Japan: Bankers or Samurai or both?

Japan’s post-war economy is the stuff of legend.

Indeed, it is even referred to as Japan’s ‘economic miracle’. But how did they do it? Well, they had a war-economy system, adapted to the production of consumer goods. Cartels controlled competition within Japan, but of course there was no such arrangement internationally and Japanese companies soon became dominant in many markets in the world. The Japanese established a trade surplus with almost all of its trading partners, most prominently with the United States and the European Union. During the 1980s, there was even talk about Japan’s economy someday overtaking that of the United States. The Ministry of Finance were the top dogs in Japan’s post-war economy. They controlled most aspects of the economy. The Bank of Japan, Japan’s Central Bank, had to report to the Ministry of Finance. However, the quantity of credit creation and its allocation was decided by the Bank of Japan. Via a process known as window guidance, the Bank of Japan was able to dictate to whom and for what banks could issue loans. Essentially, the Bank of Japan told the Commercial Banks how much they will have to lend in the coming quarter and which sectors they would have to lend to. Whenever the Ministry of Finance would inquire about the Bank of Japan’s Window Guidance policy, Bank of Japan staff would engage in complex discussions, full of technical jargon — to make the process seem impenetrable to non experts. Of course, Central Banks such as the Bank of Japan like to have full independence and establish absolute power. So how did they do it? Well, they needed to create a bubble, which would then lead to a crisis, which would then lead to the power grab. The Bank of Japan began to significantly increase window guidance loan quotas, average yearly loan growth quotas were close to 15% in the late 1980s. Essentially, they forced the commercial banks to engage in ridiculous levels of credit creation. This caused a boom in the stock market, and in real estate. Between 1985 and 1989, stocks rose around 240% and land prices rose 245%. Although Japan is 26 times smaller than the United States, its land was valued at 4 times that of the United States. Therefore, instead of being used to limit and direct credit appropriately, Window Guidance was used to create a giant bubble. The Bank of Japan was well aware that the only way for banks to meet their loan quotas, was to expand non-productive lending and therefore these asset bubbles in stocks and real estate formed. OK, so we have a bubble. Time to pop it. Yasushi Mieno, in his first press conference as the 26th Governor of the Bank of Japan in 1989, said that “Since the previous policy of monetary easing had caused the land price rise problems, real estate related lending would now be restricted.” Well, the press lauded him — fighting against this silly monetary policy. In fact, he was Deputy Governor during the bubble era, and he was in charge of creating the bubble. Starting just a week after his appointment, from late December 1989 until August 1990, the Bank of Japan heavily increased interest rates. Soon…the Japanese asset price bubble of the 1980s…popped. Bankruptcies galore. Between 1990 and 2003, the stock market fell by around 80% and land prices in the major cities fell by up to 84%. Of course, mainstream economists were relieved — the downturn demonstrates that Japan’s economic system was not so successful after all. Thou shalt embrace neoliberalism. According to Mieno: “Thanks to this recession, everyone is becoming aware of the need to implement economic transformation.” By the way, and this is important and very often overlooked, after his five-year term ended in 1994, Mieno became a Director at the BIS, the Bank for International Settlements, the central bank for central banks. In order to end the recession and improve performance, it was claimed that Japan must shift from welfare capitalism back to shareholder capitalism. Soon after his post ended in 1994, Mieno embarked on a campaign, giving speeches blaming the Ministry of Finance for the creation of the bubble and the long recession. He lobbied for a change in the Bank of Japan law. He suggested that it was the Ministry of Finance who had pushed the Bank of Japan into the wrong policies, and of course to avoid such problems in the future, the Bank of Japan needed to be given full legal independence.

In 1998, monetary policy was put entirely into the hands of the newly independent Bank of Japan.

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