In Japan, the place was completely devastated after WWII including the banking sector. The central banks re-capitalized the banking sector and used a system called ‘window guidance’, which basically instructed the banks how much and to whom to lend. This led to an economic miracle, low unemployment, and a large trade surplus. In the 80’s at the behest of lobbying
80’s era of financial deregulation in industrialized world. Tadashi Sasaki, former governor of BoJ, called for a 5 year plan
Haruo Maekawa, former BoJ governor, 10 year economic reform package, the report read like a wish list from us trade negotiators.
Calls for administrative reform, abolistion of bureaucratic powers, the goal was the transformation of the entire body politic. The abolition of the war economy system. Introduction of a US style free market economy. Called for a wholesale revolution of all parts of the Japanese Economic, political and social system.
The commision proposed that monetary policy should be used to promote a historic crisis sufficient large to overcome the vested interests of the ministry of finance, politicians and corporate japan.
The crisis is the only thing that will cause the citizens and interest groups of the need for change. Best way to do it is to create a bubble. BoJ significantly increased window guidance loan quotas. Average yearly loan growth quotas were 15% in the late 1980s. Young people in their 20s and 30s on modest salaries were able to buy second and third homes.
The credit boom caused a boom in the Real Estate and Stock Market. 1985-1989 stocks rose 240% & land prices 245%. By the end of the 80s the garden surrounding the imperial palace in central tokyo was worth as much as the entire state of California.
In 1989, 26th governor, Yasushi Mieno, he declared he was against this silly monetary policy and would end easy capital for real estate. He was deputy governor during the bubble era, he was in charge of creating the bubble.
All of a sudden, land and asset prices stopped rising. 1990 alone stock market dropped by 32%. July 1991, window guidance was abolished. This took the window offices at the BoJ by surprise themselves! Bankers were left helpless, they didn’t know how to make their lending plans anymore. When the banks realized that the majority of the 99 billion yen loans would go sour, they stopped lending to speculators, but also restricted loans to everyone else.
5 million japanese lost their jobs and did not find employment elsewhere. Suicide became leading cause of death for men between ages 20 and 44. 1990-2003 212,000 companies went bankrupt. In the same period the stock market had collapsed by 80%. Land prices fell by up to 84%.
Ministry of Finance (MoF), believing interest rates were the main policy tool put pressure on the BoJ to lower interest rates. Until rate reached 0.1%.
MoF asked BoJ to sell large amounts of yen and buy US Treasuries so exchange rate of yen would fall and exports would pickup.
BoJ steriling their intervention. MoF tells BoJ to buy 20 bn of US Treasuries, which means they are taking the money from the economy to fund the purchase. Sterilized forex intervention doesn’t work, thats why the Yen remained strong.
Central bank can withdraw money from economy by selling its assets, just as it can inject money into the economy by buying assets.
Gov’t between 92->02 had 10 stimulation packages worth 146 Trillion Yen. Fund raising done through the bond market, thereby taking the same money out of the economy. No increase in purchasing power, so gov’t intervention couldn’t have an impact. By 2011, Japans gov’t debt = 230% of GDP. The MoF was running out of options. People started blaming MoF for the recession and that it was caused by Japans economic system.
This no loan growth = no economic growth = no loan growth catch 22 can be fixed by the BoJ by printing money. Central Bank could buy all bad debts at face value, then Japan would have the strongest banks in the world. This is what the BoJ did after the war.
Tax money was used to recapitalize banks, but tax payers weren’t responsible for the problem with the banks, therefore creating a moral hazard.
BoJ could have fixed the whole thing by simply buying assets, like buying real estate and converted it into public parks. Or they could have done QE. Despite having these options, BoJ refused at every stage to adopt policies that woudl have resolved the crisis. BoJ was prolonging the crisis to get Structural Changes. BoJ defied calles from finance minister and Prime Minister. At times they actively reduced the money in circulation which actually worsened the recession. BoJ would continually blame problem the economic structure.
The MoF was made to wear the blame of the crisis, and the BoJ, in 1998 was cut free of the MoF and put in charge of Monetary Policy. In 2001 Junichiro Koizumi, became PM, compared to Margaret Thatcher. His policy = no recovery without structural reform. Japan started to shift its economy to a US style market economy, meaning moving the center of the economy from banks to stock market. To entice depositors to pull their money out of banks and into the risky stock market, reformers withdrew the guarantee on all bank deposits, while creating tax incentives for stock investments. As US style shareholder capitalism spread, unemployement rose significantly, income and wealth dispairity rose, as did suicide and incidents of violent crime. Then in 2002 BoJ strengthened its efforts to worsen banks balance sheets and force them to foreclose on their borrowers. This allowed the gov’t to nationalize the banks. This wouldn’t benefit the japanese, rather the US vulture funds specializing in the purchasing of distressed assets.
Their goals were to: destroy the MoF, get independence for the BoJ, engineer deep structural changes in the economy: shifting from manufacturing to services, opening up, deregulating, liberalizing, privitize the whole lot.
Todays US economy is characterized by fierce competition, agressive hiring and firing, take over battles between large corporations, few bureaucratic controls, strong shareholders who demand high dividends and corporate funding from the markets not banks. Throughout the post war era japans economy had been the opposite. Highly regulated, cartels limiting competition, bank financing cross shareholding reducing shareholder power, no takeovers, frozen labour market with lifetime employment and seniority pay. It was claimed to end recession it was necessary to move from welfare capitalism to shareholder capitalism. Why would a country that ran a significant and consistent trade balance need to change its economic system to become more competitive?!
Thank you KK for your response.
I see the interview you are talking about, Keiser definitely doesn’t destroy Richard Werner with any point. He defintely talks over him and when Werner wants to explain, he cuts him off for time.
Back to the Japan point. Japans welfare economy with ‘window guidance’ was responsible for an economic miracle. Why would a country that ran a significant and consistent trade balance need to change its economic system to become more competitive? Well the answer is it doesn’t. However the private central bankers cabal, wants wealth to be transfered to their 1%, so they needed to change the system.
You went from a system that was highly regulated, had cartels limiting competition, bank financing cross shareholding reducing shareholder power, no takeovers, frozen labour market with lifetime employment and seniority pay; to a system characterized by fierce competition, agressive hiring and firing, take over battles between large corporations, few bureaucratic controls, strong shareholders who demand high dividends and corporate funding from the markets not banks.
I fail to see how this is a better system? The system didn’t evolve this way, the BoJ wanted this and so they engineered the crisis. They created the bubble, and then tightened monetary policy afterwards prolonging the crisis until they could finagle all the concessions they sought, including the freeing of the BoJ from MoF legal oversight.
There is a clear difference, I think, between financing GDP related activities versus asset inflation. Going back to your housing example, finance builders who will be building net new homes, or upgrade them. Don’t finance people who are simply speculating.
Wow, long article on fractional reserve banking, kuddos! I understood that fractional reserve banking is a myth, and that banks create credit as they wish, having nothing to do with some