Princes of the Yen

Richard Werner argues that the Bank of Japan, rather than fiscal policy or market forces, created the Japanese asset bubble of the late 1980s and then deliberately destroyed it in order to force structural change on the Japanese economy. This is a strong claim about intent, and the book is built to support it.

His mechanism is window guidance, the informal quota system through which the Bank of Japan told commercial banks how much to lend and to which sectors. Werner argues that the central bank directed enormous credit growth toward real estate and speculative lending during the 1980s, that this rather than interest rates drove the asset price rise, and that when the bank withdrew the guidance the bubble collapsed. He then argues that officials chose not to reflate during the 1990s because they wanted the crisis to break the postwar economic model, weaken the Ministry of Finance and force liberalisation.

Werner also develops his general theory that credit creation for asset purchases affects asset prices while credit creation for productive purposes affects the real economy, which is the basis of his later work on disaggregated credit. He is a heterodox economist and this thesis is not accepted by mainstream Japanese monetary historians, who attribute the bubble to a combination of financial liberalisation, the Plaza Accord's consequences and monetary policy errors without the deliberate intent Werner alleges. The evidence for intent is largely inferential and rests on interviews and on published statements. Read it as a serious heterodox argument that has not been accepted, and treat the intent claims separately from the credit analysis.