aggressively.
Mieno was not the only perpetrator; the credit controls were implemented by the head of the Banking Department. From September 1986 to May 1989, for three long and vital years, this was none other than Toshihiko Fukui, the next-generation prince of the Bank of Japan. As had been decided decades earlier, he was duly appointed deputy governor in December 1994. Although Fukui had to resign together with governor Matsushita in early 1998, he had since been vying to take over from interim Governor Hayami to resume his rule. Until 2002, the media, including the foreign press, touted him as the likely successor, “in line for the top job.”43 Hayami refused to resign early. However, there is no indication that the Bank of Japan’s internal system of choosing princes has changed.44
We have identified the individuals who created Japan’s bubble economy and are responsible for the longest postwar recession and the highest unemployment recorded since the 1930s. It is a small group of people within the Bank of Japan, whose actions were not checked or controlled by other Bank of Japan staff—the Princes of the Yen. They have been in control of Japan’s economy. Their names are Yasushi Mieno, Toshihiko Fukui, and, in the early phases of the bubble creation, their mentor Haruo Maekawa. Mieno and Fukui, as deputy governor and head of the banking department, respectively, created the bubble economy from 1986 to 1989. After this, the same two people were in charge of monetary policy as governor (1989–94) and deputy governor (1994–98), overseeing the creation and prolongation of the recession of the 1990s. We have answered some questions, but new ones are raised: Mieno and Fukui were highly trained and experienced elite staff. Why on earth did they do what they did?

The Goal of Monetary Policy

We are faced with the twofold puzzle of why the Bank of Japan forced banks to create the bubble through excessive lending and why suitable policies to create a recovery during the 1990s were not pursued while government attempts at stimulating the economy were disabled. Change in personnel, such as the publicized change of governors in 1989 or 1994, cannot explain this. We found that the same two people were in charge in both the second half of the 1980s and most of the 1990s, namely, Mieno and Fukui. Why did they implement such policies?
It seems most appropriate to proceed by employing the well-tested methods of the judiciary. The first issue is to establish culpability. It would be possible to argue that Mieno, Fukui, and their close collaborators acted irrationally or suffered from temporary insanity. In economics, relying on this option as the primary explanation is frowned upon. If everyone acted irrationally and unpredictably, economic analysis would become meaningless. Instead, many economists, skeptical of people’s verbal statements, prefer to look at their actions, arguing that an analysis of people’s actual behavior reveals their intentions—the principle of “revealed preference.” But even if one were to favor the irrationality or insanity explanation, its biggest problem is that so far there has not been any evidence in its support. To the contrary, we will encounter evidence that the actions and statements of the lead actors were remarkably consistent and logically coherent.
Failing evidence for insanity, Mieno, Fukui, and colleagues must be considered culpable. The next issue is whether the charge against them is one of recklessness or intent. It may be tempting to argue that the princes were simply incompetent, and hence they were merely reckless. However, we found that the princes are the unrivaled experts in controlling credit creation and using this tool to manipulate the economy.
The knowledge gained through the extremely detailed window guidance procedure meant that the head of the Business Department during the time of the creation of the bubble, Fukui, knew exactly how much money was used for speculative real estate transactions. He could actually identify every large-scale borrower if he wished to. His boss and mentor, Deputy Mieno, the true governor of the Bank of Japan, had firsthand knowledge from the 1960s and 1970s about how increased loans to the real estate sector would create a bubble. Statements by both Fukui and Mieno in the 1980s show that they were well aware of what was going on: both commented how bank loans and expanded money supply were pushing up real estate prices. Since there was no firm rule, no disclosure of their reasoning, no pressure from MoF, and no accountability to anyone concerning the size of the window guidance loan quotas, Fukui and Mieno could do what they judged right. If they had really disagreed with the aggressively loose monetary policy pursued by MoF, the BoJ princes could easily have kept window guidance quotas smaller, for instance at 6 or 7 percent growth, half as high as the 12 to 15 percent rates Fukui implemented. But they chose such high loan growth quotas that a bubble was inevitable.
Concerning the 1990s, the conclusion is similar: Neither MoF nor the politicians had the technical knowledge to realize (at least until about 1998) that increased credit creation was the key to a recovery in the 1990s. But we saw that the BoJ princes knew very well. From the early postwar days, the princes had shown great expertise in ending credit crunch recessions. The bad debt problem was much worse in 1945, when Governor Ichimada printed money, bought corporate bills and commercial paper, refinanced the banking system, and boosted credit creation.
The Question of Motive

If knowledge and awareness of the actions and their outcomes exist, then the suspects acted with intent. The burden is on their defense team to prove that the outcome was not intended. Most of all, the prosecution has a strong case for intent if a motive can be established. If there were an explanation for their actions that is based on consistent and rational intent, premeditated action would be a plausible explanation. This seems a big hurdle at first—their policies of the 1980s and 1990s can be considered consistent only if their goal had been to wreak havoc with the economy. This does not seem rational at first. Why would anyone want to do that?
Did Mieno and Fukui make investments such that they would benefit from the bubble in the 1980s and later from the slump in the 1990s? Possible … but unlikely. One method used by detectives to identify the perpetrator and a motive is to see who benefits from a crime. Thus we could also identify the major changes that the bubble and the recession have triggered and see who benefited. There is no doubt that the Bank of Japan has emerged as the main winner among the major power players from the recession of the 1990s. While other bureaucracies were pared down, weakened, or even abolished, the BoJ finally achieved its goal of legal independence. While MoF lost key control levers, was broken up, and eventually lost its historical status as Ōkurashō, the powers and status of the Bank of Japan were dramatically enhanced. Thanks to the recession of the 1990s, the Bank of Japan won its long-standing battle with MoF, which began in the 1950s. Is this motive enough? Maybe. We have seen that the central bank had a strong desire to break free from the legal yoke of the ministry, as enshrined in the old Bank of Japan Law. It would not be the first time that an institution’s policy was misused to further the sectarian interests of that institution. However, the evidence would be only circumstantial.
Call the Defendants into the Witness Box

Another, more direct way to determine the motives of the princes is to identify their stated goals and then identify the heartfelt convictions on which these goals are based. The best sources for this information are their own utterances and their own writings. In other words, it is time to call the defendants to the witness stand.
Much material is available, since senior executives of the Bank of Japan have given interviews, delivered speeches, and published reports. What did they have to say? Of course we can’t expect dramatic revelations from published speeches or interviews. Central bankers are notorious for their extremely subtle statements and carefully worded remarks. However, the purpose of questioning witnesses is to probe for inconsistencies or contradictions—within someone’s statement, or between that of several witnesses. Through such cross-examination, the truth can often be established with ease.
Throughout the 1990s, the Bank of Japan’s spokesmen exerted considerable efforts to fend off any suggestion that the central bank could do anything beyond lowering interest rates to stimulate the economy.1 Their reasoning usually followed this pattern: A set of often legalistic or technical arguments is proposed by Bank of Japan officials. As soon as the flaws and contradictions of one argument were pointed out in public, the spokesmen reacted not by correcting their mistakes and their policy, but by correcting their line of argument and simply deploying an entirely different, usually unrelated argument that happens to come to the same conclusion. This environment of ever-shifting explanations and counterarguments by the central bank has entangled it in contradictions, which are happily ignored by the next spokesperson. While the arguments frequently change, the conclusion has always followed a common script, no matter which spokesperson happened to express his frank “personal opinion”: The central bank has throughout the 1990s done all it could (interest rate reductions were enough; there was no way the central bank could have increased the quantity of credit and thus stimulated the economy).
The central bank performed a sudden policy U-turn on March 19, 2001, now officially pursuing what it calls a policy of “quantitative easing” despite the fact that it had claimed for a decade that such a policy was impossible to implement. Nevertheless, the Bank of Japan spokesmen continue to warm up the old reasons why this new policy (though officially adopted) could not possibly work. These unwavering efforts to block any reasonable argument why greater monetary stimulation should be taken by the central bank has led many observers to the conclusion that the central bank’s statements are insincere excuses to implement its predetermined policy.
A distinguished U.S. economist who has followed the Bank of Japan’s policies for years finally complained that “in recent years BoJ officials have—to a far greater degree than is justified—hidden behind minor institutional or technical difficulties in order to avoid taking action.”2 Meanwhile, despite numerous symposia, conferences, and fellowships for overseas professors—not to mention sharp calls from leading politicians and critics to ease quantitatively—the central bank has ignored the advice, which since around 1998 had become commonplace, to increase the money supply.3 Many academics whose advice has been ignored may have been reminded of the words of Milton Friedman, long-standing consultant to central banks, when he spoke about the Federal Reserve: “I attended many such meetings of so-called academic consultants…. However, I finally concluded that the meetings were called purely for window-dressing purposes. I was unable to detect any influence whatsoever exerted by the consultants’ comments on the system’s actions. Indeed, the choice of the particular consultants invited to attend seemed designed to guarantee offsetting and contradictory advice, leaving the Fed free to pursue its own devices. However, even on those rare occasions when something approaching a consensus emerged, I could detect no subsequent effect on policy.”4
At the same time it is apparent that key Bank of Japan staff had very early on—years before most economists—been highly familiar with the problems and possible solutions.5 In 1992, an insightful journalist asked a key Bank of Japan official the question whether the central bank should not complement its interest rate reductions with quantitative easing or expansions in the money supply. The official responded, “It used to be our commonsense approach to watch both the interest rate side and the quantity side, and then take decisions, while quite widely employing methods of imposing limits, such as window guidance. Now the liberalization has moved forward and also the Bank of Japan has abolished window guidance. Now, to decide whether easing is sufficient or not, it is enough to see whether interest rates have fallen enough or not. Completely unrelated to that, I think that in the future the question will become important whether in a situation where financial institutions hold nonperforming assets, bank behavior will start to change completely, compared with the past; in other words, whether the behavior of banks will differ from the past, when the Bank of Japan implements the same interest rate reductions as monetary policy, and whether the transmission mechanism of monetary policy is changing or not.”6
The interview was with Toshihiko Fukui, at the time executive director of the Bank of Japan, who betrayed his familiarity with window guidance credit controls as well as the problem—at the time not yet visible—that bank credit would fall significantly, “changing bank behavior completely” and leading to what Bank of Japan officials later would describe as a “breakdown in the monetary transmission mechanism.” His insights were surprising—some economists took almost another decade to come to such conclusions. What is more, Fukui, who would from 1994 to 1998 control the central bank’s policies, even told us what he was going to do about these problems: nothing, since for some unspecified reason, unlike the previous fifty years, “to decide whether easing is sufficient or not, it is enough to see whether interest rates have fallen enough or not.” This is just what Fukui did when he became deputy governor in 1994 and thus, with a Ministry of Finance bureaucrat as the official governor, de facto head of the Bank of Japan.
The Goal of Monetary Policy: Sustainable Growth

After years of denials by spokesmen that the Bank of Japan was able to inject more money, or that such a policy would have any impact on the economy, senior deputy governor Yutaka Yamaguchi recently admitted: “By and large, it might be true that, if a central bank continues purchasing all kinds of assets, almost by definition, inflation can be created in the end.”7 In other words, he agrees that the central bank can reduce deflation by purchasing more assets, such as bonds (and paying through credit creation). Yamaguchi also admitted in the same speech that inflation could not happen before the economy had recovered: “It is not correct to assume that inflation comes first, followed by an economic upturn or an increase in the growth rate. What happened in the past was the opposite: an economic upturn and a rise in growth rate came first and inflation followed with a lag.”8 Precisely. So the question remains: Why is the Bank of Japan not creating more money by buying more assets, thus stimulating demand, creating a recovery, and reducing deflation—following the correct chain of causation that deputy governor Yamaguchi acknowledges? Yamaguchi tells us, “Our goal is not to cause inflation, but to realize sustainable growth.”9 Given the causation Yamaguchi acknowledges (namely, that inflation could not happen before the economy was stimulated and a recovery occurred), his statement comes close to saying that the central bank does not aim at reducing deflation or stimulating the economy in the short term. Instead, it aims to “realize sustainable growth.” Let us consider other witnesses.
“Sustainable growth” is not a new phrase. To the contrary, similar to Cato the Elder’s custom of ending every single speech with the same phrase, the majority of speeches by Bank of Japan spokesmen over the past decade contain the mysterious phrase that the “goal of central bank policy” is to achieve “sustainable growth.”10 To mention just a few recent examples: “In order to form a basis for stable and sustainable growth of Japan’s economy, the Bank of Japan is determined to continue making every effort as a central bank”;11 “the Bank … share[s] the same goal of … bringing the economy back to a sustainable growth path”;12 “adjust monetary easing accordingly, in order to realize sustainable growth.”13 Even the Bank of Japan’s Policy Board repeatedly makes statements to the effect that its monetary policy aims at “restoring Japan’s economy on a sustainable growth path.”14
Long Live the Long-Run

The key to understanding the goal of the Bank of Japan’s monetary policy is therefore the correct interpretation of what BoJ leaders mean by “sustainable growth” and what kind of measures they think are necessary to achieve it. It is tempting to interpret the phrase to mean that the central bank wishes to stimulate the economy and engage in cyclical demand management. However, quite strikingly, in its many public statements the central bank has never clearly stated that it aims to stimulate the economy in the near term, nor has it taken steps to implement such policies in a consistent fashion. Quite the opposite.
The central bankers make a clear distinction between the short-term and the long-term. In a speech in 1994, governor Mieno spoke much about “sustainable economic growth” being the objective of his policies, and clearly defined it as being a “medium- to long-term” goal.15 Other central bankers have repeated these words. Governor Hayami, for instance, often speaks of “long-term sustainable growth” as the goal of the central bank’s policies.16
What does the achievement of their long-term goal mean for the economy in the short term? Bank of Japan spokesmen have told us unambiguously and repeatedly over the past decade that quite contrary to any near-term stimulation of the economy, their goal of “sustainable growth in the long term” may require a short-term deterioration of the economy. As early as 1993, Governor Mieno indicated, “As we pass through the current adjustment phase, the most important goal we have adopted for guiding policy management is not the attainment of short-term improvements in economic conditions, but the long-term objective of achieving non-inflationary sustainable growth” (italics added).17 A year later, Mieno warned, “In conducting monetary policy, whilst fully recognizing the pain of those who are adversely affected, we have to focus on the stabilization of economic activity as a whole from the medium- to long-term perspective.”18 Mieno ends this speech with the obligatory “I should like to conclude by saying that the Bank of Japan will continue to do all it can to put the Japanese economy on the right track for a non-inflationary sustainable growth in the medium- to long-term.”19
Given a choice between a policy to achieve a recovery in the short term and one that would create a recession in the short term, but may offer “sustainable growth” in the long-run, the Bank of Japan has repeatedly stated that it would prefer the latter. By Mieno’s measure, the central bank’s policy over the 1990s therefore has not been a failure. Inflation has not been a problem during the 1990s. And the short-term pain has also been visible. The positive fruits of monetary policy, on the other hand, can only be reached after some indefinite period in the long-term future.
It was of course precisely such policies and arguments that British economist John Maynard Keynes criticized during the 1920s and 1930s, immortalized by his often-cited reminder that “this long run is a misleading guide to current affairs. In the long run we are all dead.”20
The Definition of “Sustainable Growth”: Structural Transformation

What, then, is the Bank of Japan’s definition of this promising state in the future when “sustainable growth” can be achieved? Indeed, when can Japan expect to reach it? First, let us consider the obstacles to sustainable growth. Governor Hayami told us that a “basic structural factor … behind Japan’s lost decade of the 1990s … is that a variety of systems which had supported the postwar development of Japan’s economy became unsustainable.”21 In the Bank of Japan’s view, then, a basic obstacle to achieving sustainable growth appears to be Japan’s postwar economic system. Other BoJ speakers have said it more bluntly. Shirakawa, whose title at the Bank of Japan is adviser to the governor, told us in 2001 that the “prerequisite” for sustainable growth is “structural reform.”22
Back in 1993, Governor Mieno was talking not only about structural reform, but about the need for an even more far-reaching ‘‘structural transformation”: “In my description of how I would like the economy to look, you can see that there is a very close resemblance to the economy Japan was aiming at following the Plaza Agreement and during the subsequent period of the rapid appreciation of the yen. With hindsight, I feel that the structural transformation that Japan committed itself to at that time gradually receded into the background during the recent economic boom and the bubble phenomenon. Now, once again, Japan is becoming conscious of the need to implement such transformation…. I do wish to reiterate that it is very important that these medium- to long-term objectives [to implement a structural transformation] be kept in mind when managing the nation’s monetary policy.”23
BoJ Policy Board member Kazuo Ueda has explained that this structural transformation or reform “may produce deflationary forces in the short run, but will generate a much more efficient economy after a while.”24 The Bank of Japan’s Policy Board has even declared that “structural reform may be accompanied by painful adjustments. Without such adjustments, however, neither improvement in productivity nor sustainable economic growth can be obtained.”25 Governor Hayami explains that in the short-term a recession must be accepted, as the long-run goal of structural reform takes precedence: Many people, Governor Hayami admitted, feel that “bringing the economy back to the recovery phase of the business cycle is an important challenge.”26 But, as with Mieno before him, he does not place priority on this goal, he explains in the same speech: “Furthermore, it is more important that Japan goes beyond this by regaining economic dynamism by steadily pursuing structural reform” (italics added).
To summarize what we have learned from the record of official statements by Bank of Japan leaders about the goal of monetary policy: it is not aimed at achieving a recovery in the near term. Instead, it is aimed at long-term “sustainable growth.” That, in turn, can only be achieved after structural change, even a structural transformation, has taken place.
How Can Monetary Policy Achieve Structural Change?

All this may appear puzzling at first. The central bank is in charge of monetary policy. On the one hand, the declared goal of its monetary policy is to achieve sustainable growth. On the other hand, it says that the prerequisite for this sustainable growth is structural reform. We know, however, that the Bank of Japan has no mandate and also no regulatory power to directly implement structural reform. So the obvious next question is: how can the central bank possibly implement the declared goal of its monetary policy, namely, to achieve sustainable growth through structural reform?
How can structural reform, a change of the “systems that had supported the postwar development of Japan’s economy,” be achieved by the Bank of Japan?27 We know it can only use monetary policy to achieve its aims. But would it use monetary policy to implement structural reform? And if so, what type of monetary policy could it possibly take that would achieve its aim and result in a structural transformation of the economy?
Finally, is this not a political agenda, out of bounds and out of the hands of the central bank? The Bank of Japan does not think so. Shirakawa, adviser to the governor, explains, “It is not easy to change the institutional framework and promote structural reform since it necessarily involves the vested interests of all the related individual economic agents.”28 This is where the Bank of Japan feels it has a role to play; it realizes what critics have pointed out, namely, that structural reforms will not stimulate demand.29 Policy Board member Ueda agrees that “such efforts may produce deflationary forces in the short run.” The aim is in the long run, when structural reforms “will generate a much more efficient economy after a while.”30
So how can current monetary policy be helpful in achieving the long-term goal? The central bankers already told us the surprising answer to this riddle: It can be helpful by not being helpful. The Bank of Japan’s Shirakawa explains that “further easing [of monetary policy] would not contribute to economic recovery, but would rather delay the progress of structural reform that is a prerequisite for sustainable economic growth.”31 The BoJ’s Okina explains, concerning stimulatory short-term policies: “Couldn’t the current low interest rate policy cause some harm? The answer is yes…. Low interest rates as a pain reliever may induce a further delay in the progress of structural adjustment. When the economy recovers, nonperforming loans could become collectable, excess inventories could be sold, and excess equipment could become operational.”32 According to him, such a state of affairs—normally called a recovery—is to be avoided. This is why Deputy Governor Yamaguchi can say about the link between central bank policy and structural change that “monetary policies cannot replace structural policies” and that the Bank of Japan had faced the “big dilemma” that monetary easing would produce a “mitigation of immediate risks,” which in turn would result in a “delaying of adopting ultimate solutions.”33 This is why former deputy governor Fukui can say, “Considering the gap in supply and demand conditions in the economy, it’s easy to think of a policy of decisive monetary easing…. But we must be wary of the risks associated with further easing, such as by purchasing more Japanese government bonds or setting inflation targets.” What are the risks? “It’s dubious to think that monetary policy alone could lead to a sustainable recovery…. As the financial markets tell us, what is also important are Prime Minister Koizumi’s structural reforms” (italics added).34 The risk that the BoJ has in mind is a delay or even an end to structural reforms, which it has defined as being a necessary condition for its goal of “sustainable growth.”
It cannot be considered a secret. The media have been frequently reporting that “Hayami is convinced that Japan needs to undergo radical corporate restructuring and banking reforms before it can recover—and that he has a duty to promote this…. Mr. Hayami’s passion for reform also has a flavor of austerity. On paper, most economists—and politicians—think it would be sensible to offset the pain of restructuring with ultra-loose monetary policy. But Mr. Hayami fears that if he loosens policy too quickly, it would remove the pressure for reform.”35
In other words, it must be concluded that the central bank is aware that serious monetary stimulation would create a recovery, but it has chosen for a decade to avoid this because it would delay its structural reform agenda.36 Adam Posen, an economist at the Institute for International Economics in Washington, D.C., agrees with this conclusion: “Between a process of elimination, and careful reading of the statements of BoJ policy board members, I am led to the conclusion that a desire by the BoJ to promote structural change in the Japanese economy is a primary motivation for the Bank’s passive-aggressive acceptance of deflation.”37
This explains why the central bank has consistently and puzzlingly opposed what appears to be a sensible idea to other supporters of structural reform: “If this structural policy has a depressive or a stimulatory effect on the economy, it must be accompanied by the appropriate macroeconomic policy to offset this effect.”38 To this type of argument, Governor Hayami countered 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.”39 That was his justification for tightening monetary policy again in 2000. Indeed, only when one has fully understood the Bank of Japan’s definition of sustainable growth—namely, the implementation of a far-reaching structural reform agenda—does it become obvious why most of the central bank speeches and statements have denied the need for further monetary stimulation in the short run: Such stimulation is deemed inimical to achieving sustainable growth precisely because it would create short-term growth—and hence reduce the pain and pressure necessary to gather enough political support for the structural reform goal.
The Goal of Monetary Policy in the 1980s

The public statements by central bankers have provided the answers. We have found the reason for the Bank of Japan’s actions in the 1990s. It never aimed at stimulating the economy. It intentionally took recessionary policies, because it pursued a political agenda that required it to engineer a recession. That agenda is nothing less than to change Japan’s institutional arrangements and transform the economy.
But what about the 1980s, when the princes forced banks to create the bubble? How do the defendants explain this when called to the witness stand? When Toshihiko Fukui was head of the Banking Department, he was interviewed by the Japanese-language Nikkei Financial Daily in July 1987, just after he had kicked off the bubble. The journalist asked the right man the right question. He asked Fukui, “Borrowing is expanding fast…. Don’t you have any intention of closing the tap on bank loans?” Fukui answered, “Because the consistent policy of monetary easing continues, quantity control of bank loans would imply a self-contradiction. Therefore we do not intend to implement quantity tightening. With structural adjustment of the economy going on for quite a long period, the international imbalances are being addressed. The monetary policy supports this; thus we have the responsibility to continue with the monetary easing policy for as long as possible. Therefore it is natural for bank loans to expand.”40
On first reading, this may appear to be a convoluted and somewhat confusing answer. However, upon closer inspection it becomes quickly intelligible.41 Fukui justified the setting of the excessively large loan quotas—and thus the creation of the bubble—by the necessity for “structural adjustment,” which had to continue “for quite a long period.” According to him, already in the mid- and late 1980s, the goal of the Bank of Japan’s monetary policy was to “address … the international imbalances” through this “structural adjustment.” Again, initially, there seems to be a puzzle: If the goal of monetary policy in the 1980s, just as in the 1990s, is to engineer a structural transformation, just what current monetary policies could the Bank of Japan possibly take in order to support this goal? Fukui explains that the right monetary policy to implement the structural transformation of Japan’s economy during the 1980s was to “continue with the monetary easing policy for as long as possible. Therefore it is natural for bank loans to expand.”
Fukui’s mentor and associate, Yasushi Mieno, seemed equally aware of the implications of their window guidance quotas. In a speech in 1993, the then-governor admitted that he knew that a bubble must always lead to recession. Talking about the bubble, he said, “Once a wave of this proportion had come into being, it was inevitable that it would be followed by a major adjustment.”42 That, according to Mieno, had a positive effect. As we have heard, Mieno, like Fukui, was a declared supporter of a transformation of Japan’s economic system.
To transform Japan was no small undertaking. As we saw in the initial chapters, the war economy system was internally consistent and permeated all sectors and levels of the economy and even society. It had shaped the labor market, the capital market, the corporate governance structure, the legal system and the behavior of firms, bureaucrats, and politicians, as well as ordinary people. To change Japan, it seemed, one needed to change everything. Only if one abandoned all features of the old system would it be possible to create a different economic structure. How could such a historically unprecedented undertaking be completed? Mieno told us that it was the recession that made everyone in Japan “conscious of the need to implement such transformation.”
The Recession Is Good—for Reform

Deputy Governor Yamaguchi also revealed his insights into the historic origin of Japan’s system and the feasibility of deep changes if the system was put under pressure: “I should point out that systems and practices are not set in stone, so to speak. They would change, however gradually, under pressures from the changing environment. For example, according to economic historians, lifetime employment, which is now closely associated with major Japanese corporations, was not widely adopted until the 1920s. I believe, therefore, that constraints on economic growth from existing systems and practices are temporary, until the economy adapts to the new environment…. What is important is to keep our heads up and carry on with the necessary structural reforms” (italics added).43 This seems to explain Yamaguchi’s view that monetary easing would produce a “mitigation of immediate risks,” which in turn would result in a “delaying of adopting ultimate solutions.”44
Sasaki Calls for Transformation of Japan

We have established the structural reform agenda as the consistent leitmotiv of the central bank’s policies in the 1990s. We also found it present already during the 1980s. The next question we now need to ask is where this structural reform agenda comes from, on what type of theory it is based, and how long it has been pursued. In probing these issues, we may be able to make further progress in finding answers to the question why the princes expanded the window guidance bank loan quotas so dramatically during the 1980s and thereby forced the creation of the bubble.
Since the princes are known to have worked together closely, it would be illuminating to check whether Fukui and Mieno’s predecessors, who handpicked them, also shared their goals. In doing so, it is hoped that we can shed further light on the events of the 1980s. We therefore go back to the man who hired young Mieno and anointed him prince—Tadashi Sasaki. Sasaki himself was the first prince picked by “Pope” Ichimada, who made him head of the Banking Department and let him implement his tightly operated credit allocation mechanism. As planned, Sasaki soon succeeded Ichimada to control the economy for over ten years. Like Ichimada, a hands-on dirigiste and interventionist, he made ample use of his far-reaching powers by deciding on the allocation of funds in the economy, quite similar to the wartime days when Araki and Ichimada controlled and allocated credit according to the guidelines drawn up by the wartime planners.
Despite these first-rate credentials as planner and controller, in the early 1980s a mysterious transformation seems to have occurred: Sasaki appeared to have converted to a different creed altogether. All of a sudden he had become an outspoken supporter of the goal of financial liberalization and internationalization of Japan’s economy. Apparently he had become convinced that Japan’s economic system needed to be fundamentally changed. Having handed the BoJ baton on to Prince Maekawa, Sasaki had become head of the Keizai Dōyūkai (Japan Association of Corporate Executives), and as such, in January 1983 he called for a five-year plan for transforming and liberalizing the Japanese economy, entitled “Toward Consciousness and Behavior of a World Nation.”45
This plan called on Japan to help the world by speedily opening its markets, arguing that the economy “must be changed from one looking after national interest to one looking after common world interest.” It targeted the agriculture, finance, and service sectors for fast, “complete” liberalization. It aggressively demands administrative reform, a greater role for politicians in policy making, an end to regulations and bureaucratic guidance, and a significant strengthening of the role of the prime minister, giving him the power to exert strong leadership. These changes, the plan said, would benefit Japan and the world: “Such a bold market opening would not only help in solving the economic friction with Europe and the United States, but if the economic structure changes, this would also lead to a continued vitality of the Japanese economy.” Thanks to these revolutionary changes, Japan’s economic growth rate would remain high, rendering 5 percent real growth possible.46
The report was mainly aimed at a domestic audience. Although formulated in polite and understated language, it was radical for its time, as it called for a fundamental transformation of Japan, including a change in the political process and an end to the power of the bureaucracy. Although veiled, it represented a frontal attack on the elite of the postwar system, especially the Ministry of Finance.
Sasaki followed up his demands with another report issued by the Keizai Dŭyūkai a year later. Now he demanded, in the name of internationalization and portfolio diversification, that Japanese banks should expand their business activities aggressively abroad. In order to make this possible, the Ministry of Finance should loosen the regulation of banks’ foreign business (until then kept tightly in check) and allow trust bank and stock brokerage subsidiaries abroad.47 His recommendations were implemented. They provided the institutional setting within which the window guidance successfully created the bubble and the surge in Japanese capital outflows of the 1980s. It is telling, of course, that deregulation convert Sasaki did not demand changes in the way the Bank of Japan was tightly controlling the banking system and running the economy via window guidance. To the contrary, he even hinted that he supported it, and in 1983, when window guidance was officially not relevant for monetary policy anymore, Sasaki gave evidence that window guidance still existed. In an interview about a published report on the need for financial liberalization in April 1983, an insightful journalist asked him: “In an era of financial liberalization, how should monetary policy management be conducted?” His answer: “It is necessary for changes in the ODR to be done flexibly, elastically. This is what the BoJ has really been aiming at, thus it can also be said that the report affirms the current ODR policy. About the BoJ window guidance of private financial institutions, the opinion that this should be changed is not especially mentioned.”48
Maekawa’s Private Meetings

In the end, monetary policy was indeed highly “flexible” during the 1980s and 1990s. While Sasaki was too old to see through the implementation of his ideas and what then was called a five-year plan, he could trust his successor, Haruo Maekawa, to fight the battle for him. Maekawa’s internationalist credentials were earned early on, when he became the BoJ section chief in charge of foreign exchange (where it was part of his job to cooperate with the U.S. Federal Reserve System).49 Later on, he was sent to head the BoJ New York office for two years, from 1958 to 1960. Back at Tokyo headquarters in Nihonbashi, Maekawa then was made head of the foreign exchange bureau, where he continued to coordinate Bank of Japan operations with the New York Fed. Before commencing his ten-year rule, first as deputy governor, then as governor, Maekawa had been a regular representative of the Bank of Japan at meetings of the IMF and the BIS (Bank for International Settlements) as board director.
In his public pronouncements, Maekawa followed in the newly formulated footsteps of his mentor Sasaki. He also seemed an ardent proponent of liberalization and internationalization of the financial sector—though once again his zeal for deregulation did not include the abolition of central bank window guidance, which continued throughout the 1980s. As governor of the Bank of Japan, he criticized the Ministry of Finance’s policies that protected the financial sector from foreign competition: “It is not good to help every single financial institution like a ship in a convoy formation.” Just like the U.S. negotiators, he demanded liberalization of interest rates for large short-term deposits as a first step toward full-blown financial liberalization.50
Yet Maekawa had to tread carefully. As central bank governor he could not be seen to be pushing for changes of Japan’s economic system too openly. Politicians and the bureaucrats, especially at the Ministry of Finance, would have objected and pointed out that such issues are not the concern of the central bank. MoF would probably have argued that these are policy considerations that need to be decided through the institutions of a democracy.
During his time as deputy governor, Maekawa confided in the small group of “Kwantung Army” members, the hand-picked princes and insiders who ran Japan’s economy through the window guidance credit controls. They met every evening on the eighth floor, the executive floor, of the new building of the BoJ headquarters, for exclusive marutaku roundtable deliberations. Access was limited and the content of their discussions remained private. Although legally, Maekawa had to report to Governor Morinaga, the “old boy” from the Ministry of Finance, he did not bother to invite him to the daily deliberations. The Nikkei once reported that Morinaga “forgave” such exclusive meetings—presumably since he thought he was in control of the economy via his influence over interest rates. Like many ministry bureaucrats, Morinaga seems to have been blissfully unaware of the crucial role of the clandestine window guidance controls.51
The Maekawa Report

After ten years in charge of monetary policy, Haruo “Mike” Maekawa handed over the control levers of the economy to Mieno in December 1984. As Sasaki had done before him, this enabled him to engage in lobbying and more open scheming in the pursuit of his goals.52 The lobbying of Sasaki and Maekawa, as well as other like-minded internationalists, was not without impact. On October 31, 1985, Japan’s prime minister, Yasuhiro Nakasone, formed the Study Group on Adjusting the Economic Structure for International Cooperation, officially translated into English as the Advisory Group on Economic Structural Adjustment for International Harmony. Nakasone appointed Maekawa to head the group with the brief to “conduct a study on policy measures, from medium- to long-term perspectives, concerning Japan’s economic and social structure and management” and how it should change. Over the coming five months, the Advisory Group met nineteen times, and on April 7, 1986, it submitted its recommendations to the prime minister.53 In the media, the report quickly became known by the name of the chairman who had shaped its content and conclusions—Maekawa. While the Maekawa report received far more media attention, it closely echoed the demands of the earlier Sasaki report. It was, however, more detailed in its recommendations and blunter in its language.
In the opening paragraphs it stated its conclusion: “The time has thus come for Japan to make a historical transformation in its traditional policies on economic management and the nation’s lifestyle. There can be no further development for Japan without this transformation” (italics added).54 The medium-term national policy goal propagated by the report was the “determination … to attain the goal of steadily reducing the nation’s current account imbalance.” It was recognized that the “large current account surplus is basically linked with Japan’s economic structure” and its export orientation. Therefore, “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”(italics added).
The report read like a wish list by U.S. trade negotiators. It started with the call for administrative reform—basically the abolition of bureaucratic powers by switching from regulation and the license system toward policies based upon market mechanisms and to “freedom in principle, restrictions only as exceptions.” It aimed at import expansion, greater market access for foreigners, and a “thorough promotion of deregulation.” Even concerning the politically sensitive agricultural sector, the report called for an opening up to imports and “greater use of market mechanisms.”
Maekawa’s report called for the “transformation from export-led economic growth to domestic, demand-driven growth by expansion of domestic demand.” This was to be achieved through increased private consumption as well as a shift of low-value-added factories abroad. Consumption was to be stimulated by income tax cuts, more free time through reduced working hours, the five-day work-week, and a greater use of paid leave for longer periods. Consumption was also to be boosted by housing policies and urban redevelopment, based on tax incentives, relaxation of residential development guidelines, and easing of restrictions on building size and land use.
In order to “encourage imports of manufacturing goods” Japan should streamline its distribution mechanism and review the “various restrictions pertaining to distribution and sales.” It also called for the government to deal harshly with unfair or exclusive trading practices, “promote the liberalization and internationalization of the nation’s financial and capital markets,” and internationalize the use of the yen.
Prince Mieno Recruited for Maekawa Report

In short, the goal was a “transformation” of the entire body politic, the abolition of the war economy system, and the introduction of a U.S.-style free market economy. In the words of the report: “It is imperative that every effort be made for attainment of this national goal, and the Group thus very much hopes that the Government will make every effort to implement these recommendations with the full understanding and support of the entire nation” (italics added).
Maekawa’s advisory group recruited the ruling prince, Deputy Governor Mieno, as a member, while some of those members who uttered dissent, such as the highly respected economist Isamu Miyazaki, were relieved of duties.55 In May 1987, a new, updated Maekawa report was announced. This report had been expanded from eleven pages to forty-one and basically reiterated the points of the first report but included a much more detailed set of concrete changes that Japan should undertake. Moreover, it included some estimates how the economy was expected to shift away from the agricultural and manufacturing sectors toward the knowledge and service industries. Intriguingly, it also set a timetable for the completion of its goals: The knowledge and service industries, for instance, were expected to account for 32 percent of GDP in the year 2000—up from 25 percent in 1985. It also presented calculations on the number of jobs that would be created thanks to deregulation in the new sectors. A third version of the report was announced in June 1988. It was entitled “The New Economic Plan—The Japan that Lives Together with the World.”
The explicit timetable of achieving set targets for a structural transformation of Japan by the year 2000 was further emphasized by the unofficial name of the Maekawa reports. Since their publication, the set of Maekawa reports had been known inside the Bank of Japan simply as the “ten-year plan.”56
Using Monetary Policy for Structural Reform

The reports in the press and by commentators on the Maekawa report were highly critical: Observers recognized the radical nature of the plan. Thus it seemed far too ambitious. It was calling for a wholesale revolution of all parts of the Japanese economic, political, and social system. It seemed Utopian to think one could solve the deep-rooted and intractable problems of the structural trade surplus, high land prices, the closed agricultural sector, the low quality of life, long working hours, and too much regulation all at the same time. Not surprisingly, at the packed press conference where the Maekawa report was announced, disrespectful foreign journalists gave Haruo Maekawa a difficult time: “We’ve heard this so many times before,” one German reporter said. “Why should we believe it now?”57
Although the plan was fairly clear about what was wanted, it was embarrassingly silent about how the proponents were going to go about achieving those lofty goals. The only statement it contained about how to reach these goals was this: “In the implementation of these recommendations, fiscal and monetary policy has a significant part to play” (italics added). This is an intriguing statement, because fiscal and monetary policy are largely cyclical policies, while the report was all about structural change, something that has to do with regulations, changes of laws, and practices—in other words, a political process aimed at changing the regulatory and hence institutional framework. True, fiscal policy can have significant structural features, so its mention can be justified. Indeed, the report called for fiscal reform, including abolition of preferential tax treatment for savings. What remains unexplained, however, is how the purely cyclical policy tool called monetary policy could be used to implement structural changes. The report merely says the following to clarify this mystery: “While ensuring currency stability, flexible management of monetary policy is necessary to realize an economy led by domestic demand” (italics added).
There it was again—the enigmatic demand by central bankers, such as Sasaki, to implement structural changes through “flexible” monetary policy. “Flexibility,” according to the Oxford English Dictionary, means “easily changed to suit new conditions.” The time scale envisaged by the report was long, but with an immediate start: “Since the process of reforming the economic structure and improving the basic character of our economy is a long-term one, efforts to this end should be made continuously and form a long-term perspective. However, relevant policy must be initiated as soon as possible” (italics added).
The Round of the Twelfth

This raises two questions: Just what is the “relevant” form of “flexible” monetary policy that would further the structural transformation envisaged in the Maekawa report? Second, how could Maekawa hope to implement whatever this relevant flexible monetary policy was, considering he was out of power as governor? We begin by assessing the second issue—did Maekawa have any influence over monetary policy?
Maekawa may have formally been out of power. But he was no outsider. As sempai (senior) and mentor of the current de facto head of the Bank of Japan, Yasushi Mieno, he had direct access to the powerful extralegal window guidance credit controls. Maekawa held exclusive meetings with Bank of Japan staff on a frequent basis. Every twelfth of the month (with the exception of weekends and holidays), Maekawa gathered current Bank of Japan officials of the rank of board director and department head in the Hotel Okura in Tokyo. They could participate only if invited. Upon arrival, they were asked to report on their current activities and their policies at the Bank of Japan. Maekawa then gave them advice on what to do. It was an honor to be invited to this exclusive gathering with “Mike,” called the “Round of the Twelfth.” And since the loyalties of the princes go back decades, his precious advice was probably heeded by Mieno and his colleagues.58
Remote Control

There were other meetings. An even closer circle of Maekawa followers met on the first Monday of the month—the “Monday Club.” The most frequent attendees were Mieno and Fukui—the latter by 1986 head of the Business Department and long anointed as the next prince and Mieno’s successor. Every two months, Maekawa gathered a yet more select circle of followers to the Hongoku kai, named after the address of the Bank of Japan in Hongoku-cho, Nihonbashi. Of course Mieno was there, as were selected executive board directors, such as Kanno. It goes without saying that neither Satoshi Sumita, the reigning governor of the Bank of Japan, nor other Ministry of Finance executives were invited.59
This is strong evidence that Maekawa kept closely in touch with the affairs at the Bank of Japan. However, could he actually influence events at the central bank, such as the secretive window guidance? There is evidence that Maekawa’s influence even over minute details at the Bank of Japan remained significant. His power over his juniors and followers extended to personnel decisions, since it was Maekawa who basically decided into which companies the BoJ bureaucrats, once retired from the Bank of Japan, would parachute for their amakudari jobs—one of the most important, if not the most important personnel decision, since the pay structure at Japanese bureaucracies is such that payoff time arrives when a retirement job is taken. The following facts were provided by an investigative journalist of the Nikkei Financial Daily: Akira Oka, who had been Executive Director at the Bank of Japan, had just been made deputy governor of the Japan Development Bank. But Maekawa was looking to appoint a loyal follower to fill the post of president of the Tokyo Bay Road Company.60 So he asked Oka to resign from his new post at the Japan Development Bank (JDB) to take this job. “Once you have reached a position like yours, you can’t just decide about your life on your own,” Maekawa had told Oka. “So, having been told this, I had no choice,” reflected Oka later.61 By having power to allocate the plum retirement jobs, Maekawa was in a strong position vis-à-vis his juniors at the central bank.
We don’t know, of course, what exactly Maekawa had to discuss with the current elite of Bank of Japan executives. We do know, however, that he was keen to get them closely involved with his ten-year plan, for he took the official step of formally enlisting his chosen successor, Yasushi Mieno, into the advisory council for the second Maekawa report. Mieno was at the time officially deputy governor of the Bank of Japan and the ruling prince (needless to mention, the official Bank of Japan governor, MoF’s Sumita, was not part of the Maekawa report advisory council).
Not only was Mieno the highest-ranking trueborn Bank of Japan official, but he, together with his chosen successor, Fukui, controlled the window guidance. We must therefore consider it as established that those who produced the Maekawa report and its timetable of transforming Japan by 2000 also had direct access to the most powerful economic policy tool, the window guidance credit controls.
Needed: A Crisis

Thus we move on to the first question. How could Maekawa and his confidants implement the Maekawa report and achieve its numerical targets by about 2000? And what was the role of the right type of (“flexible”) monetary policy, which they had hinted at cryptically? We saw above that the head of the department that implemented window guidance credit controls, Toshihiko Fukui, had said in July 1987, soon after the publication of the second Maekawa report, that suitable central bank policy to implement the structural transformation of Japan’s economy was to “continue with the monetary easing policy” and, explicitly, for “bank loans to expand.”
Another riddle. Why did the Bank of Japan leadership consider the excessive extension of speculative loans in the second half of the 1980s as the right monetary policy, in order to implement Maekawa’s structural transformation of Japan’s economy? Why did the very same leadership (of Fukui and Mieno) consider the recessionary credit policy of the 1990s as the right monetary policy to further the plan to transform Japan’s economic structure? How can the disastrous monetary policy of first creating a bubble and then a massive recession be considered appropriate by Fukui and Mieno?
The reformers wanted to rid Japan of the war economy structure and transform its economic system, together with the structure of political decision making (by disenfranchising the ministerial bureaucracy that had previously been dominant in shaping the regulatory framework). As their talk of a “transformation” indicated, they were aware that this was nothing short of a revolution. Why are such revolutions never easy to implement? Because any system has groups that benefit from it and hence have no desire to change it. Maekawa and friends therefore would have to overcome all the economic and political vested interests of the old system. The politicians were happy with the way things had been—they received lush funding from big business and the Finance Ministry for pork barrel projects in their rural constituencies. Big business was doing fine—huge profits were accumulating from the successful export drive that had conquered world markets. And finally, the entire power base of the bureaucracy was built on its ability to conduct administrative guidance and grant licenses. The Ministry of Finance in particular, pinnacle of the bureaucratic elite, stood to lose heavily from the proposed financial deregulation program.
Given these odds, it is understandable that the media reacted negatively to the publication of the Maekawa report. Surely such a tall order was a nonstarter. More hot air from Tokyo, the foreign journalists thought. True, there were many influential leaders who shared the internationalist perspective—in politics, in business, and even among the bureaucracy. But they were clearly outnumbered. Even if some members of the elites could be won over by the rational arguments presented in the Maekawa report, the majority, especially those less interested in the benefit for foreign countries, could not be expected to agree to scrap Japan’s economic system—the very system that had delivered the postwar economic miracle. The revolution was likely to fall on deaf ears.
Historians would not be surprised at such obstacles. It is one of the laws of history that there is only one set of circumstances under which countries ever change in a fundamental way; indeed, there is probably no country in the world that has changed its economic, social, and political system in a significant way without a crisis. Since any system breeds vested interests, change tends to come about only when a crisis shakes up the entire nation and undermines the position of the established powers.
The Maekawa report was not detailed about the “significant part” that monetary policy would play in the implementation of its goals. How could Mieno, Fukui, and their followers inside the Bank of Japan “initiate the relevant monetary policy” immediately? We saw that the Bank of Japan is a believer in this law of history, since a Bank of Japan official said, “It is not easy to change the institutional framework and promote structural reform since it necessarily involves the vested interests of all the related individual economic agents.”62 Except if there is a crisis.
Is this where central bankers can be helpful? In 1993, when the recession had already started (triggered by window guidance), Mieno pointed out that thanks to this recession everyone was becoming “conscious of the need to implement such transformation,” as the Maekawa report had envisaged. This is from the person who was responsible for the window guidance that created the bubble, and who indicated in 1993 that he knew very well that such a bubble must be followed by a significant downturn.
The Crisis That Window Guidance Could Create

If one wanted to implement the Maekawa report, had the necessary tools at hand to manipulate the economy, and had a Machiavellian bent, one might start thinking about how a crisis could be created.
By 2000, I was not the only observer who had concluded that “the BoJ wants to use monetary policy to induce structural reform.”63 If the Bank of Japan wanted to use the cyclical tool of monetary policy “flexibly,” starting “immediately” in 1986, to achieve the long-run implementation of the structural transformation goals of the ten-year plan, as Bank of Japan spokesmen told us, logic leaves only one way to do this. Monetary policy would have to be used to promote a historic crisis, sufficiently large to overcome the vested interests (notably the Ministry of Finance).
Of course, such implementation would be impossible if monetary policy was transparent and worked through interest rates, but this was not the case. What type of window guidance would achieve the long-term goals best? There are only two options: one, to tighten window guidance drastically to create an immediate downturn; the other, to loosen it dramatically to create a financial bubble. One problem with the former option is that if one simply restricted window guidance without any good reason and thus created a recession, there was the danger that the cause of the recession would quickly become public knowledge (as actually happened with the tight window guidance of 1989). Opponents would complain about the excessive tightness of window guidance, and it would become difficult to tighten further. In the 1980s, the Bank of Japan still had to consider the opinions of its political opponents and the Ministry of Finance, because legally it was completely subordinated to the latter. The second problem would be that a sudden tightening would create a recession but would probably be insufficient to create a crisis of sufficient scale and length to discredit the old elites and force the type of historic structural transformation Maekawa, Mieno, and later Fukui, Yamaguchi, Hayami, and their colleagues talked about. Finally, the Ministry of Finance had just committed itself to lowering interest rates and stimulating the economy at the Plaza agreement. Thus the option to loosen window guidance drastically was really the only feasible one to implement the ten-year plan. It also offered the additional benefit that any criticism or leaks by bankers, central bankers, or journalists (as happened, and as we recorded) could be talked down easily by explaining that window guidance had to be consistent with MoF’s policy of low interest rates.
Deductive logic therefore forces us to conclude that the only way monetary policy could have been used “immediately” in the 1980s to work toward the achievement of the transformation of Japan by 2000 involved the second option: to use window guidance to create a speculative bubble. There would be no political opposition to this move, and hence there would be no resistance to the creation of the ensuing crisis. By opening the monetary taps and flooding the economy with money, even the opponents of change would initially do so well that they would not complain. The easy money would effectively buy them. During the bubble period, corporate profits soared, real estate speculators and banks made fortunes, politicians creamed off large sums as party contributions, and the Ministry of Finance was overjoyed about the unexpectedly large tax revenues. The lush funds boosted expense accounts throughout the country. The old elite of business, bureaucrats, and politicians was satisfied, thanks to the pleasures of the economic boom. Few were wise enough to see the dangers and refuse the easy money that was on offer. The result was that a massive crisis struck when the bubble was burst. Similar to the experience of Midas, who perished due to his golden touch, the easy money of the 1980s had a high price.
Maekawa and his princes Mieno and Fukui controlled what probably were the only levers powerful enough to change Japan. Maekawa passed away in 1989, but his successors remained in power. Mieno and Fukui first boosted borrowings of the nation so that they by far exceeded national income growth. Having created a speculative bubble, the very same princes then made sure it burst in a spectacular and shattering way. As soon as the princes closed the monetary taps, it was inevitable, as Mieno testified in 1993, that a recession would follow. Excessive credit turned into bad debts. The paralyzed banking system would then cause a credit crunch recession. As we saw, the princes could easily have ended the recession, but they did not do so. Meanwhile, all public eyes were on the politicians and the Ministry of Finance. Few suspected the role of the Bank of Japan.
Just like Hjalmar Schacht’s Reichsbank in the 1920s, the Bank of Japan has acted like a “second government” in the pursuit of a political agenda of systemic change.
External Motives

There is additional information on the motivation of the princes. The goals pursued by the princes were virtually identical with the goals demanded by the United States. American pressure on Japan to change its system mounted from the late 1970s onward. First, the United States made its demands known in negotiations with Japan. In a long string of meetings and agreements, from the yen-dollar talks in the early 1980s to the Structural Impediments Initiative toward the decade’s end, the United States demanded that Japan change its economic structure in order to open up its economy for foreign imports and to introduce an economic system that is nominally modeled on the free market principle, as in America. The princes had always relied on direct intervention in the credit markets in order to manipulate the economy. Their continued use of window guidance credit allocation even in the 1980s shows that they very much believed in the power of bureaucratic intervention and “guidance” of the economy. Yet, since the 1980s, they also seemed to be in favor of deregulation, liberalization, and an abandoning of direct intervention in the economy.
The close match between the ten-year plan and the demands by the United States on Japan may be pure coincidence. We do know that Prince Ichimada had been selected by the U.S. occupation and had close friends in the United States. His senior, credit controller Araki, moved from being a suspected war criminal straight to the post of Japanese ambassador to the United States. They, in turn, handpicked their successors early, thus establishing deep loyalty.
While the postwar policy of the United States switched in the early postwar era to maintaining the mobilized war economy system, this had changed by the early 1980s. The costs to the United States of the successful war economy system were appreciating. So the United States gave the go-ahead for Japan to change. This was no secret and was widely publicized at the time of the first yen-dollar talks. That was when Sasaki published his first plans for changing Japan. Soon afterward, his successors Maekawa, Mieno, and Fukui were all found to be advocates of the structural transformation of the Japanese economy. Some have been more outspoken in public and some less so, but since the 1980s they have all been keen to dismantle the war economy and open up Japan to the United States and the world.
The Prosecution Rests Its Case

What we have established is that Fukui, Mieno, and their colleagues were not insane, and that they were aware of the consequences of their actions when they created the bubble of the 1980s and when they prolonged the recession of the 1990s. Moreover, we have established that they had a widely publicized motive, and given that motive, their behavior could be explained as a rational course of action—indeed, the only one consistent with achieving their goals. In law, the judge or the jury would now look at the evidence and testimonials, deliberate, and announce the verdict. But Mieno, Fukui, and their colleagues are not in court. They are still at large. Their successors are in power. Indeed, today, as Prime Minister Junichiro Koizumi has adopted the Bank of Japan’s structural reform agenda as government policy, Toshihiko Fukui is a member of the government’s Financial System Council (while also being an adviser of Goldman Sachs) and, despite political resistance against him, remained a leading candidate to become central bank governor in March 2003.
In 1998, the Bank of Japan became legally more powerful, and is now virtually unaccountable. As a public institution, the Bank of Japan has responded to the raising of these issues with silence or misinformation (for instance, it still claims in public that window guidance was meaningless during the 1980s). Despite this book becoming a best-seller in Japan and being widely discussed, the Bank of Japan has not raised any objections in public to its arguments.