Review: Princes of the Yen: Japan's Central Bankers and
the Transformation of the Economy
A. Werner, Princes
of the Yen: Japan’s Central Bankers and the Transformation
of the Economy (Armonk: M.E. Sharpe, 2003).
by Scott B. MacDonald
purchase Richard A. Werner's book, "Princes
of the Yen", directly from Amazon.com
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,
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?