Book Review: Princes of the Yen: Japan's Central Bankers and the Transformation of the Economy

Richard A. Werner, Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy (Armonk: M.E. Sharpe, 2003). 362 pages.

Reviewed by Scott B. MacDonald



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Richard A. Warner has no doubt written a fascinating book. Whether or not one concurs with his views, it is worth reading. The fundamental thrust of his argument is that the Bank of Japan is the dominant force behind Japan’s wrenching economic transformation over the last decade. As he states: “This book shows the Japanese recession was indeed due to the main force driving the business cycle – money. It is not by coincidence that the main proponents of structural change are precisely those who are in control of Japan’s money.” The proof is that the central bank has consistently defied calls by the government to create more money to stimulate the economy and end the long recession. Indeed, the Bank of Japan has intentionally left Japan in the economic wilderness to make certain that the government and politicians had no other path but to make painful changes.

What elevated the Bank of Japan over its rival, the Ministry of Finance (MOF)? A long series of painful scandals hurt the MOF, while the BOJ remained largely faceless to the public. Over time, the Bank of Japan emerged as the most powerful financial actor, all “because of a lack of transparency and a lack of meaningful accountability by the central bank for its monetary policy.” Werner’s view is that the central bank is supreme: “It is not the government but the BoJ that decides whether we will have a boom or recession.”

At the end of the day, Werner’s book is about competing capitalist economic models. The message is ultimately that the Anglo-American model founded more on deregulation and liberalization of markets (in a sense more rough-and-tumble economics) is inferior to the more state-guided German/Japanese/Korean models. In the case of Japan, he asserts: “If anything, structural reform toward deregulation and liberalization has been accompanied by reduced economic growth, both in the short term and in the long term.” He concludes his book by noting: “Finally, a comparison of the longer-term macroeconomic performance of the German, Japanese and Korean economies in the twentieth century suggest that economic structures that do not conform to the U.K./U.S. model can be highly successful, or surpass the U.S./U.K. model, especially when measured by certain indicators of social welfare (such as indicators of inequality, social stability, or basic needs, including access to health services, welfare, and education).”

While there are certain parts of Werner’s argument that are persuasive, the simple equation that deregulation and liberalization are bad and state-guided capitalism is good, is a weak argument. Certainly anyone looking into the German economy through the last 10 years is keenly aware that the German model is deeply troubled, reflecting that the system ultimately is not affordable. Both the U.S. and U.K. made painful structural changes during the 1980s and 1990s to make certain their economies remained highly competitive. While these systems are not without their own set of problems, they still provide a much better living for their citizens than most other countries on the planet. Could they be better? Absolutely. Yet, they still attract foreign capital and individuals that find the risk/reward system to be worth the venture.

In Germany and Japan the old systems were tinkered with, but the major gut-wrenching changes were avoided. Now demographic and financing problems are mounting. If the vaunted German model is so great, why then has its major bank, Deutsche Bank,openly talked of re-locating outside the country to avoid heavy social costs and an inflexible labor market?

Werner’s book was popular in Japan because it is supportive of the status quo. Let’s avoid those painful decisions, neuter the power of the Bank of Japan, and return to a system based on greater social equity. Nice sentiments, but hardly realistic for a country with public sector debt expected to reach 160% of GDP in the near future. Moreover, with the demographic clock ticking, who will pay the bills for such a system in the future?

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Jonathan Lemco, Robert Windorf, Sergei Blagov, Caroline Cooper, Kumar Amitav Chaliha and Stephen F. Berlinguette

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