The Sins of the Princes

Katalin Ferber, International College, Waseda University [About | Email]

Volume 4, Issue 1 (Book review 3 in 2004). First published in ejcjs on 16 February 2004.

Werner, Richard A. (2003) Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy, New York: M. E. Sharpe, ISBN 0-7656-1049-3, Paperback, 350 pages with index.

What are the connections between Japan’s current financial and fiscal crises and the actual decisions of the Bank of Japan (BOJ)? How can we differentiate between personal and institutional responsibilities in terms of policy-related decisions? Why has the BOJ not been supportive of the Japanese government’s attempts to implement structural reform? Can researchers place all the blame for mistakes onto single institutions or small groups of decision-makers?

Richard A. Werner’s recently published book, Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy, deals with all these questions and, in addition to laying the blame for Japan’s current financial crises solely on the incompetence of BOJ bosses, offers a non-conventional remedy for the crises. This review focuses on these two important issues of “blame” and “cure”.

Scholars rarely analyse the decision making of financial and monetary authorities. If they choose this complicated topic, their research usually results in two different outcomes. Some scholars target a large, non-expert audience and books in this category usually enjoy quick but often short-term success as they openly discuss complicated topics and “secretive” authorities like the Ministry of Finance (MOF) or the BOJ. Many of these popular books lack cohesiveness, and primary sources are rarely used to support arguments. Academic works, on the other hand, target a very limited but well-informed audience, so these monographs are usually drier, less accessible to the non-specialist readership and have more modest claims than their general market counterparts.

Princes of the Yen is an unusual text, for it attempts to straddle both forms of writing. Werner admittedly targets a large audience; yet his arguments are supported by primary sources from the BOJ and from his personal experience in the domestic and international capital markets. Werner is a widely-known money-market expert and so his views on Japan’s financial crises deserve attention.

Werner claims to explain complicated issues in a simplified way in order to speak to a larger audience. He also offers a critical view on the financial activities of various authorities, both past and present. The book’s main goal is to explain the longest financial and banking crises in post-war Japanese economic history. And Werner is confident that he has the solution to Japan’s current problems (pages 106–11).

The book’s central argument is that banks can create money without the danger of inflation because credit is supply-determined (page 46). As such, the central bank (in this case the BOJ) can print more money to “give to the banks” (page 109), and so the problem of bad debt “can be solved in a day” (page 110). Readers can expect, therefore, that upon turning over the last page of this book they should have the solutions for these crises which are, in any case, easy to recognise and even easier to fix (pages 109–10).

Princes of the Yen can be divided into two different “narratives”. The first concerns the historical development of the Japanese financial system from the inter-war period through to the current banking and financial crises. The second narrative focuses on individuals who have worked in the BOJ over the past several decades, either as governors or vice-governors. According to Werner, in post-war Japan the governors of the BOJ have been responsible for mistaken decisions and also for secretive practices (see below). Therefore, the incompetent behaviour of these governors, with their elite bureaucratic and authoritarian ambitions, led to previous financial crises and has led to the current crises. The post-war “princes”, as Werner describes the governors, are not on trial in the court of public opinion, as they perhaps should be, but “are still at large” (page 178). These are strong words, indeed; though, if they are well-founded, readers can be sure that something revolutionarily is being presented.

The Rationale of Printing Money

The book has nineteen chapters. The first three focus on the origin of the post-war Japanese financial and monetary systems (pages 1–37). Here, readers can find a brief summary on the market-oriented and capital market-based Japanese economy in the inter-war period, a short description on the wartime economic and monetary systems and also some conclusions concerning the sources of Japan’s post-war economic success. The fourth chapter relies mainly on Marco Polo’s diary, as it is one of the earliest examples of how the Chinese paper money system worked successfully in the tenth century (pages 40–1). Chapter 4, “The Alchemy of Banking” (pages 38–47), demonstrates that money can be created without danger of inflation and that the monetary authorities of various countries have recognised this. The next two chapters analyse how Germany and Japan recognised in the 1930s that, via the centralised (state-managed) credit allocation among priority-related industries, industrial production could be easily controlled (pages 49–72). The following three chapters (Chapters 7–9) offer explanations on the bubble economies of the 1970s and the late 1980s. These chapters also explain the workings of the BOJ credit-rationing system, monetary policy and the US-Japan dollar-yen policies. From the tenth chapter, the book turns to the issue of economic remedies and offers solutions to the bad debt crisis.

According to Werner, the BOJ (like any other bank) could create money (credit or virtual money) and pull the economy out of a crisis by printing additional money (pages 106–10). The problem of bad debts could be solved easily. As the central bank has the license to create money (out of nothing), it could also purchase all of the bad debts of the commercial banks and print money for a zero cost (page 110). Henceforth, Werner refers to both the German and Japanese financial policies of the 1930s as quick, cheap and efficient solutions for pulling an economy from a crisis via creating more money.

The second part of the book, especially from Chapter 11 through to Chapter 16 (pages 114–207), focuses on the policy-related decisions of the BOJ governors. Werner creates a “court case” and presents a thorough investigation showing why the central bank’s decisions were wrong. He describes in detail why successive central bankers had no interest in creating a healthy monetary and financial policy for Japan in the post-war period (except for early inflationary finances, which he considers a good example because a money-printing policy helped the economy recover from the war). In Werner’s “court case”, the BOJ governors are convicted as he demonstrates that, during most of the post-war period, Japanese monetary and financial policy-related decisions were determined by the personal ambitions of BOJ governors, fierce rivalry between MOF and the BOJ and, finally, by the wartime-like credit-rationing policy that the BOJ practiced until recently.

The last chapter (Chapter 19) is a case study on the German central bank’s (Bundesbank) contemporary status in terms of its independence. This chapter also describes the strengths and weaknesses of an independent central bank, as far as the process of monetary decisions are concerned. The Appendix is an excerpt from Werner’s earlier published article, “Japanese Fiscal and Monetary Policies in the 1990s”.

To summarise, Princes of the Yen accuses monetary authorities (especially BOJ governors and vice-governors) for mistaken policy-decisions that have led to the current crises. It concludes that Japan can solve these crises if BOJ governors are democratically elected, if the important decisions and policy changes are publicly known and therefore transparently-made, and if influential policy-related decision makers, such as the BOJ governors, come to understand that money is merely a supply-related tool and there is no limit to its issue if it is used productively (see the sub-chapter, “Print Money and Create Parks”, page 108).

The Personal Legacy of the Monetary System

To begin with, economic historians (Japanese and foreign) are familiar with the wartime and post-war institutional and personal continuities that contributed to Japan’s post-war economic success. It is true that the monetary and financial histories of the post-war period require further research, but it is unrealistic to insist that the BOJ should take sole responsibility for mistaken financial and monetary policies in the last four decades.

Werner analyses the policies and occasionally the personalities of six BOJ governors. He concludes that, because of their secretive and unaccountable policies, they were practically quasi-independent from MOF control, a situation which led to a co-ordination problem between monetary authorities and politicians. In addition, after the BOJ became de jure independent in 1998, the government lost control of monetary policy and thus also lost a way to “sack” the BOJ governor. Accordingly, the politicians have had no tool to “exert their will” on the monetary authorities (page xv).

Such thinking is characteristic of how Werner views the relationships among the BOJ and MOF and between bureaucrats and politicians. He creates an impression that politicians are the key figures who know what the Japanese people need. Yet, despite redefining Japan’s politicians in such a bold manner, Werner does not provide any primary or secondary sources to substantiate the position that politicians are indeed the experts who transmit the interests of various social groups to the bureaucrats.

Werner however does not stop here, but characterises the “authoritarian” system inside the BOJ. He quotes a BOJ employee who says that the top BOJ leaders act like the Kwantung Army from the 1930s: that is, they act independently, just as the Kwantung Army in China acted independently of the Japanese military headquarters and the civil government (pages 151–2, footnote 31). This is only one example from Princes of the Yen where “insiders” begin to drive the book when the author fails to analyse other published material, both historical and contemporary. It is both positive and promising when scholars scrutinise decision-making institutions and their secretiveness; but, as history teaches us, personal views, even of “insiders”, do not necessarily speak accurately on the real state of affairs.

It would be very interesting to know the origin and the history of BOJ personnel, including the knowledge-based experience of its post-war governors, but unfortunately there is little here other than the wartime origins of the BOJ’s institutional policy and personal continuity. The governors of the BOJ (be it wartime or post-war) are caricatured as simply authoritarian, secretive and quite unprofessional. Werner suggests (pages 157–64) that the BOJ policy has been targeting “sustainable growth” via recession. This seems overly simplified, but Werner nevertheless tries to prove that successive BOJ leaders failed to create additional (necessary) credit to pull the economy out from the crisis, because long-term structural adjustment, as they understood it, would be far more efficient and helpful than a short-term economic recovery. As Werner quotes Keynes, “this long run is a misleading guide to current affairs. In the long run we are all dead” (page 162). But the BOJ is also characterised as being well aware of its activities and their effects, and so various leaders of the Bank can thus be judged to have been primarily responsible for deliberately creating, maintaining and prolonging one of the longest and most destructive crisis in post-war Japan.

Werner also analyses the BOJ’s lack of independent legal status between 1942 and 1998, and MOF’s dominating (if not privileged) position in the financial and fiscal systems. He describes how the BOJ fought for its independence, which finally arrived in 1998 in the form of the new law separating it from MOF influence. Werner does not present this independence as a progressive step toward a more democratic and more accountable monetary policy. His example of the Bundesbank (Chapter 19) shows that an independent central bank can be dangerous because its decisions cannot be controlled. Yet, for its many pages of argument, this book seems to miss what many other scholars have already shown. That is, since the entire budget of the BOJ belongs to MOF, and is thus dependent upon MOF approval, the BOJ in fact did not become significantly more autonomous in 1998 (Mikuni and Murphy 2003, 49).

Indeed, there is fierce debate, both outside and inside Japan, as to who is in charge of the country’s monetary and financial decisions. Unfortunately, Werner hardly sheds any light on this subject (even at an institutional level) because he confusingly combines personal responsibilities with institutional histories and personal histories with institutional responsibilities.

In any case, neither personal nor institutional responsibilities can explain why MOF bureaucrats and BOJ employees have been unable to recognise the coming crises let alone explain why they might be interested in prolonging the crises. To find some answers, Werner offers a quite different explanation from the first narrative. He argues provocatively on the nature of money and on the role of banks. It is with these two paradigms that Werner offers a quick and simple remedy for the current financial crisis.

Solving the Problem “In a Day”

Since the emergence of the debate between the Metallists and the Chartalists, the latter group has viewed money as a state-determined obligation, regardless of the real value (be it in gold or silver) of money. One of the famous representatives of the Chartalist view is Georg Friedrich Knapp (1924), who argues that money is credit. Werner uses this theory to show that there is no risk or cost involved in creating money or buying bad debts from the banks in Japan, because money is simply a declaration, therefore, there is no practical limit preventing the BOJ from solving the current bad debt crisis.

Why has the BOJ not followed this path? At this point, most reasonable observers might begin to search around for extra or counter explanations. But Werner returns to his pet ideas of the ignorance, ambition and authoritarianism of the BOJ bosses. In fact, the literature is rich in competing attempts to explain just this issue, including Johnson's (1996) developmental thesis, the monetary explanation (see for example: Mikuni and Murphy 2003) and the structural explanation (Gao 2001), to mention just a few.

Since the Meiji Restoration, Japan has struggled with a fear of economic and monetary dependence upon the West. In order to maintain the country’s national integrity, without losing opportunities to mobilise capital and other resources for economic development, Japan opted for the broadest meaning of mercantilism to pursue its economic and financial policies (Mikuni and Murphy 2003). For monetary authorities in Japan, maintaining a safe and excessive foreign reserve was a key element of monetary policy under bimetallism (1871–97), as well as under the Gold Standard (and Gold Exchange Standard). And this problem returned in an even more drastic form after World War II, since Japan lost the war and the United States determined the post-war monetary order (via the Bretton Woods system).

Japanese monetary authorities, including the BOJ and MOF, utilised a quantitatively-controlled credit system and set up a strict, centralised foreign currency system. In this regard, the post-war monetary and financial systems were keys to achieving rapid economic growth. With probably the most efficient means to control production, especially in the export-driven sectors, Japan fully adapted its own wartime policy to the new circumstances, so the post-war system differed from the pre-war system in only one aspect. In place of military-related production (and its centrally-controlled credit system), export-driven production enjoyed the privilege of being subsidised with credits and loans. In this scheme, interest rates and credit distribution among banks and companies focused on one target — the creation of an “artificial shortage” or “hunger for credit” which led to a BOJ-generated competition for liquidity.

It is fully documented that such a shortage leads to “queuing” for scarce resources, such as the “monitored” credit supply, as well as “competition” among Japanese manufacturers. The persistent raising of credit-ceilings is also proof that the most important motivation for monetary authorities to maintain the window guidance system was not only control but the reproduction of export-driven growth in order to have more US dollars. Instead of criticising various monetary authorities for this policy, Werner might have asked why this policy (or its most important elements) was not changed if Japan had accumulated one of the world’s largest currency reserves by the 1970s. Ultimately, Werner’s ideas on this subject are ambiguous, and he leaves several policy-related dilemmas unanswered.


This is a thought-provoking work. However, in spite of its promising and radical tone at the beginning, by the end readers will likely be disappointed. The main problems in the book are partly technical and partly conceptual. First, the book is poorly edited. Among various chapters and sub-chapters there are too many jumps and loopholes. It lacks focus. Second, the balance between the main theme of the book and other non-related issues, such as the earlier article or quotes from Marco Polo’s diary, seriously weaken the central argument. Third, though it is most likely a consequence of writing something for a larger audience, Werner falls into the trap of creating a style that is overly personal and thus blurs the line between personally-driven interest and professional, detached observation. His analysis echoes a view, which is widely held among Japanese politicians, that bureaucrats fundamentally disregard the national interest because their personal lives are safe.

After the stock market falls of 2001 and 2002 many politicians called for the resignation of the BOJ governor. Mr. Hayami responded to such criticism by demanding that Japanese people give up lifetime employment and face less job security. His own job security was assured. (page xv)

The quote warns all of us how personal and institutional responsibilities can be mistakenly mixed. It is a warning sign for researchers to distinguish clearly between their “insider” views and documented arguments. This reviewer would have liked less assertion and more demonstration, less personal “blaming” and more historical narrative. Passion can often be a creative force for good research, but one must be careful, for it is not always fruitful.


Bell, Stephanie (2001), “The Role of the State and the Hierarchy of Money”, Cambridge Journal of Economics, vol.25, no.2, pp.149–63.

Gao, Bai (2001), Japan’s Economic Dilemma: The Institutional Origins of Prosperity and Stagnation, Cambridge: Cambridge University Press.

Johnson, Chalmers (1996), MITI and the Japanese Miracle: The Growth of Industrial Policy 1925-1975, fourth printing, Tokyo: Charles E. Tuttle.

Knapp, Georg Friedrich (1924), The State Theory of Money, translated by H. M. Lucas and J. Bonar, abridged edition, London: Macmillan.

Kornai, Janos (1992), The Socialist System: The Political Economy of Communism, Princeton: Princeton University Press.

Mikuni, Akio and Taggart Murphy (2003), Japan’s Policy Trap: Dollars, Deflation and the Crisis of Japanese Finance, Washington: Brookings Institution Press.

About the Author

Katalin Ferber is a comparative economic historian who has taught at various universities in Japan. From April 2004, she takes up a position as associate professor in The International College of Waseda University. Her main research interest is the development of modern Japanese finance in the Meiji period and, especially, the history of the Japanese Deposit Fund and its role in empire building (1895–1945). Her most recent work, “‘Run the State Like a Business’: The Origin of the Deposit Fund in Meiji Japan”, was published in Japanese Studies in September 2002.

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