The beginning of the documentary, Princes of Yen, reads, “Central banks have the power to create economic, political and social change.” A documentary screened by my department’s Books and Documentary Club, it was an attempt for us to understand the meaning and the significance of the term, Lost Decade– Japanese Economic Crisis.
World War II had just ended and the United States had secured supremacy in Japan. Post the war, all Japanese banks were reeling under war loans and a significant portion, if not all, of the banking sector was bankrupt. The Bank of Japan tackled this issue by simply buying the banking sectors faulty papers-leading to valueless assets. In order to revive the economy the Bank of Japan followed several fiscal and monetary policies.
Though the Bank of Japan was supposed to report to the Ministry of Finance, it enjoyed complete autonomy when it came to credit creation and allocation. The Bank of Japan followed a monetary policy called; Window Guidance– refers to a policy in which the central bank places credit growth and allocation quotas on commercial banks, in order to re-build its economy. This essentially meant that the central bank allocated industries to which a particular commercial bank could lend and how much it could lend (all loans were split into sectors and sub-sectors). Hence, the Bank of Japan was able to control the growth of different sectors of the economy. This policy led to an increase in the standard of living, accompanied with even income distribution and growth. Between 1953 and 1965, GDP grew at more than 9% p.a, manufacturing and mining by 13% and infrastructure by 12%.
Another consequence of window guidance was the explicit control it gave to the Bank of Japan when it came to cartel control. In the war economy, industries competed not for profit, but for market share and hence, many would go bankrupt competing for the same- a phenomenon called excess competition.
However, acceptance of the role of extensive window guidance was downplayed by the Bank of Japan.
It was in the 1960’s that the Bank of Japan aimed to transform the economy into a free market economy like the United States, moving under the guidance of the invisible hand. It called for change not only of the wartime economic system, but also the political and social structure. The main aim was to create a big enough crisis, such that people are convinced that change is required.
The simplest way to do so was to create a bubble. This was created through excessive extension of loan quotas by the commercial banks, as directed by the Bank of Japan. This sharp growth in credit injection, led not only to a boom in the real estate sector, but also the stock markets. Between 1985 and 1989, stock and land prices rose 240% and 245% respectively. However, certain economists believed that the reason for skyrocketing prices was in fact the scarcity of land.
“Although Japan is only 126th the size of the United States, it’s land was valued at 4times that of the United States.”
Another consequence was the boom in the labour market, which lead to fears of a possible labour shortage. This culminated in firms taking final year students for luxurious vacations, enticing with hefty packages. Moreover, many small industries and traditional manufactures began investing in the stock market as well. In order to meet the quota banks began lending to high risk borrowers; lending even when demand for loans was dismally low. The bubble grew rapidly due to excessive creation of money by the Bank of Japan.
Banks began the accepting stocks as collateral, with stock prices as given, new money was generated. As more money entered the stock market, the stock prices rose significantly due to a similar action by all banks (simulataneously). This continued until the collapse of the Nikkei Stock Index by the early 1990’s. Though, the market collapsed by early 1992, the economy declined for another decade. This led to the creation of the term, “Lost Decade”.