Princes of the Yen | The Hidden Power of Central Banks

Long live the imperial army. I pledge allegiance to the flag of the United States of America.

General Douglas MacArthur arrived in Yokohama on August 30, 1945. Democracy was to be instilled in the Japanese people. Kabuki plays and books about bombings were banned or censored. War crimes trials took place, with some defendants expressing loyalty to the Emperor. The banking sector was bankrupt after the war but was resolved by the Bank of Japan buying bad papers with newly created reserves.

In post-war Japan, Kishi Nobusuke, a former war crimes suspect, became Prime Minister. He had been involved in the war effort as General Tojo's Minister of Commerce and Industry. Despite his past affiliation with national socialism, he transformed into a defender of democracy after the war. With support from crime syndicates, industrial corporations, and CIA funds, Kishi built the Liberal Democratic Party into a powerful political machine that remained in power for almost four decades.

The Ministry of Finance's Control The Ministry of Finance in Tokyo controlled most aspects of Japan's economy. They had power over the Bank of Japan and other institutions. However, they did not have control over credit creation and allocation, which was decided by the Bank of Japan.

"Window Guidance" for Credit Allocation "Window guidance" was a method used by the Bank of Japan to allocate credit to different sectors. They instructed individual banks on how much money to lend and who should receive it. This system allowed them to encourage or discourage certain projects.

Prosperity and Excess Competition Under this war economy system, Japan experienced high growth, even income distribution, and improved quality of life. However, competition among industrial sectors became excessive as companies fought for market share instead of profit.

The US current account deficit The US current account deficit has reached its highest level in 9 years, surprising many economists. Japan's dominance in international markets was not limited by cartels like within Japan. Japanese corporations became dominant globally and held formal congressional hearings on their productivity lessons for America.

"Invisible hand" vs War Economy "Invisible hand" theory suggests that only free markets lead to success, but Japan became the second largest economy without relying solely on this concept. Their postwar economy shifted from weapons production to consumer goods through a fully mobilized war economy approach.

Window guidance and credit controls Despite presenting itself as a champion of free markets, the Bank of Japan used window guidance as an embarrassment due to its role in credit controls. The Ministry of Finance engaged with complex discussions full of technical jargon when questioned about credit creation and allocation policy.

Government bonds and national debt Japanese government bonds were introduced in November 1965, shifting pressure from the Bank of Japan onto the Ministry of Finance for increased spending. This led to an ever-increasing national debt mountain presided over by the ministry.

In the 1980s, Japan's central bankers called for a transformation and liberalization of the Japanese economy. They proposed administrative reform, abolition of bureaucratic powers, and introduction of a US-style free-market economy. The plan was seen as radical and ambitious but lacked details on implementation. The Bank of Japan advocated scrapping the traditional Japanese system in favor of US-style capitalism.

The Bank of Japan increased loan quotas, leading to a credit boom in real estate and the stock market. Land prices and stocks rose significantly during this period. The high land prices were justified by economists as being due to scarcity. Companies also benefited from the bubble, with tax revenues going up and manufacturers making more money through speculative investments than manufacturing.

The Rapid Creation of New Money During the Japanese bubble in the late 1980s, new money was rapidly created by the banking system. The Bank of Japan's Banking Department played a significant role in this process by issuing window guidance quotas that forced banks to lend aggressively. As a result, banks pursued potential customers and made exaggerated assessments of land value, leading to inflated loan-to-land value ratios.

"Excess Money" Phenomenon "Excess money" became a term used by ordinary people to describe the strange phenomenon of rising land prices during this period. However, economists and financial experts dismissed this simplistic analysis and attributed it to more complex factors beyond just excess money.

When a country creates too much money, some of that money spills out abroad in the form of investments. In the 1980s, Japanese capital flows multiplied from a net inflow of more than $2 billion in 1980 to an outflow of $132 billion in 1986. Japan was able to do this because its currency was not devalued and it had a significant trade surplus.

The Crash of the Japanese Economy In 1990, the stock market dropped by 32% and window guidance was abolished in July 1991. Banks became fearful as bubble loans were likely to turn sour, leading them to stop lending. This resulted in a bleak Christmas for Japan with the stock market sinking and many companies going bankrupt.

Government Intervention and Economic Challenges "Lower interest rates will stimulate growth" is not supported by empirical evidence. The Ministry of Finance asked the Bank of Japan to sell yen and buy US dollars to boost exports but sterilized intervention doesn't work effectively. Government spending increased government debt without increasing total purchasing power.

Radical Measures to Strengthen Banks Central banks can take radical measures to strengthen banks, such as buying bad debts at face value or helping them make sizeable profits. These actions have been used by central banks in the past and can be effective in improving the financial health of the banking sector.

"Printing Money" and Quantitative Easing "Printing money" through quantitative easing is another option for injecting money into the economy. The Bank of Japan has been reluctant to implement these policies, despite calls from government officials. However, increasing the money supply could help prevent deflation and stimulate economic growth.

The US and Japan held insurance talks to overcome the interests of large insurance companies and the Ministry of Finance bureaucracy. They need an agreement before December 15th or face trade sanctions. Securitisation of real estate is expected as a key move for meaningful securitisation, but it requires deregulation by reducing the power of the Ministry.

The Bank of Japan's Growing Influence "From the mid-1990s onwards, the Government began to dismantle much of the power structure of the Ministry of Finance. The Bank of Japan saw its influence grow significantly."

"Independence" for the Bank of Japan "There is no doubt that the Bank of Japan will become independent from the Ministry of Finance and be on par with other central banks. The Ministry has lost credibility due to their role in creating economic problems, while public criticism towards th

No Economic Growth without Structural Reform In October 1997, all policy initiatives to stimulate the economy originated from politicians. Junichiro Koizumi became Prime Minister and emphasized the need for structural reform. Japan shifted its economic system to a US-style market economy, moving away from banks towards stock markets. This led to rising unemployment, income disparities, suicides, and violent crime.

'Princes of the Yen' - Manipulating Japan's Economy "Princes of the Yen" refers to influential figures in Japanese monetary policy who aimed at changing the country's economic structure through crisis manipulation. Toshihiko Fukui played a significant role during Japan's bubble period as head of Banking Department inside BOJ. The goals included breaking up Ministry of Finance, achieving independence for Bank of Japan by changing laws and implementing deep structural changes like deregulation and privatization.

In the 1990s, the currencies of Southeast Asian Tiger Economies collapsed due to a fixed exchange rate with the US dollar. The crash was caused by aggressive deregulation and borrowing from abroad influenced by external pressure. Central banks maintained fixed exchange rates, leading to less competitiveness and shrinking imports. When speculators sold their currency, central banks attempted to maintain pegged rates but depleted foreign reserves.

The IMF provided financial assistance to Thailand, Indonesia, and South Korea during their economic crisis. However, their policies demanded strict measures such as curbing credit creation and raising interest rates. This led to defaults on loans, bankrupt banking systems, corporate bankruptcies, and high unemployment rates. Some argue that the IMF worsened the crisis and had a hidden agenda of changing political and social systems in these countries.

Long-Term Capital Management, a hedge fund in New York, faced potential bankruptcy due to its massive losses. To prevent a banking crisis and protect the US financial system, the Federal Reserve organized a bailout by pressuring Wall Street and international banks to contribute funds. This contradicted their previous stance on not bailing out financial institutions.

Countries within the Euro currency bloc have forfeited their right to a national currency and handed this power to the European Central Bank. The ECB has made mistakes in monitoring credit creation, leading to different credit cycles in countries like Spain, Ireland, Germany, and Greece. These cycles have resulted in economic crises and insolvency of banking systems. The ECB's decision-making bodies are secretive and attempts at influencing them are forbidden.

Central banks hold significant, yet little understood powers. They operate in the shadows and their actions affect us all. However, they are often independent, unaccountable, and obscure. Examples of central bank deception can be seen worldwide.