# Princes of the Yen: Japan built, bubbled, and broken Japan rebuilt, risen, then bubbled and broken after the 1985 Plaza Accord as the US turned to China. Werner reads the crash as engineered; the mainstream sees policy error. *This story parallel: The world trade and money order* *This story parallel: The bankers* *This story parallel: The Bank for International Settlements* *This story parallel: The central bankers and the road to war* *This story part of: The Cold War* *This story part of: State, law, and coercion* *Capital and the totalitarianisms: who funded Stalin and Hitler parallel this story* *Paper money, central banks, and credit creation part of this story* *Reichsbank: independence, hyperinflation, and Hitler part of this story* *Japan's wartime command economy part of this story* *Occupation Japan keeps the controls part of this story* *The Bank of Japan's window-guidance machine part of this story* *Japan's miracle: guided credit and export power part of this story* *The Plaza Accord and the endaka turn part of this story* *Japan's asset bubble: credit orders, land, stocks, and the Nikkei part of this story* *The lost decade: credit crunch, stimulus, and broken banks part of this story* *Big Bang Japan: the Ministry of Finance loses power part of this story* *Asian crisis and the blocked Asian Monetary Fund part of this story* *Quantitative easing begins in Japan part of this story* *From Bretton Woods to the euro: monetary regimes around Japan part of this story* ## 10th century — Sung Dynasty launches the world's first paper money The world's first paper money was launched in the tenth century in China by the ruling Sung Dynasty, with the emperor as sole issuer and money creation by others punishable by death. > "The world’s first paper money was launched in the tenth century in China by the ruling Sung Dynasty." > — Princes of the Yen ## 13th century — Marco Polo in Kublai Khan's China Marco Polo spent twenty years in Kublai Khan's China in the late thirteenth century and delivered to Europe a detailed description of its advanced paper money system. > "It is at this time that a detailed description was delivered to Europe in the form of Marco Polo’s report of his twenty years spent in Kublai Khan’s China in the late thirteenth century." > — Princes of the Yen ## 1875 — Foundation of the Reichsbank The Reichsbank was founded in 1875 as a largely privately owned central bank accountable to its shareholders, giving it de facto independence from the German government. > "This independence existed to a great extent de facto since its foundation in 1875, because the central bank was largely privately owned and accountable to the shareholders.21" > — Princes of the Yen ## c. 1900 — United States overtakes Britain economically Growing rapidly without a central bank, the United States had just about overtaken Britain, then the world's leading economic power, by 1900. > "America did not fare badly without a central bank: It was the fastest-growing emerging market at the time and by 1900 had just about overtaken Britain, the world’s number one economic power." > — Princes of the Yen ## 1908 — Havenstein becomes Reichsbank president Rudolf von Havenstein became president of the German Reichsbank in 1908 and was a strong defender of central bank independence. > "Rudolf von Havenstein, for instance, became president of the Reichsbank in 1908 and strongly defended the principle of central bank independence." > — Princes of the Yen ## 1913 — Founding of the U.S. Federal Reserve The Federal Reserve was founded in 1913, half privately owned, after Congress was persuaded that a central bank could bail out banks in a crisis. > "The Federal Reserve was founded only in 1913 and remains half privately owned. A reluctant Congress was finally persuaded to agree to its establishment based on the argument that the central bank could step in and bail out banks when a banking crisis occurs." > — Princes of the Yen ## 1913 — Founding of the U.S. central bank The United States acquired a central bank as recently as 1913; until the advent of central banks, private banks printed and issued paper money whenever someone took out a loan. > "Until the advent of central banks (in the United States as recent as 1913), private banks therefore printed and issued paper money when someone took out a loan." > — Princes of the Yen ## 1920s to 1945 — Wartime consolidation of Japanese banks To simplify credit allocation, the number of Japanese banks was drastically reduced from about fourteen hundred at the end of the 1920s to sixty-four by the end of the Second World War, organized under the National Financial Control Association. > "To simplify the credit allocation regime, the number of banks was drastically reduced, from about fourteen hundred by the end of the 1920s to a mere sixty-four by the end of the Second World War." > — Princes of the Yen ## 1922 to 1923 — German hyperinflation under the Reichsbank The German central bank, then called the Reichsbank, created too much money in 1922 and 1923, causing hyperinflation, the episode usually cited to justify postwar central bank independence. > "It is well known that the German central bank, then called the Reichsbank, created too much money in 1922 and 1923, and hence caused hyperinflation." > — Princes of the Yen ## May 1922 to 1939 — Reichsbank independence written into law The Reichsbank's independence from the German government was explicitly written into law in May 1922 and lasted until 1939, leaving it unaccountable to the people, government, or parliament. > "Independence was explicitly written into law in May 1922 and lasted until 1939.22" > — Princes of the Yen ## 1923 — Schacht appointed Reichsbank president In 1923 the Allied Reparation Commission, dominated by Wall Street banks, handpicked and appointed Hjalmar Schacht as Reichsbank president against the wishes of the Reichsbank executives. > "It was this commission that handpicked and appointed Schacht in 1923 as Reichsbank president against the wishes of the Reichsbank executives." > — Princes of the Yen ## 1924 to 1931 — Reichsbank credit tightening and credit crunch From the mid-1920s until 1933 the Reichsbank adopted highly restrictive policies, with a first phase of credit tightening between 1924 and 1926 followed by an even worse credit crunch in 1931, bankrupting thousands of firms. > "The first phase of credit tightening, between 1924 and 1926, was followed by an even worse credit crunch in 1931. In both periods, thousands of firms failed to obtain funding and went bankrupt." > — Princes of the Yen ## 1924 — Reichsbank made independent after hyperinflation After the German hyperinflation of 1924 the Reichsbank was made independent from the government, leaving it free to impose credit controls as it wished; inflation had been brought under control by 1924. > "Since the Reichsbank had been made independent from the government after the hyperinflation of 1924, it could do as it wished." > — Princes of the Yen ## 1924 to 1930 — Schacht's reign as Reichsbank president Hjalmar Schacht headed the Reichsbank from 1924 until his resignation in 1930, wielding credit controls so powerful that contemporaries called him a credit dictator and the Reichsbank Germany's second government. > "Governments fell at a hectic pace, but Schacht remained firmly enthroned from 1924 until he resigned in 1930, a period that turned out to be crucial for Germany’s later development." > — Princes of the Yen ## August 1924 — New banking law confirms Reichsbank independence In August 1924 a new banking law reconfirmed the Reichsbank's independence from the government while greatly increasing the influence of Germany's foreign creditors, with the bank under the control of the Wall Street-dominated Reparations Commission. > "In August 1924, a new banking law again confirmed the Reichsbank’s independence from the government—”but greatly increased the influence over the central bank of Germany’s foreign creditors.”23" > — Princes of the Yen ## 1927 — Japanese banking crisis of 1927 Japan suffered a banking crisis in 1927, partly triggered by the aftereffects of the 1923 Great Kanto earthquake. > "Japan actually had an earlier banking crisis in 1927, partly triggered by the aftereffects of the 1923 Great Kanto earthquake." > — Princes of the Yen ## 1929 — New York stock market crash of 1929 The 1929 New York stock market crash had borderless fallout: distressed banks worldwide withdrew loans, bankrupting much of the corporate sector and producing deflation and mass unemployment, which cast doubt on the capitalist paradigm. > "The fallout from the New York stock market crash of 1929 was borderless. Worldwide, distressed banks withdrew their loans, bankrupting large proportions of the corporate sector and choking off demand, which led to deflation and large-scale unemployment." > — Princes of the Yen > "There is no better illustration of that law than the Crash of 1929" > — The Creature from Jekyll Island: A Second Look at the Federal Reserve, p. 515-519 ## 1929 — U.S. deposit withdrawals throw Germany into depression After the U.S. credit crunch that began in 1929, U.S. banks pulled their deposits from German banks and the Reichsbank made banks call in loans to German industry, forcing firm closures, mass unemployment, and Germany's plunge into the Great Depression. > "When U.S. banks pulled their deposits from German banks in the aftermath of the U.S. credit crunch that began in 1929, the Reichsbank insisted that the banks call in their loans to German industry to pay the U.S. depositors." > — Princes of the Yen ## c. 1930 — The Great Depression and the Fed's inaction During the Great Depression of the 1930s, the U.S. Federal Reserve failed for almost a decade to take the policies needed for recovery, watching as tens of thousands of banks went bankrupt with the savings of ordinary citizens. > "However, the Fed failed to take the policies that were necessary to create a recovery for almost a decade. Instead of intervening and implementing the policies for which it was created, namely, printing sufficient amounts of money and supporting the banks, the Fed watched as tens of thousands of banks went bankrupt, taking the savings and livelihoods of many ordinary citizens with them." > — Princes of the Yen ## 1930s — Japanese military fitness survey of the early 1930s A countrywide survey conducted by the Japanese military in the early 1930s found a high percentage of young men physically unfit for military service due to malnutrition, disease, and job-induced disabilities. > "A countrywide survey conducted by the military in Japan in the early 1930s found that a high percentage of young men were physically unfit for military service due to malnutrition, disease, and job-induced disabilities." > — Princes of the Yen ## 1931 — Manchuria placed under direct army rule Manchuria had been under direct Japanese army rule since 1931 and served as the testing ground where planners experimented with the prototype of the mobilized war economy before implementing it in Japan. > "They had gained invaluable experience in implementing and running this system when they were experimenting with its prototype in Manchuria, which had been under direct army rule since 1931." > — Princes of the Yen ## 1932 — Foreign exchange control laws of 1932 Japan's 1932 foreign exchange control laws were used to restrict imports and represented the first set of reforms that would eventually create a controlled war economy. > "The 1932 foreign exchange control laws were used to restrict imports. They had represented the first set of reforms that would eventually create a controlled war economy." > — Princes of the Yen ## 1932 to 1942 — Joseph Grew serves as U.S. ambassador to Japan Joseph C. Grew, married to a cousin of banker J. P. Morgan, was U.S. ambassador to Japan from 1932 until 1942, later becoming undersecretary at the State Department. > "Joseph C. Grew, married to the cousin of Wall Street banker John Pierpont Morgan, was ambassador to Japan from 1932 until 1942." > — Princes of the Yen ## 1933 to 1937 — Reichsbank's monetized fiscal policy under Schacht From 1933 to 1937 the Reichsbank under Hjalmar Schacht combined stepped-up central bank credit creation with fiscal spending programs funded by bills of exchange purchased by banks and the central bank, known in the German tradition as silent funding. > "This is effectively the policy combination adopted by the Reichsbank from 1933 to 1937." > — Princes of the Yen ## 1933 to 1939 — Schacht reappointed head of the Reichsbank under Hitler Hjalmar Schacht, who used his monetary powers to help hand Germany over to Adolf Hitler, was rewarded by being reappointed head of the Reichsbank from 1933 to 1939. > "The highly acclaimed monetary technician Hjalmar Schacht, for one, used his skills and legal powers to actively and purposely hand Germany over to Adolf Hitler. He was rewarded for his services by being reappointed as head of the Reichsbank from 1933 to 1939.27" > — Princes of the Yen ## 1936 — Hirota cabinet puts economy on quasi-war footing In 1936 the Hirota cabinet agreed to put Japan's economy on a quasi-war footing, beginning with a boost to the military expenditure budget. > "In 1936, the Hirota cabinet agreed to put the economy on a quasi-war footing. The first step was to boost the budget for military expenditure." > — Princes of the Yen ## 1937 — Full-scale war with China begins When hostilities with China turned into full-scale war in 1937, the Japanese military pushed through major changes under emergency war legislation, giving reform bureaucrats a mandate to build a mobilized economy. > "When hostilities with China turned into full-scale war in 1937, the military pushed through major changes under the cover of emergency war legislation, which gave the reform bureaucrats the mandate to establish a mobilized economy with strong government intervention." > — Princes of the Yen ## 1937 — Konoe cabinet promulgates three wartime control laws In 1937 the promilitary Konoe cabinet promulgated three wartime control laws that directed critical materials and capital to the munitions industry and expanded bureaucratic control over the economy. > "The 1937 promilitary cabinet of Konoe (the grandfather of 1993 prime minister Hosokawa) promulgated three wartime control laws. The Export-Import Commodities Emergency Measures Law ordered priority allocation of critical materials to the munitions industry." > — Princes of the Yen ## 1937 — Temporary Funds Adjustment Law With the reform bureaucrats in power after hostilities opened in China, the Temporary Funds Adjustment Law of 1937 brought banks' investment and loan decisions under strict control by the central bank and the Ministry of Finance. > "This law brought banks and their investment and loan decisions under strict control by the central bank and the Ministry of Finance. Funding through the stock market was reduced to a trickle, and the banking system was relied upon for resource allocation." > — Princes of the Yen ## 1937 to 1945 — Wartime transformation of the Japanese economy Between 1937 and 1945 the New Economic Order transformed Japanese firms from private profit-seeking undertakings into quasi-public ones focused on growth, replacing the prewar market mechanism with planning and government guidance. > "The changes implemented between 1937 and 1945 reshaped the function of the firm. Under the slogan “Public interest above individual interest,” the New Economic Order successfully transformed firms from private profit-seeking undertakings to quasi-public ones focusing on growth, not profits." > — Princes of the Yen ## October 1937 — Cabinet Planning Board established The Cabinet Planning Board, set up in October 1937, was designed as the economic general staff of the militarized economy, tasked with building a system for maximum growth and directing resources to priority industries. > "Overall coordination lay in the hands of the Cabinet Planning Board, set up in October 1937. It was designed as the economic general staff of the militarized economy." > — Princes of the Yen ## 1938 — Industrial Patriotic Societies established In 1938 the doctrine of the firm as an organic organization was officially implemented through Industrial Patriotic Societies in all companies, while trade unions were abolished and union activity channeled to the company level. > "The doctrine of the firm as an “organic organization” binding employers and employees together and serving for the public benefit was officially implemented in 1938, with the establishment of Industrial Patriotic Societies in all companies." > — Princes of the Yen ## 1938 to 1939 — Wartime health insurance laws The National Health Insurance Law of 1938 and the Personnel Health Insurance Law of 1939 provided virtually complete health coverage to employees, the most advanced welfare schemes in Asia. > "The National Health Insurance Law of 1938 and the Personnel Health Insurance Law of 1939 provided virtually complete health coverage to employees." > — Princes of the Yen ## April 1938 — National General Mobilization Law In April 1938 the sweeping National General Mobilization Law was put to the Diet, allowing mobilization of all physical things in the country and the drafting of imperial subjects; Konoe pushed it through against vigorous resistance. > "In April 1938, the sweeping National General Mobilization Law was put to the Diet. It allowed the mobilization of all physical things in the country, and it stated that “the Government may in time of war (including incidents that are to be treated as war) draft Imperial subjects and employ them in mobilization work as stipulated by Imperial Decree whenever necessary.”" > — Princes of the Yen ## April 1938 — National Savings Promotion Campaign launched In April 1938 a National Savings Promotion Campaign was launched to boost the savings rate to 30 percent of GNP, with savings committees spreading nationwide and a promotion agency established at the Bank of Japan. > "In April 1938, a National Savings Promotion Campaign was launched that aimed at boosting the savings rate to 30 percent of GNP." > — Princes of the Yen ## 1939 — Hitler dismisses Schacht and nationalizes the Reichsbank In 1939 Hitler sacked Schacht as Reichsbank president after disagreements and took more direct control over the central bank through a new law; he nationalized the Reichsbank the same year. > "But in 1939 Hitler sacked Schacht as Reichsbank president after disagreements, taking more direct control over the central bank through the new law." > — Princes of the Yen ## January 1939 — Reichsbank renamed and subordinated to the Reich government In January 1939 the Reichsbank Law was changed, renaming the bank the Deutsche Reichsbank and making it directly accountable and subordinate to the Reich government rather than private shareholders or the Reparations Commission. > "In January 1939, the Reichsbank Law was changed, with the central bank renamed the Deutsche Reichsbank and made directly accountable and subordinate to the Reich government, not private shareholders or the foreign Reparations Commission." > — Princes of the Yen ## April 1939 — Dividend increase permits required Beginning in April 1939, firms with dividend rates of 10 percent or more needed a Ministry of Finance permit to raise their dividend rate, making stock investment less attractive. > "Beginning in April 1939, firms with dividend rates of 10 percent or more—about two-thirds of large firms at the time—required a permit from the Ministry of Finance to increase their dividend rate." > — Princes of the Yen ## 1940 — Industrial Standardization Law The Industrial Standardization Law of 1940 set norms and standards rigorously enforced by the military, making quality control a lasting feature of Japanese manufacturing. > "Quality control had been a major concern of the military, which rigorously enforced norms and standards set by the Industrial Standardization Law of 1940." > — Princes of the Yen ## 1940 — Proclamation of the New Economic Order In 1940 the Konoe cabinet proclaimed the New Economic Order, composed of a New Financial System, a New Fiscal Policy, and a New Labor System, as Japan approached entry into World War II. > "With such legal powers in their hands and with the approach of Japan’s entry into World War II, the Konoe cabinet in 1940 proclaimed the New Economic Order, composed of a New Financial System, a New Fiscal Policy, and a New Labor System." > — Princes of the Yen ## 1940 to 1950 — Wartime switch to bank funding Between 1940 and 1950 Japanese firms radically switched their external funding from the stock market to bank borrowing, which averaged 60 percent of liabilities versus 40 percent equity; bank financing predominance persisted until the late 1980s. > "In the period from 1940 to 1950, on average 60 percent of firms’ liabilities consisted of bank borrowing and only 40 percent consisted of equity financing." > — Princes of the Yen ## 1942 — Bank of Japan Law of 1942 The Bank of Japan Law was introduced in 1942, largely as a translation of Hitler's Reichsbank Law of 1939. The Ministry of Finance later fought off attempts to change it while the BoJ kept sole charge of window guidance. > "While the ministry won the first political battle and avoided a change in the Bank of Japan Law (which had been introduced in 1942, largely as a translation of Hitler’s Reichsbank Law of 1939), the Bank of Japan remained solely in charge of window guidance." > — Princes of the Yen > "After his "parachute" study, which was published in 1942, Morrison's attention score and the research it generated seem not to be referred to again in the professional literature." > — Life in Classrooms ## 1942 to 1991 — Credit quantity as BoJ's central policy tool, 1942-1991 Research cited by the author shows the Bank of Japan used the quantity of credit creation as its central monetary policy operating and target variable at least from 1942 to 1991. > "Most importantly, as Werner (1998d, 1999a, 2002a) has shown, the central bank has used the quantity of credit creation as its central monetary policy operating and target variable at least throughout the period from 1942 to 1991." > — Princes of the Yen ## 1942 — National Financial Control Association established In 1942, as the mobilized war economy was fully implemented, the National Financial Control Association was established as the nerve center of wartime credit allocation, with Ichimada as its first secretary-general. > "The time to make full use of his knowledge and experience came in 1942, when the system of a mobilized war economy was being fully implemented and the National Financial Control Association was established." > — Princes of the Yen ## 1942 — Workmen's Annuity and Insurance Law The 1942 Workmen's Annuity and Insurance Law for the first time required payment of annuities for old age, disability, or death, and was broadened in 1944 to include other personnel and women. > "The 1942 Workmen’s Annuity and Insurance Law for the first time required the payment of annuities in case of old age, disability, or death. In 1944 it was broadened to include other personnel and women." > — Princes of the Yen ## October 1943 — Munitions Corporation Law promulgated As part of the 1943 Measures to Strengthen the Domestic System, corporate law was changed and the Munitions Corporation Law was promulgated in October 1943, eliminating shareholders' influence on firm management. > "Thus as part of the 1943 Measures to Strengthen the Domestic System, the corporate law was changed and a new Munitions Corporation Law was promulgated in October of that year. It eliminated shareholders’ influence on firm management." > — Princes of the Yen ## November 1943 — Creation of the Munitions Ministry In November 1943 the Cabinet Planning Board was united with the Ministry of Commerce and Industry to form the powerful Munitions Ministry, strengthening the planners' powers. > "The planners’ powers were also strengthened, when in November 1943 the Cabinet Planning Board was united with the Ministry of Commerce and Industry to form the powerful Munitions Ministry." > — Princes of the Yen ## 1944 to 1945 — Creation of the main bank system In 1944 key military suppliers were designated munitions companies, and in 1945 over six hundred firms were assigned designated banks by the Ministry of Finance under a compulsory lending system; these main bank relationships lasted into the present. > "In 1944, key producers of military supplies were designated as “munitions companies.” In 1945, over six hundred firms received necessary funds to fulfill their production quota via one or two banks that had been allocated to them by the Ministry of Finance." > — Princes of the Yen ## March 1944 — Share dividends capped at 5 percent In March 1944 the annual share dividend was decreased to 5 percent, eliminating residual shareholder influence and reducing shareholders to fixed-income investors without a vote. > "In March 1944, the annual share dividend was decreased to 5 percent. Any residual influence by shareholders over profit allocation, fund-raising matters, and the appointment of managers was eliminated." > — Princes of the Yen ## 1945 to 1952 — U.S. occupation of Japan The U.S. occupation, officially in charge until 1952, implemented reeducation and democratization, providing Japan with a new constitution, political parties, free elections including for women, and a market-oriented capitalist system. > "The U.S. occupation, officially in charge until 1952—longer than in Germany—implemented the U.S. program of reeducation and democratization of the Japanese people." > — Princes of the Yen ## August 1945 to October 1945 — Araki appointed BoJ deputy governor, then governor Immediately after Japan's defeat in August 1945, Eikichi Araki, former wartime head of the Banking Department, was appointed deputy governor of the Bank of Japan, and two months later governor. > "Immediately following Japan’s defeat in August 1945, he was appointed deputy governor of the Bank of Japan. Two months later, he was appointed governor." > — Princes of the Yen ## August 1945 — Japan's defeat in World War II Japan's defeat in 1945 is widely regarded as a watershed heralding a new Japan, with burned-down cities and destroyed factories marking the end of the war in August 1945. > "The defeat of 1945 is often regarded as a watershed that heralded the beginning of a new Japan." > — Princes of the Yen ## 30 August 1945 — MacArthur arrives at Atsugi; BoJ money accepted General MacArthur arrived at Atsugi naval airdrome on August 30, 1945, where Bank of Japan officials reportedly met him with banknotes; MacArthur accepted BoJ money rather than issuing military currency. > "Legend has it that Haruo Maekawa was one of the monetary officials who met General MacArthur with a suitcase full of banknotes upon his arrival in Atsugi naval airdrome on Tokyo’s outskirts on 30 August 1945." > — Princes of the Yen ## September 1945 — Occupation Order No. 3 continues economic controls Order No. 3 of the occupation forces of September 1945 declared the continuation of Japan's wartime economic controls, and foreign currency rationing was reintroduced immediately. > "Certain wartime legislation was officially reintroduced soon after the war, especially by MITI and MoF: the Order No. 3 of the occupation forces of September 1945 declared the continuation of economic controls." > — Princes of the Yen ## 2 September 1945 — The US occupation of Japan begins After Japan's surrender, the United States occupied the country under General Douglas MacArthur as Supreme Commander for the Allied Powers. The early occupation aimed to demilitarize Japan and break up the zaibatsu conglomerates. It also wrote a new pacifist constitution and pushed land reform and the rights of labor. ## December 1945 — Munitions Ministry and Home Ministry broken up In December 1945 the occupation broke up the Munitions Ministry, the heart of the war economy, along with the powerful Home Ministry and its police apparatus including the Thought Police. > "The Munitions Ministry, at the heart of the war economy, was broken up in December 1945. So was the powerful Home Ministry, with its police apparatus, including the dreaded Thought Police." > — Princes of the Yen ## 1946 — Ichimada appointed Bank of Japan governor In 1946, with the approval of the U.S. occupation, Hisato Ichimada, a Bank of Japan official trained in credit creation who had studied Schacht's Reichsbank in Berlin, was appointed BoJ governor. > "In 1946, with the approval of the U.S. occupation, a young Bank of Japan official named Hisato Ichimada was appointed BoJ governor." > — Princes of the Yen ## 1946 — Nationalization of the Bank of England The British Labour government nationalized the Bank of England in 1946, following the earlier nationalization of the German Reichsbank. > "The British Labor government followed suit in 1946 by nationalizing the Bank of England." > — Princes of the Yen ## March 1946 — Bank of Japan freezes loan balances The Bank of Japan's Banking Department instructed that banks could not in principle increase their outstanding loan balances beyond the level of 20 March 1946 without a permit from the Bank of Japan and the government, blocking low-priority claims on scarce resources. > "The Bank of Japan’s control had already been asserted a year earlier, when the director of the Banking Department had issued instructions that “in principle” banks were not allowed to increase their outstanding loan balance beyond the balance of 20 March 1946 without a permit from the Bank of Japan, as well as the government." > — Princes of the Yen ## June 1946 — Araki indicted by war crimes prosecutors and resigns In June 1946 BoJ governor Araki was indicted by war crimes prosecutors and had to resign, whereupon Hisato Ichimada took over as governor. > "However, as with many members of the Manchurian elite, in June 1946 he was indicted by the war crimes prosecutors and had to resign." > — Princes of the Yen ## June 1946 to December 1954 — Ichimada rules the BoJ for eight and a half years Hisato Ichimada, known as 'the Pope,' controlled the economy as Bank of Japan governor from June 1946 to December 1954 through his decrees on who would receive money. > "His “infallible” decrees about who would or would not receive money ruthlessly controlled the economy for eight and a half years, from June 1946 to December 1954, while his mentor Araki oiled the communications pipeline from Washington." > — Princes of the Yen ## August 1946 to 1952 — Economic Stabilization Board established The wartime Cabinet Planning Board was revived as the powerful but short-lived Economic Stabilization Board, established in August 1946 and lasting until 1952, to direct postwar funding of the economy. > "The Cabinet Planning Board was revived in the form of the powerful but short-lived (1946–52) Economic Stabilization Board (ESB or Keizai Antei Honbu), established in August 1946." > — Princes of the Yen ## October 1946 to 1952 — Temporary Materials Ordinance and Price Control Ordinance In October 1946 occupied Japan enforced the Temporary Materials Ordinance, and in the same year the Price Control Ordinance revived and strengthened the wartime price-fixing system through the new Price Agency; both were undone in 1952. > "In October 1946, the Temporary Materials Ordinance was enforced, similar to the wartime laws (it was repealed in 1952). In the same year the Price Control Ordinance not only revived the wartime price-fixing system, but also strengthened it through the founding of the Price Agency (which was dissolved in 1952)." > — Princes of the Yen ## c. 1946 — Purge of the zaibatsu families Under the U.S. occupation the zaibatsu owners were forced to sell their stocks to the public, holding companies were banned entirely until 1998, and zaibatsu leaders were purged and prohibited from further business activity. > "The zaibatsu owners were forced to sell their stocks to the public, and the holding companies were forbidden entirely (until 1998)." > — Princes of the Yen ## 1947 — Anti-Monopoly Law enacted An Anti-Monopoly Law and a Law for the Elimination of Excessive Concentration of Economic Power were enacted in 1947 as part of the occupation's deconcentration program. > "An Anti-Monopoly Law and a Law for the Elimination of Excessive Concentration of Economic Power were enacted in 1947." > — Princes of the Yen ## 1947 — Priority lending regulations of 1947 With the 1947 Regulations on the Provision of Funds by Financial Institutions, announced by the Ministry of Finance, the government reestablished the wartime priority production system, ranking 460 types of business into lending categories. > "Second, the government planners took the initiative to reestablish the priority production system from the wartime era with the 1947 Regulations on the Provision of Funds by Financial Institutions (Kinyū Kikan Shikin Yūzū Junsoku), announced by the Ministry of Finance." > — Princes of the Yen ## 1947 — Temporary Interest Rates Adjustment Law reintroduced In 1947 the occupation reintroduced the wartime interest-fixing law as the Temporary Interest Money Rates Adjustment Law, enabling the BoJ and Ministry of Finance to set interest rate ceilings; it remained 'temporary' until the 1980s. > "The Temporary Money Rates Adjustment Law, which fixed interest rates, was reintroduced in 1947 by the occupation as the Temporary Interest Money Rates Adjustment Law. It enabled the BoJ and MoF to set maximum ceilings on interest rates." > — Princes of the Yen ## 1947 to 1949 — Temporary Law for Credit Allocation enacted and rescinded In 1947 the Temporary Law for Credit Allocation moved the Bond Committee to the central bank; in 1949 the law was rescinded and the Ministry of Finance reclaimed oversight of private-sector bond issuance. > "In 1947, the Temporary Law for Credit Allocation moved the Bond Committee (Kisai Kai) to the central bank, putting it in charge of bond issuance. In 1949, the Temporary Law for Credit Allocation was rescinded, and MoF reclaimed oversight of private-sector bond issuance, which was subject to approval by its securities bureau." > — Princes of the Yen ## 1947 — U.S. reverse course on occupation policy By 1947, with the advent of the Cold War, MacArthur's democratization policies had been seriously undermined and a major unannounced U-turn in the U.S. stance toward Japan had taken place, with GHQ now advancing the continuation of the wartime mobilization system. > "Already by 1947, General MacArthur’s democratization policies had been seriously undermined. Although there was no official announcement, a major U-turn of the U.S. stance vis-à-vis Japan had taken place." > — Princes of the Yen ## January 1947 — Reconstruction Finance Bank established In January 1947 the Reconstruction Finance Department was separated from the Industrial Bank of Japan and established as the public Reconstruction Finance Bank, tasked with preferential funding of strategic industries and funded by government bills the central bank had to discount. > "In January 1947, it was separated and established as the public Reconstruction Finance Bank (Fukkō Kinyū Kinko), whose job was to provide preferential funding to strategic industries." > — Princes of the Yen ## March 1947 — Emergency Measures Law of March 1947 Japan's postwar financial control measures, compared by Yoshino to Schacht's policies of the early 1920s, were fully implemented with the Emergency Measures Law of March 1947. > "With the Emergency Measures Law of March 1947, they were fully implemented." > — Princes of the Yen ## 1948 — Deconcentration program abandoned Of the 325 firms scheduled for dismantling in 1948, only 18 were actually split up, and the planned breakup of the five largest banks was abandoned, leaving the financial system unchanged from its wartime setup. > "Of the 325 firms scheduled for dismantling in 1948, only 18 were actually split up." > — Princes of the Yen ## July 1948 — Occupation restricts trade-based unions In July 1948, alarmed by communist influence over the labor movement, the U.S. occupation restricted the right to form trade-based unions and abolished civil servants' right to strike, after which wartime company unions were revived. > "In July 1948 it restricted the right to form trade-based unions and abolished the right of civil servants to engage in strikes." > — Princes of the Yen ## December 1948 — Nine-Point Economic Stabilization Program In December 1948 Washington instructed SCAP to issue a Nine-Point Economic Stabilization Program recommending tighter monetary and fiscal policies for Japan. > "Ichimada’s views were heard in Washington, which first instructed SCAP (the Supreme Commander for the Allied Powers) to issue a Nine-Point Economic Stabilization Program in December 1948 that recommended tighter monetary and fiscal policies." > — Princes of the Yen ## c. 1948 — The reverse course rebuilds Japan as a Cold War anchor As the Cold War hardened, US policy shifted from punishing Japan to rebuilding it as a stable, anti-communist ally in Asia. Officials eased the breakup of big business, curbed the unions they had earlier encouraged, and prioritized economic recovery. This shift is known as the reverse course. ## 1949 — Bank of Japan Policy Board introduced A nominal Policy Board was introduced at the Bank of Japan in 1949, but Ichimada ensured it was placed inside the central bank and under its control, creating a sleeping board that made no important decisions. > "Apart from the marginal change that resulted from the introduction of the nominal Policy Board in 1949, the law was still the same one that had been introduced in 1942, when the control bureaucrats were in charge." > — Princes of the Yen ## 1949 to April 1998 — Foreign Exchange and Foreign Trade Control Law The Foreign Exchange and Foreign Trade Control Law, promulgated in 1949, continued the series of control laws begun with the Capital Flight Prevention Law of 1932 and remained in force until April 1998. > "The Foreign Exchange and Foreign Trade Control Law, promulgated in 1949, was merely a continuation of the laws that started with the Capital Flight Prevention Law of 1932, the first series of laws that established the controlled war economy. It lasted until April 1998." > — Princes of the Yen ## 1949 — The Dodge Line imposes austerity and fixes the yen Detroit banker Joseph Dodge, sent by Washington, forced a harsh stabilization program on Japan to kill runaway inflation. He balanced the budget, cut subsidies, and pegged the yen at 360 to the dollar, an exchange rate that later helped exports. The squeeze caused a sharp recession before recovery took hold. ## February 1949 to April 1949 — Dodge mission and the Dodge plan Joseph Dodge, president of Detroit Bank, was sent to Japan from February to April 1949 as adviser to SCAP; his plan, passed unaltered by parliament, prescribed an overbalanced budget, ended deficit spending, and decreed the end of the Reconstruction Finance Bank. > "Washington next sent Joseph Dodge, president of Detroit Bank, to Japan with the rank of minister from February to April 1949 as adviser to SCAP." > — Princes of the Yen ## April 1949 — Yen fixed at 360 per dollar On the recommendation of Detroit bank president Joseph Dodge, a single fixed exchange rate of 360 yen to the dollar was set in April 1949, weaker than an earlier U.S. mission had recommended and a lasting boost to Japanese exporters. > "What is known is that Detroit bank president Joseph Dodge recommended the establishment of a single fixed exchange rate, which was set at ¥360/$ in April 1949." > — Princes of the Yen ## May 1949 — MITI and the developmental state take shape Japan created the Ministry of International Trade and Industry, known as MITI, to steer industrial policy. It guided credit, technology, and foreign exchange toward chosen industries such as steel, shipbuilding, and later electronics and autos. Scholars call this close partnership of state and business the developmental state. ## June 1949 — Bank of Japan Policy Board established The Bank of Japan's Policy Board was established in June 1949, the only change made to the wartime BoJ Law of 1942 until that law was scrapped in 1998; it was widely known as a sleeping board. > "The Policy Board was established in June 1949—the only change made to the BoJ Law of 1942 until it was scrapped in 1998." > — Princes of the Yen ## 1950 to 1951 — Postal-savings-funded government banks created Following the end of the Reconstruction Finance Bank, government banks such as the Japan Export Bank in 1950 and the Japan Development Bank in 1951 were funded from postal savings, leaving them without power to create credit. > "It established the principle that henceforth government banks, such as the Japan Export Bank (1950) or the Japan Development Bank (1951), would be funded from postal savings." > — Princes of the Yen ## June 1950 — The Korean War procurement boom lifts Japanese industry When the Korean War broke out, the US military bought vast supplies from Japanese factories, from trucks and textiles to munitions. These special procurements, called tokuju, poured dollars into the economy and pulled it out of the Dodge Line slump. The war became a launch pad for Japan's industrial recovery. ## 1952 — Araki appointed ambassador to the United States In 1952, shortly after the ban on suspected war criminals holding public office was lifted in 1951, Araki was appointed Japan's ambassador to the United States, the most important diplomatic post. > "in 1952, Araki was appointed ambassador to the United States, almost straight from being under investigation for war crimes." > — Princes of the Yen ## 1952 — Enterprise Rationalization Promotion Law The Enterprise Rationalization Promotion Law of 1952 established very high depreciation rates for important machinery, creating large tax incentives to accelerate capital investment; its origin lay in the wartime Price Compensation System of 1943. > "The Enterprise Rationalization Promotion Law of 1952 established a depreciation system for important machinery with very high rates of depreciation and hence large tax incentives to accelerate capital investment." > — Princes of the Yen ## 1953 — Anti-Monopoly Law watered down By 1953, a year after the U.S. occupation left, the Anti-Monopoly Law had been drastically watered down: restrictions on stock retention, interlocking directorships, and mergers were relaxed, and depression and rationalization cartels allowed. > "By 1953, just a year after the departure of the U.S. occupation, the Anti-Monopoly Law had already been drastically watered down. Restrictions on stock retention, interlocking directorships, and mergers were relaxed, depression and rationalization cartels allowed." > — Princes of the Yen ## 1954 — Abolition of the Loan Coordination Division announced To appease critics and fend off Ministry of Finance influence, the abolition of the Bank of Japan's Loan Coordination Division was announced in 1954, while all credit control powers were quietly retained by the Banking Department. > "To appease critics, and fend off attempts by the Ministry of Finance to influence its policies, its abolition was announced in 1954." > — Princes of the Yen ## 1954 to 1956 — Araki returns as BoJ governor After the U.S. occupation ended, Araki moved back from the ambassadorship to head the central bank again, serving as Bank of Japan governor from 1954 to 1956. > "Araki switched surprisingly smoothly back from U.S. ambassador to central banker and controlled Japan’s economy again as BoJ governor from 1954 to 1956." > — Princes of the Yen ## 1954 — Ichimada becomes Minister of Finance After serving as the longest-serving Bank of Japan governor, Hisato Ichimada was appointed minister of finance in 1954, giving him legal control over monetary policy and a platform to lobby for greater BoJ independence. > "In 1954, having been the longest-serving Bank of Japan governor, Ichimada became minister of finance. Now his control over monetary policy was legal." > — Princes of the Yen ## 10 December 1954 to 12 June 1958 — Ichimada serves as finance minister Former BoJ governor Ichimada was appointed finance minister in the first Hatoyama cabinet on December 10, 1954, was reappointed twice, and later served in the first Kishi cabinet until resigning on June 12, 1958. > "Ichimada was appointed as finance minister to the first Hatoyama cabinet on December 10, 1954. He was reappointed to the second Hatoyama cabinet (on March 19, 1955) and to the third (on November 22, 1955). He resigned with the entire cabinet on December 20, 1956." > — Princes of the Yen ## 1955 — Commercial Law Article 280 amended In 1955 the Diet revised Paragraph 2 of Article 280 of the Commercial Law, allowing company boards to issue additional shares and assign them to each other without approval from current stockholders, enabling cross-shareholding takeover defenses. > "“The new provision allowed the board of a company to issue additional shares and assign them to each other—that is, they dilute the present stock of shares without obtaining formal approval from the current stockholders.”" > — Princes of the Yen ## 1955 to 1993 — Formation of the Liberal Democratic Party The unification of several parties created the Liberal Democratic Party in 1955, establishing a one-party reign resembling the wartime Imperial Rule Assistance Association system; all governments were solely LDP until 1993. > "It remains to say that the unification of several parties to create the so-called Liberal Democratic Party in 1955 established the one-party reign (if not rule) that provided the democratic fig leaf for the control bureaucrats who were actually running the country." > — Princes of the Yen ## September 1955 — Japan joins GATT Japan attained GATT membership in September 1955, having secured exemptions to the membership rules; the Diet revised the Commercial Law the same year to enable takeover defenses. > "In 1955, just in time for GATT membership in September of that year, the Diet revised and amended Paragraph 2 of Article 280." > — Princes of the Yen ## c. 1955 — Keiretsu and the main bank system organize the economy Postwar Japan reorganized big business into keiretsu, loose groups of firms tied together by cross-shareholdings and a shared main bank. The main bank supplied patient credit and monitored the companies it lent to. This structure favored long-term investment and market share over short-term profit. ## 1956 — Government committee established to review Bank of Japan Law In 1956 the LDP government set up a forty-five-member investigation committee of academics, bankers, journalists, and MoF and BoJ representatives to consider revising the Bank of Japan Law. > "In 1956, the LDP government established an investigation committee to consider changes in the Bank of Japan Law." > — Princes of the Yen ## 1957 to 1972 — Kishi and Sato premierships Nobosuke Kishi, the wartime munitions minister and leading Manchurian control bureaucrat, and his brother Eisako Sato were prime ministers for a combined ten years between 1957 and 1972. > "Kishi and his brother, Eisako Sato (a former railway bureaucrat), were prime ministers for altogether ten years, between 1957 until 1972." > — Princes of the Yen ## 25 February 1957 to 6 July 1972 — Premierships of Kishi and Sato Nobusuke Kishi served as Japanese prime minister from February 25, 1957 to July 19, 1960, and Eisaku Sato from November 9, 1964 to July 6, 1972. > "Kishi was prime minister from February 25, 1957, to July 19, 1960, Sato from November 9, 1964, to July 6, 1972." > — Princes of the Yen ## 1958 — Committee recommends monetary policy freedom for the BoJ In 1958 the government committee recommended that the BoJ should be free to decide monetary policy, with MoF only able to request a delay, and that price stability become the main policy objective. > "In 1958, it recommended that the BoJ should have freedom to decide monetary policy, while MoF would only be able to request a delay of a BoJ decision. It also recommended that price stability should become the main objective of BoJ policy." > — Princes of the Yen ## October 1958 — BoJ publicly abolishes window guidance In October 1958, while the government committee deliberated the BoJ Law, the Bank of Japan removed window guidance from public view by officially abolishing it, though the credit controls continued in practice through reserve requirements. > "Already in October 1958, when the government committee deliberated the BoJ Law, the BoJ had removed window guidance from public view by abolishing it under the pretense that it had become ineffective." > — Princes of the Yen ## 1960 — Ikeda becomes prime minister with the income doubling plan Hayato Ikeda became prime minister in 1960 and made the income doubling plan his cabinet's major policy aim, with fiscal expenditures rising more than 25 percent per year on the back of high growth. > "When Hayato Ikeda became prime minister in 1960 and his cabinet made the “income doubling plan” its major policy aim, fiscal expenditures increased by more than 25 percent per year." > — Princes of the Yen ## 1960 — The Income Doubling Plan launches the high-growth era Prime Minister Hayato Ikeda pledged to double national income within a decade, focusing the nation on rapid growth. Real output grew at close to ten percent a year through the 1960s. The plan channeled public attention away from bitter security politics and toward prosperity. ## 1960 — U.S.-Japan Security Treaty pushed through the Diet In 1960 Prime Minister Kishi pushed the U.S.-Japan Security Treaty through the Diet despite severe public opposition, having police remove opposing politicians; the treaty was ratified at the cost of his career. > "Kishi even sacrificed his political career when his U.S. friends asked him to push the U.S.-Japan Security Treaty through the Diet in 1960, despite severe public opposition. By having police remove opposing politicians from parliament, the treaty was ratified, though at the cost of Kishi’s career." > — Princes of the Yen ## April 1960 — Finance Minister Sato declines to revise the BoJ Law In April 1960 the new finance minister Eisaku Sato declared that with two conflicting committee recommendations he could not introduce legislation to change the BoJ Law, leaving MoF's legal supremacy over the central bank intact. > "In April 1960, the new finance minister, Eisaku Sato (brother of Prime Minister Nobosuke Kishi and nephew of their uncle Yosuke Matsuoka, the great industrialist of the Manchurian war economy), declared that with two conflicting recommendations from the committee, he could not introduce new legislation to change the BoJ Law.62" > — Princes of the Yen ## 1961 — First round of Japanese trade liberalizations Japan carried out its first round of trade liberalizations in 1961, but the United States remained dissatisfied and demanded the abolition of Japanese import restrictions to reduce the trade imbalance. > "The first round of trade liberalizations had taken place in 1961, but the U.S. side was dissatisfied and demanded abolition of Japanese import restrictions in order to reduce the trade imbalance." > — Princes of the Yen ## 1962 — Sasaki becomes de facto head of the Bank of Japan After heading the Banking Department from April 1951 to September 1954 and administering Ichimada's credit allocation regime, Tadashi Sasaki was appointed executive director and in 1962 became de facto head of the BoJ as deputy governor and later governor. > "After this, Sasaki was appointed executive director and, in 1962, became the de facto head of the Bank of Japan as deputy governor and then governor." > — Princes of the Yen ## 1963 — Emergency Financial Order repealed In 1963, as part of liberalization ahead of Japan's OECD entry, the Emergency Financial Order was repealed, removing a potential legal basis for Ministry of Finance involvement in credit allocation. > "In 1963, as part of the liberalization policies in the run-up to Japan’s entry into the OECD, the Emergency Financial Order (Kinyū Kinkyū Sochi Rei) was repealed.63" > — Princes of the Yen ## 1964 — BoJ reintroduces window guidance to slow the economy In 1964 the Bank of Japan under Deputy Governor Sasaki suddenly reintroduced window guidance credit controls, broadening them to trust, regional, and mutual banks, and used them to slow the economy; growth fell from 11 percent in 1964 to 5.8 percent in 1965. > "Having previously abolished window guidance, in 1964, the Bank of Japan, under Deputy Governor Sasaki, suddenly reintroduced the credit controls, broadened their scope to further include trust, regional, and mutual banks, and used them to slow the economy." > — Princes of the Yen ## October 1964 — The Tokyo Olympics and the bullet train announce Japan's arrival Japan hosted the 1964 Summer Olympics and opened the Shinkansen bullet train between Tokyo and Osaka days before. Both showcased a rebuilt, modern nation less than twenty years after defeat. They marked Japan's return to the front rank of industrial countries. ## July 1965 — Window guidance abolished again With window guidance attracting public attention after the Yamaichi episode, the Bank of Japan once more abolished the credit controls in July 1965, though the controls continued informally. > "As window guidance had again caught some public attention, it was once more abolished in July 1965." > — Princes of the Yen ## November 1965 — First postwar Japanese government bonds issued After Tanaka agreed to change the Finance Law to permit bond issuance, the first batch of Japanese government bonds came onto the market in November 1965, tipping the power balance between MoF and the BoJ in the central bank's favor. > "In November 1965, the first batch of Japanese government bonds (JGBs) came onto the market. This change tipped the power balance between MoF and the BoJ distinctly in favor of the BoJ." > — Princes of the Yen ## c. 1965 — Run on Yamaichi Securities and forced BoJ rescue After stocks crashed, the fourth biggest broker Yamaichi Securities suffered a customer run, and Finance Minister Kakuei Tanaka demanded that the Bank of Japan extend unlimited credit to Yamaichi and expand credit creation, which the legally subordinate BoJ had to do. > "As small investors pulled their money out of the market, the fourth biggest broker, Yamaichi Securities, experienced a run by its customers. Finance Minister Kakuei Tanaka was quick to take appropriate action. He went straight to the Bank of Japan and demanded unlimited credit for Yamaichi Securities and an increase in credit creation for the economy." > — Princes of the Yen ## 1966 — Cross-shareholding program completed By 1966 the program to boost stable cross shareholdings among Japanese firms was virtually completed, and Article 280 was modified again to give the appearance of propriety and avoid foreign criticism. > "By 1966, the program to boost stable cross shareholdings was virtually completed. To prevent the possibility of criticism from abroad, the bureaucrats and business leaders decided to modify Article 280 to give the appearance of propriety." > — Princes of the Yen ## 1966 to 1982 — Tight Bundesbank policy linked to fall of three chancellors The downfalls of chancellors Ludwig Erhard in 1966, Kurt Georg Kiesinger in 1969, and Helmut Schmidt in 1982 were directly or indirectly linked to tight Bundesbank policies. > "The downfall of three chancellors—Ludwig Erhard in 1966, Kurt Georg Kiesinger in 1969, and Helmut Schmidt in 1982—was directly or indirectly linked to tight Bundesbank policies.33" > — Princes of the Yen ## 1967 — German parliament passes the Stability and Growth Act In 1967, ten years after the Bundesbank's founding, the German parliament passed the Stability and Growth Act, mandating the central bank to pursue price stability, high employment, external equilibrium, and steady adequate economic growth. > "In 1967, ten years after the founding of the Bundesbank, the parliament passed the Stability and Growth Act, which clearly set out the objectives of its policy as “price stability, a high level of employment, external equilibrium, steady and adequate economic growth.”" > — Princes of the Yen ## September 1967 to 1969 — Window guidance reintroduced and expanded The Bank of Japan reintroduced window guidance credit controls in September 1967 and widened their scope in 1969 to cover all private-sector credit creators. > "Window guidance was reintroduced in September 1967, and in 1969 the scope was widened to include all private-sector credit creators." > — Princes of the Yen ## 1968 — Japan becomes the world's number-two economy By 1968 Japan's output passed West Germany's, making it the second largest economy in the non-communist world after the United States. Export-led growth in cars, ships, steel, and electronics drove the rise. Japan held the number-two rank for more than four decades. ## 1970 — Japan becomes the world's second-largest economy Between 1960 and 1970 Japan's real GDP rose 2.6 times, and by 1970 it had overtaken Germany to become the number two economic power in the world. > "By 1970, Japan had overtaken Germany and soared from the ashes to become the number two economic power in the world." > — Princes of the Yen ## 1970 — Zenith files dumping suit against Japanese television makers In 1970 the U.S. television maker Zenith filed a suit charging that Japan was dumping television sets in the United States, an early episode in the escalating U.S.-Japan trade disputes. > "In 1970, the U.S. television maker Zenith filed a suit charging that Japan was dumping television sets in the United States." > — Princes of the Yen ## c. 1970 — Japanese exports spark trade friction with the United States Through the 1970s and 1980s a flood of Japanese cars, televisions, and semiconductors captured American markets. US industries and unions accused Japan of unfair advantage and a closed home market, and pressed Washington to act. Trade friction became a central strain in the alliance. ## 1970s — Japan's first postwar bubble economy In the 1970s the Bank of Japan used window guidance to order banks to expand credit to speculative real estate borrowers, causing land prices to soar and Japan's first postwar bubble, followed by recession. > "Using window guidance, it ordered the banks to expand credit to speculative real estate borrowers. As a result, land prices soared and Japan found itself in the midst of the first postwar bubble economy." > — Princes of the Yen ## 1971 — End of the Bretton Woods system Under the Bretton Woods system, which lasted until 1971, much of the world had fixed exchange rates with the U.S. dollar, forcing other countries to accept dollars at given rates while the United States printed large amounts of them. > "At the time, much of the world had fixed exchange rates with the U.S. dollar under the Bretton Woods system (until 1971)." > — Princes of the Yen ## August 1971 — Nixon shock ends dollar-gold convertibility In August 1971, after France demanded conversion of its dollars into gold, the United States suspended the convertibility of dollars into gold, collapsing the fixed exchange rate system and sending the dollar sharply lower. > "Consequently, in August 1971, in what is often called the “Nixon shock,” the United States had to suspend the convertibility of dollars into gold. The fixed exchange rate system collapsed and the U.S. dollar fell sharply on world markets." > — Princes of the Yen ## December 1971 — Smithsonian Agreement fixes the yen at 308 per dollar After the yen rose following the Nixon shock, the short-lived Smithsonian Agreement of December 1971 fixed the yen at 308 to the dollar. > "Then, the yen rose, triggering the short-lived Smithsonian Agreement, which fixed it at ¥308/$ in December 1971." > — Princes of the Yen ## 1972 to 1973 — Japan's first bubble economy in land and stocks Overdone BoJ monetary stimulus after the Nixon shock fueled speculative land purchases and a stock boom, with land prices exploding in 1972 and 1973 and the Nikkei rising from 3,000 in March 1972 to 5,000 by year-end. > "Land prices exploded in 1972 and 1973. Capital gains on land holdings produced substantial paper profits." > — Princes of the Yen ## 1972 — Karl Schiller forced out over Bundesbank dispute In 1972 German economics and finance minister Karl Schiller argued for revaluing the DM against excessive U.S. credit creation; the Bundesbank under President Klasen refused and the popular minister was forced out of government, though the Bundesbank took his advice a year later. > "For instance, in 1972, when economics and finance minister Karl Schiller correctly argued that the excessive credit creation by the United States and massive flight from the dollar should be countered by revaluing the DM, the Bundesbank under President Klasen refused. The highly popular and hitherto successful minister was forced out of the government and resigned." > — Princes of the Yen ## 1973 to 1975 — BoJ imposes tight window guidance to end the credit boom From the first quarter of 1973 the Bank of Japan imposed tight window guidance loan growth ceilings, ratcheting quotas down quarter after quarter, with the tight controls lasting until early 1975. > "From the first quarter of 1973, it imposed tight window guidance loan growth ceilings. First, it reduced loan growth to the modest growth rate of 12.7 percent YoY." > — Princes of the Yen ## November 1973 — Oil shock hits Japan The oil shock of November 1973 sent oil prices jumping and triggered panic buying of consumer staples in Japan, including the legendary Osaka toilet paper run. > "All this happened before the oil shock of November 1973. The sudden jump in oil prices did not assuage the situation (although it was mitigated by the strong yen)." > — Princes of the Yen ## 1974 — Alternating MoF-BoJ governorship tradition begins The tradition of alternating the Bank of Japan governorship between Ministry of Finance alumni and trueborn BoJ men began in 1974, when BoJ governor Sasaki was succeeded by ex-MoF man Morinaga. > "This tradition started in 1974, when trueborn BoJ governor Sasaki was succeeded by the ex-MoF man Morinaga." > — Princes of the Yen ## 1974 — Inflation peaks with 26 percent consumer price rise In 1974, following the credit boom and oil shock, Japan's consumer price index rose 26 percent year-on-year and the wholesale price index 37 percent, creating social friction. > "In 1974, the consumer price index rose 26 percent year-on-year (YoY) and the wholesale price index 37 percent." > — Princes of the Yen ## 1974 to 1975 — Japan sinks into its biggest postwar recession After the credit tightening, bad debts piled up, industrial production dropped 19 percent between late 1973 and early 1975, and real GDP growth fell to virtually nil in 1974, ending Japan's high-growth era. > "Real GDP growth dropped precipitously from around 15 percent in the 1960s to virtually nil in 1974—and Japan sank into its biggest postwar recession.7" > — Princes of the Yen ## c. 1974 — Bank runs on credit associations As insolvencies from speculative real estate lending surfaced during the mid-1970s bust, several shaky credit associations faced full-scale bank runs, and MoF and BoJ officials were dispatched to Aichi Prefecture to reassure depositors. > "As this became apparent, a number of shaky credit associations faced full-scale bank runs. The Ministry of Finance and the Bank of Japan were forced to dispatch officials to Aichi Prefecture to reassure residents that their deposits in the local credit union were secure." > — Princes of the Yen ## 1975 — Fiscal stimulus packages fail to revive the economy The government launched a string of fiscal stimulus packages in February, March, and June 1975 and repeatedly cut interest rates, but the economy did not respond while BoJ credit controls stayed tight. > "Despite a string of fiscal stimulus packages, such as in February, March, and June 1975, and a repeated reduction in interest rates, the economy did not respond." > — Princes of the Yen ## April 1975 to February 1978 — Mieno heads the BoJ Banking Department From April 1975 to February 1978, Yasushi Mieno headed the Bank of Japan's Banking Department, in charge of implementing window guidance, during the recovery engineered by raising loan growth ceilings. > "From April 1975 to February 1978, the head of the Banking Department, in charge of implementing window guidance, was Yasushi Mieno." > — Princes of the Yen ## 1976 — Industrial production recovers after BoJ loosens credit After the BoJ raised its window guidance loan growth ceilings in late 1975 and early 1976, industrial production recovered in late 1976, regaining its October 1973 peak and ending Japan's worst postwar slump. > "In late 1976 industrial production finally recovered, and reached its previous peak levels of October 1973 again. Japan’s worst postwar slump was ending." > — Princes of the Yen ## 1977 — Noguchi and Sakakibara publish 'Analysis of the MoF-BoJ Kingdom' In 1977 MoF officials Yukio Noguchi and Eisuke Sakakibara published a pathbreaking article in Chuo Koron identifying Japan's economic system as the wartime system for total economic mobilization. > "Twenty years before, in 1977, in a pathbreaking article (“Analysis of the MoF-BoJ Kingdom”) in the highbrow magazine Chūō Kōron, Noguchi and Sakakibara were the first and only public figures to clearly identify and acknowledge the true nature of Japan’s economic system." > — Princes of the Yen ## 1978 — Bank of Japan introduces monetary targeting In 1978 the Bank of Japan officially adopted monetary targeting, announcing growth targets for money supply measures such as M2+CD, a framework the author describes as a monetarist smoke screen for its window guidance credit controls. > "In 1978, the Bank of Japan officially introduced monetary targeting, a procedure by which the central bank selects a certain measure of the so-called money supply, such as M2+CD, and at the same time announces a specific target for its growth rate that was to be attained in the next time period, such as the coming six months." > — Princes of the Yen ## December 1978 — BoJ declares tighter quantitative control In December 1978 the Bank of Japan declared tighter quantitative monetary control necessary, citing rapidly rising stock prices, sharply higher city-center land prices, and excess money circulating in the private sector. > "In December 1978, the Bank of Japan declared that tighter quantitative monetary control was necessary, because stock prices “continue to rise rapidly, city center land prices have risen sharply and there is too much money [kane amari] circulating in the private sector.”" > — Princes of the Yen ## December 1978 — Deng Xiaoping launches China's reform and opening At a Communist Party meeting in December 1978, Deng Xiaoping set China on a course of market reforms and opening to the outside world. Farms were decontrolled, special economic zones invited foreign investment, and private enterprise slowly returned. This began the transformation that made China a manufacturing power. ## 1979 — MITI's 'samurai plan' aircraft leasing scheme In 1979 MITI promoted a leasing scheme, devised with Japan's top banks, to cosmetically reduce the current account surplus by booking foreign aircraft leases as Japanese imports; MoF called it off after a year fearing IMF scrutiny. > "In 1979, MITI thought that the scheme was a “trump card in reducing the surpluses” by an estimated $800 million in fiscal 1979 alone.17 The Ministry of Finance, worried that the IMF might see through the scheme, called it off after a year." > — Princes of the Yen ## 1979 — Swiss central bank briefly imposes negative rates In early 1979 the Swiss central bank briefly lowered short-term interbank rates into negative territory. > "The Swiss central bank briefly lowered short-term interbank rates into negative territory in early 1979." > — Princes of the Yen ## 1 January 1979 — The United States and China normalize relations The US established full diplomatic relations with the People's Republic of China, building on Nixon's 1972 opening. Washington bet that trade and engagement would draw China into the global order. American investment and know-how helped power China's export industries. ## 1980 — Benchmark revision of the foreign exchange law Japan's legal restrictions on capital movements were eased over the 1980s, starting with benchmark changes of the foreign exchange law in 1980. > "Indeed, legal regulations were eased gradually over the 1980s, with benchmark changes of the foreign exchange law in 1980." > — Princes of the Yen ## 1980 to June 1991 — Window guidance operated continuously through the 1980s Interviews with BoJ officials and bank officers unanimously confirmed that window guidance credit controls were conducted without interruption during the 1980s, in the same form as before, until at least June 1991. > "The central bank and bank officers confirmed to us that window guidance was conducted without interruption during the 1980s, until at least June 1991. It took exactly the same form as the window guidance in the pre-1980 period: The Bank of Japan decided on an aggregate bank loan growth rate for the entire country, and then young BoJ staff calculated on their Excel spreadsheets how this could be divided up among all the bank types (city banks, trust banks, regional banks, etc.) and by individual bank (Fuji Bank, Sanwa Bank, etc.)." > — Princes of the Yen ## December 1980 — Japan liberalizes capital flows Japan liberalized its international capital flows in December 1980, a major departure from the old economic structure that later served as a parallel to Thailand's deregulation. > "There is no doubt that, as with Japan’s liberalization of capital flows in December 1980, this marked a major departure from the old economic structure." > — Princes of the Yen ## 1980s — Central banks abandon monetary targets By the mid-1980s both the Bank of England and the U.S. Federal Reserve announced that they had lost faith in M1, M2, and M3 money-supply measures and were abandoning monetary targets altogether. > "By the mid-1980s, both the Bank of England and the U.S. Federal Reserve had announced that they had lost faith in the M1, M2, or M3 type of money-supply measures and were abandoning monetary targets altogether." > — Princes of the Yen ## 1981 — U.S.-Japan Wise Men's Group calls for open Japanese markets In 1981 the U.S.-Japan Wise Men's Group reported that Japan needed to make much greater efforts to open its domestic markets to goods, services, and capital to a degree equal to the United States. > "The so-called U.S.-Japan Wise Men’s Group reported in 1981 that there was a need for Japan to make much greater efforts to open its domestic markets to the inflow of goods, services, and capital to a degree equal to that of the United States.11" > — Princes of the Yen ## May 1981 — Japan accepts voluntary export restraints on cars Under US pressure, Japan agreed to limit its car exports to America to about 1.68 million vehicles a year. The voluntary restraint eased political anger but pushed Japanese makers to build factories inside the United States and move upmarket. It showed how far trade tension had grown. ## December 1981 — BoJ announces abolition of window guidance controls In December 1981 the Bank of Japan announced that window guidance controls would be abolished from January 1982, saying it would instead 'respect' banks' lending plans, though officials testified the controls were not really ended. > "In December 1981, the central bank announced that window guidance controls would be abolished beginning in January 1982. Instead of dictating loan growth quotas to the banks, the BoJ said it was going to “respect” their lending plans." > — Princes of the Yen ## 1982 to 1987 — Federal Reserve abandons monetary targeting The Federal Reserve, struggling to control both interest rates and monetary quantities, abandoned M1 targeting in 1982 and monetary targeting altogether in 1987. > "Eventually, it capitulated: In 1982 it abandoned M1 targeting and in 1987 targeting altogether, as it felt that it could not control both the price of money (interest rates) and its quantity at the same time." > — Princes of the Yen ## 1982 — Liberalization of gold transactions Japanese authorities liberalized gold transactions in 1982, setting off a gold rush in which paper gold purchases booked as imports helped reduce the recorded trade surplus. > "The authorities’ liberalization of gold transactions in 1982 had set off the process. MoF also gave the licenses for the gold accounts, and it ordered the memorial gold coins.15" > — Princes of the Yen ## 1983 to 1987 — Sasaki and Maekawa reports on structural reform Commissions headed by former Bank of Japan governors produced the Sasaki report of 1983 and the Maekawa reports of 1986 and 1987, which echoed U.S. calls for structural reform of Japan's economy. > "The reports by commissions headed by former key Bank of Japan governors, namely, the Sasaki report of 1983 and the Maekawa reports of 1986 and 1987, attracted much attention." > — Princes of the Yen ## January 1983 — Sasaki calls for a five-year plan to transform Japan's economy In January 1983 former BoJ governor Tadashi Sasaki, as head of the Keizai Doyukai, called for a five-year plan for transforming and liberalizing the Japanese economy, titled 'Toward Consciousness and Behavior of a World Nation.' > "Having handed the BoJ baton on to Prince Maekawa, Sasaki had become head of the Keizai Dōyūkai (Japan Association of Corporate Executives), and as such, in January 1983 he called for a five-year plan for transforming and liberalizing the Japanese economy, entitled “Toward Consciousness and Behavior of a World Nation.”45" > — Princes of the Yen ## 1984 — BoJ announces complete abolition of window guidance In 1984 the Bank of Japan announced the complete abolition of any form of window guidance, part of a series of official pronouncements the author argues misrepresented the continued use of the credit controls. > "In 1984, the BoJ announced the complete abolition of any form of window guidance.4" > — Princes of the Yen ## 1984 to 1989 — Ex-MoF vice minister Sumita serves as BoJ governor From 1984 to 1989, during the inflation of the bubble, former MoF vice minister Satoshi Sumita served as governor of the Bank of Japan. > "From 1984 to 1989, an ex-MoF vice minister, Satoshi Sumita, was even governor of the Bank of Japan." > — Princes of the Yen ## December 1984 — Maekawa hands over BoJ monetary policy control to Mieno After ten years running monetary policy as deputy governor and then governor of the Bank of Japan, Haruo Maekawa handed control to Yasushi Mieno in December 1984, freeing him to lobby for structural reform. > "After ten years in charge of monetary policy, Haruo “Mike” Maekawa handed over the control levers of the economy to Mieno in December 1984." > — Princes of the Yen ## 1985 — Endaka recession In 1985 Japan's economy was in the endaka (strong yen) recession, leaving pent-up demand for money as loan officers began working to meet high window guidance quotas. > "The economy had been in the endaka recession of 1985, and there was pent-up demand for money." > — Princes of the Yen ## 1985 to 1987 — Yen rises 106 percent Despite enormous Japanese capital outflows, the yen strengthened sharply, rising 106 percent from 1985 to 1987, which the author calls part of the Great Yen Illusion. > "Despite the enormous capital outflows, the yen did not weaken. To the contrary, it rose 106 percent from 1985 to 1987.29" > — Princes of the Yen ## January 1985 to December 1989 — Japanese asset price bubble inflates From January 1985 to December 1989 Japanese stocks rose 240 percent and land prices 245 percent, driving land valuations to levels where the Imperial Palace grounds were notionally worth as much as all of California. > "Between January 1985 and December 1989, stocks rose 240 percent and land prices 245 percent." > — Princes of the Yen ## 22 September 1985 — Plaza Accord Finance officials of five major economies agreed at the Plaza Hotel to weaken the US dollar against other currencies. It was a notable case of coordinated intervention in global currency markets. ## 22 September 1985 — Plaza Accord realigns the dollar The United States, Japan, West Germany, France and Britain agreed to act together to weaken the dollar against the yen and the mark. The accord showed coordinated state power over exchange rates. ## 22 September 1985 — The Plaza Accord drives the yen sharply higher At the Plaza Hotel in New York, finance officials of the US, Japan, West Germany, France, and Britain agreed to push the dollar down and the yen up. Within about two years the yen roughly doubled in value against the dollar. The strong yen squeezed Japanese exporters and triggered a policy response at home. ## October 1985 — Deposit interest rate deregulation begins Gradual deregulation of Japanese deposit interest rates began in October 1985 as part of broader financial liberalization. > "Liberalization of capital flows in December 1980, gradual deregulation of deposit interest rates from October 1985, increased creation of debt markets, and the introduction of more short-term money market and general open market operations by the central bank all meant that other monetary policy tools could be used by the central bank to achieve its goals, while there was the possibility that window guidance itself would become less effective in such an environment." > — Princes of the Yen ## 31 October 1985 — Nakasone forms the Maekawa advisory group Prime Minister Yasuhiro Nakasone created the Advisory Group on Economic Structural Adjustment for International Harmony and appointed Haruo Maekawa to head it, charged with studying how Japan's economic and social structure should change. > "On October 31, 1985, Japan’s prime minister, Yasuhiro Nakasone, formed the Study Group on Adjusting the Economic Structure for International Cooperation, officially translated into English as the Advisory Group on Economic Structural Adjustment for International Harmony." > — Princes of the Yen ## 1986 to 1987 — BoJ orders banks to expand lending during the bubble According to bank officer testimony, especially in 1986 and 1987 the Bank of Japan used window guidance to push banks to lend more than they wanted, telling them to use larger quotas because of the recession. > "Especially in 1986 and 1987, for around one year, the Bank of Japan said: ‘Use more, because we have a recession.’ Window guidance can be used not just to make borrowing smaller, but also to make it bigger." > — Princes of the Yen ## 1986 — Japan buys three-quarters of U.S. Treasury auctions At the 1986 peak of portfolio outflows, almost 90 percent of Japanese foreign securities investment went into U.S. Treasury bonds, and Japanese money absorbed 75 percent of all Treasury bonds auctioned that year. > "Japanese money mopped up a staggering 75 percent of all Treasury bonds auctioned off in 1986.9" > — Princes of the Yen ## 1986 — Mieno warns the Diet about excess money In 1986, as the bubble began under his own window guidance, Deputy Governor Mieno testified to the Diet that he was worried about excess money (kane amari) in the economy, creating what the author calls an alibi. > "Already in 1986, when the bubble was started by Mieno’s window guidance, Deputy Governor Mieno testified to the Diet that he was worried about the problem of excess money in the economy (kane amari).40" > — Princes of the Yen ## 7 April 1986 — Maekawa report submitted to the prime minister After nineteen meetings over five months, Maekawa's advisory group submitted its recommendations on April 7, 1986, calling for a historical transformation of Japan's economic structure toward domestic demand-led growth and deregulation. > "Over the coming five months, the Advisory Group met nineteen times, and on April 7, 1986, it submitted its recommendations to the prime minister.53" > — Princes of the Yen ## September 1986 to May 1989 — Fukui heads the Banking Department during the bubble From September 1986 to May 1989 Toshihiko Fukui headed the Bank of Japan's Banking Department, administering the window guidance credit controls during the bubble years while being groomed as the next 'prince.' > "From September 1986 to May 1989, longer than average, the head of the Banking Department was Toshihiko Fukui." > — Princes of the Yen ## December 1986 — Window guidance quotas tightened amid land price surge The Nikkei reported in December 1986 that window guidance quotas were tightening and that the BoJ was aware of surging land prices, excess liquidity, and strong bank lending to the real estate sector. > "December 1986: Window guidance quotas tighten. The Bank of Japan is aware of the surge in land prices, the high growth of the money supply, excess liquidity (kane amari), and the strong expansion of bank lending toward the real estate sector.16" > — Princes of the Yen ## c. 1986 — Banks aggressively expand credit creation From about 1986 Japanese banks aggressively expanded credit creation, with city bank loan growth averaging about 15 percent in the late 1980s while national income grew only half as fast, fueling unproductive speculation. > "From about 1986 onward, banks increased credit creation aggressively. Loan growth of the city banks averaged about 15 percent in the late 1980s, and total loan growth remained above 12 percent most of the time." > — Princes of the Yen ## c. 1986 to 1990 — Japanese capital floods world markets From around 1986 until 1990, unprecedented Japanese overseas investment flowed into real estate and corporate takeovers worldwide; in 1987 net long-term foreign investment was almost twice the record current account surplus. > "From around 1986 until 1990, Japanese money flooded the world. From real estate in New York, Hawaii, and Australia to corporate takeovers in the United States, Europe, and Asia, Japanese money seemed to buy up the planet." > — Princes of the Yen ## c. 1986 — The Bank of Japan cuts rates to counter the strong yen To cushion the export slump caused by the soaring yen, the Bank of Japan cut its discount rate step by step to a record low of 2.5 percent by early 1987. Cheap money flooded into stocks and real estate rather than only into productive investment. The easy policy fed a growing asset boom. ## 1987 — Record Japanese long-term capital outflows Japanese long-term capital outflows exploded from $65 billion in 1985 to a record $137 billion in 1987, nearly twice the record current account surplus, dominating world capital flows. > "In 1987 another record was set when a tide of $137 billion swept over the exchanges, followed by outflows of $ 131 billion the following year. In 1987 the net long-term capital outflows were almost twice as large as the already record-breaking current account surplus." > — Princes of the Yen ## 1987 — Window guidance extended to foreign-currency loans From 1987 the Bank of Japan's credit controls were also imposed on non-yen (impact) loans, which previously had only been reported. > "Only from 1987 were credit controls also imposed for non-yen (impact) loans." > — Princes of the Yen ## February 1987 — Executive Board cuts the discount rate to 2.5 percent In February 1987, under Ministry of Finance pressure, the Bank of Japan's Executive Board decided to reduce the official discount rate to the low rate of 2.5 percent. > "In February 1987, the Executive Board decided, under MoF pressure, to reduce the ODR to the low rate of 2.5 percent." > — Princes of the Yen ## February 1987 to May 1989 — Official discount rate held at 2.5 percent The Bank of Japan maintained a low official discount rate of 2.5 percent from February 1987 to May 1989, often cited as the cause of the bubble, though the author argues interest rates had no stable relationship with asset prices. > "It is often said that the low official discount rate of 2.5 percent, maintained from February 1987 to May 1989, was the cause of the bubble." > — Princes of the Yen ## May 1987 — Second Maekawa report announced An updated Maekawa report, expanded from eleven to forty-one pages, reiterated the first report's goals with detailed concrete changes and a timetable for structural transformation by the year 2000. > "In May 1987, a new, updated Maekawa report was announced. This report had been expanded from eleven pages to forty-one and basically reiterated the points of the first report but included a much more detailed set of concrete changes that Japan should undertake." > — Princes of the Yen ## July 1987 — Fukui defends expanding bank loans in Nikkei interview In July 1987, just after setting off the bubble as head of the Banking Department, Toshihiko Fukui told the Nikkei Financial Daily that the BoJ would not tighten loan quantities, justifying loan expansion by the need for long-term structural adjustment. > "When Toshihiko Fukui was head of the Banking Department, he was interviewed by the Japanese-language Nikkei Financial Daily in July 1987, just after he had kicked off the bubble." > — Princes of the Yen ## July 1987 — Fukui endorses continued monetary easing to implement structural reform In July 1987, shortly after the second Maekawa report, Toshihiko Fukui, head of the department implementing window guidance, said the right central bank policy for structural transformation was to continue monetary easing and expand bank loans. > "We saw above that the head of the department that implemented window guidance credit controls, Toshihiko Fukui, had said in July 1987, soon after the publication of the second Maekawa report, that suitable central bank policy to implement the structural transformation of Japan’s economy was to “continue with the monetary easing policy” and, explicitly, for “bank loans to expand.”" > — Princes of the Yen ## c. 1987 — An asset bubble inflates in stocks and Tokyo land Cheap credit and easy bank lending pushed share and land prices to extraordinary heights in the late 1980s. At the peak, the grounds of the Imperial Palace were said to be worth more than all the real estate in California, and Japan's total land value dwarfed that of the United States. Banks lent freely against land collateral whose price kept climbing. ## 1988 — Asymmetric cross-border acquisitions of 1988 In 1988 Japanese companies acquired 315 firms abroad while foreigners bought only 11 firms in Japan, illustrating how cross shareholdings kept corporate Japan closed to foreign investment. > "In 1988, Japanese companies acquired 315 firms abroad. Foreigners, however, bought only 11 firms in Japan." > — Princes of the Yen ## 1988 to 1989 — Window guidance begins tightening before Mieno's governorship Window guidance was already tightening in 1988 and 1989, well before Mieno officially became governor, while Governor Sumita knew little about the policy reversal. > "Window guidance was already tightening in 1988 and 1989, well before Mieno became official governor.32" > — Princes of the Yen ## June 1988 — Third Maekawa report announced A third version of the Maekawa report was announced in June 1988 under the title "The New Economic Plan, The Japan that Lives Together with the World." > "A third version of the report was announced in June 1988. It was entitled “The New Economic Plan—The Japan that Lives Together with the World.”" > — Princes of the Yen ## 1989 — Banks suddenly restrict loan growth In mid-1989 Japanese banks suddenly restricted loan growth, cutting off the flow of new money into asset markets; stock prices peaked half a year later and land prices stopped rising. > "In mid-1989, banks suddenly restricted loan growth. Half a year later, stock prices peaked. Then land prices stopped rising." > — Princes of the Yen ## 1989 — Bubble lending reaches 27 percent of all bank loans By the end of 1989, loans to real estate, construction, and nonbank financial institutions used for speculation totaled 27 percent of all bank loans, some 98.9 trillion yen or 25 percent of nominal GDP. > "In total, “bubble” loans already summed up to 27 percent of total loans, an absolute sum of ¥98.9 trillion or 25 percent of 1989 nominal GDP." > — Princes of the Yen ## 1989 — Death of Haruo Maekawa Former Bank of Japan governor Haruo Maekawa died in 1989, but his chosen successors Mieno and Fukui remained in power at the central bank. > "Maekawa passed away in 1989, but his successors remained in power." > — Princes of the Yen ## 1989 — End of the Showa era The Showa era, the official calendar of Emperor Hirohito's reign, ended in 1989, sixty-four years after it began; Hirohito had remained in office after 1945, exchanging his military uniform for civilian clothes. > "It was not even half-time of the official calendar, the Showa era, which ended only in 1989, sixty-four years after Hirohito began his reign." > — Princes of the Yen ## 1989 — Mieno appointed governor of the Bank of Japan Yasushi Mieno was appointed official governor of the Bank of Japan in 1989, with observers noting parallels between his career and that of former governor Sasaki. > "On the occasion of Mieno’s appointment as official governor of the Bank of Japan in 1989, an informed Nikkei reporter pointed out many of the parallels between Mieno’s and Sasaki’s career: “Sasaki formed factions with his ‘tori maki’ followers and was criticized for a closed, secretive system (for instance, by an executive director at the time)." > — Princes of the Yen ## 1989 — Peak of the Japanese asset bubble By 1989 speculative credit had pushed asset prices to extremes: the land surrounding the Imperial Palace in Tokyo had the same market value as the entire state of California. > "In 1989, the little plot of land surrounding the Imperial Palace in Tokyo had the same market value as the entire state of California. It was a bubble." > — Princes of the Yen ## 1989 — Yasushi Mieno becomes Bank of Japan governor Yasushi Mieno became governor of the Bank of Japan in 1989, with Haruo Maekawa having become governor ten years earlier; both had long been tipped as certain successors. > "The same unanimous case was made by the media and well-informed observers before Yasushi Mieno became governor in 1989, and ten years before that, when Haruo Maekawa became governor." > — Princes of the Yen ## June 1989 — BoJ tightens window guidance and ends the bubble The Bank of Japan ended the bubble by suddenly tightening its window guidance credit controls in June 1989, an act the author identifies as the trigger of the recession of the 1990s. > "It was the Bank of Japan that ended the bubble by suddenly tightening window guidance in June 1989 and then created the recession of the 1990s.1" > — Princes of the Yen ## July 1989 to 28 July 1990 — Structural Impediments Initiative The bilateral U.S.-Japan Structural Impediments Initiative was launched in July 1989 and released its final report on July 28, 1990, detailing U.S. structural reform demands. > "For detailed suggestions of U.S. structural reform demands, see, for instance, the reports by the bilateral Structural Impediments Initiative (SII), which was launched in July 1989, with a final report released on July 28, 1990." > — Princes of the Yen ## December 1989 to 1994 — Mieno becomes BoJ governor Yasushi Mieno served as governor of the Bank of Japan from December 1989 to 1994, determined to end the bubble he blamed for dividing Japan into haves and have-nots. > "This is similar to the picture painted of Yasushi Mieno, governor of the Bank of Japan from December 1989 to 1994." > — Princes of the Yen ## December 1989 — Mieno's 'Christmas present' rate hike ends the bubble Only a fortnight after becoming governor, Mieno raised the official discount rate in December 1989, the infamous Christmas present; asset prices began tumbling in 1990 and land prices eventually fell around 80 percent. > "He decided to end the bubble and raised the official discount rate only a fortnight after becoming governor, delivering the infamous “Christmas present” of 1989. Asset prices, led by stock prices, began to tumble in 1990." > — Princes of the Yen ## December 1989 — Nikkei peaks at all-time high of 38,915 After rising an average 30 percent per year from 1984, the Nikkei 225 stock index peaked at an all-time high of 38,915 yen in December 1989. > "From 1984 to 1989, the Nikkei 225 stock index rose on average by 30 percent per annum. In December 1989, it peaked at an all-time high of ¥38,915." > — Princes of the Yen ## 29 December 1989 — The Nikkei peaks at nearly 39,000 On the last trading day of 1989 the Nikkei 225 stock average closed at 38,915, its all-time high. Japanese assets and companies looked poised to dominate the world. It was the top of the bubble, though few recognized it at the time. ## 1990 — Collapse of the Japanese bubble From 1990 onward bank loan growth slowed, asset prices fell, speculators went bankrupt, and about 100 trillion yen of loans turned into bad debts, pushing Japan into its worst recession since the Great Depression. > "This is what happened from 1990 onward. Bank loan growth slowed. As asset prices fell, speculators were bankrupted and banks were left holding the bag." > — Princes of the Yen ## 1990 to 1999 — Decade of fiscal stimulus packages During the 1990s the Japanese government implemented over a dozen large-scale spending packages totaling more than 145 trillion yen, without producing a sustained recovery. > "During the 1990s, over a dozen large-scale government spending packages had been implemented, amounting in aggregate to over ¥145 trillion—also apparently to no avail." > — Princes of the Yen ## 1990 — Japan becomes the world's top direct investor In 1990 Japanese foreign direct investment reached $48 billion, overtaking portfolio investment, and Japan became the world's number one provider of direct investment. > "In 1990, at $48 billion, foreign direct investment had taken the lead over portfolio investment and Japan became the world’s number one provider of direct investment.10" > — Princes of the Yen ## 1990 — Mieno publicly defies the Finance Ministry In 1990 Governor Mieno engaged in a rare high-profile disagreement with the Finance Ministry, which opposed monetary tightening, and stuck to his tight money policy throughout his term. > "Then, in 1990, Mieno surprised the establishment by engaging in a rare high-profile disagreement with the Finance Ministry over monetary policy." > — Princes of the Yen ## 1990 — Ministry of Finance total volume regulation of bank lending In 1990 the Ministry of Finance imposed its sōryō kisei, a rare total volume regulation of bank lending, though it was administered by the Bank of Japan and followed the BoJ's earlier tightening of 1988-89. > "The Ministry of Finance’s sōryō kisei (total volume regulation of bank lending) of 1990 caught the public attention, as it was a rare intervention by the ministry in the quantity of bank lending, but it was also administered by the Bank of Japan; more importantly, it only followed the tight window guidance policy that the Bank of Japan had already adopted much earlier, in 1988 and 1989." > — Princes of the Yen ## 1990 — Nikkei falls 32 percent in one year In 1990 the Nikkei 225 index dropped 32 percent and land prices began a sharp decline, with some speculative commercial plots losing 80 percent or more of their market value. > "In 1990 alone, the stock market, as measured by the Nikkei 225 index, dropped a precipitous 32 percent. Land prices also started their sharp decline." > — Princes of the Yen ## 1990 — The bubble bursts and markets crash Stocks fell through 1990 as the Bank of Japan raised interest rates, and land prices peaked and then slid from 1991. By 1992 the Nikkei had lost more than half its value from the peak. Trillions of dollars in paper wealth vanished, and the collateral behind bank loans collapsed. ## January 1990 to December 1994 — Asset prices collapse and the bust begins From January 1990 to December 1994 Japanese stock and land prices halved, bankruptcies soared to postwar highs, several banks and securities firms became insolvent, and the boom turned into the biggest slump since the 1930s. > "Between January 1990 and December 1994, stock and land prices halved. Many companies and individuals who had borrowed money to purchase land speculatively found themselves unable to service their debts, let alone repay the principal." > — Princes of the Yen ## March 1990 — Unemployment hits record low of 2 percent At the height of the boom's labor shortage, Japanese unemployment fell to a record low of 2 percent in March 1990. > "Unemployment hit a record low of 2 percent in March 1990." > — Princes of the Yen ## 1991 — Bank of Japan declares window guidance abolished In 1991 the chief of the Bank of Japan's Banking Department, Tamura, told the press that the abolition of window guidance was final and that it would never be reinstituted. > "No wonder Bank of Japan Banking Department’s chief, Tamura, had to emphasize in 1991 to the press that “this time” the abolition was for real and that “in the future, window guidance will under no circumstances be re-instituted.”" > — Princes of the Yen ## 1991 — EMEAP central bank club formed In 1991 the eleven central banks of the East Asia and Pacific region formed the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP), a low-profile club whose deputy governors met twice a year. > "Already in 1991, the eleven central banks of the East Asia and Pacific region formed an exclusive club, called the Executives’ Meeting of East Asia-Pacific Central Banks, or EMEAP." > — Princes of the Yen ## 1991 — Japan becomes a net capital importer In 1991 Japan suddenly turned from being the biggest net capital exporter ever to a net importer of capital, a reversal that defied traditional economic models. > "The plot thickened in 1991, when Japan suddenly turned from being the biggest net capital exporter ever to a net importer of capital." > — Princes of the Yen ## 1991 — Japan slides into its longest postwar recession With paralyzed banks shrinking credit creation, Japan's economy slid from 1991 into the longest and deepest postwar recession since the 1930s, with unemployment at postwar records and probably more than five million jobs lost. > "Thus, from 1991 onward, Japan’s economy slid into the longest and deepest postwar recession since the 1930s. Unemployment soared to postwar records." > — Princes of the Yen ## 1991 — Japanese foreign investment tide reverses In 1991, even as the current account headed for record surpluses over $90 billion, Japan's long-term capital outflows vanished and the country recorded $40 billion of net inflows, its first in more than a decade, becoming a net seller of foreign assets. > "In 1991, as the Japanese current account was heading for new record surpluses, topping $90 billion, net long-term capital outflows had suddenly vanished. Japan recorded $40 billion worth of net inflows of long-term capital, the first in more than a decade." > — Princes of the Yen ## 1991 to 1992 — U.S. recession of 1991 and rapid Fed reflation After a credit boom turned to bust and bad debts paralyzed U.S. banks, real GDP contracted about 1 percent in 1991; the Federal Reserve printed money from 1990 onward and the economy had fully recovered by 1992. > "In 1991, real GDP contracted by approximately 1 percent. How long this recession was going to last was in the hands of one institution—the Federal Reserve. It needed to print money. That is what it did, from 1990 onward." > — Princes of the Yen ## July 1991 to September 1995 — Bank of Japan begins 1990s rate-cutting cycle The Bank of Japan lowered the official discount rate ten times during the 1990s, starting with the first cut in July 1991 from 6 percent, reaching 1.75 percent by September 1993 and 0.5 percent by September 1995. > "The Bank of Japan lowered the ODR ten times in the decade of the 1990s, beginning with the first reduction in July 1991, before which it stood at 6 percent. Until September 1993 it was lowered seven times, reaching 1.75 percent. The ODR was further lowered to 1.0 percent in April 1995 and to 0.5 percent in September 1995." > — Princes of the Yen ## July 1991 — BoJ announces immediate abolition of window guidance In July 1991, shortly after publishing an English-language report claiming window guidance had not been applied since 1982, the Bank of Japan announced that window guidance would be abolished immediately. > "Soon after its publication, the BoJ spoke its final, though somewhat contradictory, word on window guidance, announcing in July 1991 that window guidance would be abolished immediately." > — Princes of the Yen ## July 1991 — BoJ begins cutting the official discount rate Starting with the first reduction in July 1991, when the rate stood at 6 percent, the Bank of Japan lowered the official discount rate ten times during the 1990s, reaching 1.75 percent by September 1993 and 0.5 percent by September 1995. > "The Bank of Japan lowered the official discount rate (ODR) ten times in the 1990s, beginning with the first reduction in July 1991, before which it stood at 6 percent." > — Princes of the Yen ## 1992 — "One Market, One Money" study published In 1992 the European Commission published its commissioned study "One Market, One Money," which purported to demonstrate that central bank independence leads to low inflation and served as the scientific basis for the Maastricht Treaty. > "Published in 1992 under the name “One Market, One Money,” the study purported to demonstrate that central bank independence leads to low inflation.14" > — Princes of the Yen ## 1992 to 1999 — Bank of Japan monetary contractions of the 1990s At several junctures in the 1990s, including 1992, 1993, early 1995, and much of 1999, the Bank of Japan actively reduced the amount of money circulating in the economy, aborting emerging recoveries. > "At crucial junctures, such as in 1992, 1993, early 1995, and much of 1999, the Bank of Japan (BoJ) even actively reduced the amount of money circulating in the economy." > — Princes of the Yen ## 1992 — Credit crunch hits small firms As banks burdened with bad debts grew risk averse in the early 1990s, they cut lending to small and medium-sized firms, which suffered a credit crunch from 1992; unemployment began rising and consumption slumped. > "From 1992 onward, small firms suffered from a credit crunch.23" > — Princes of the Yen ## 1992 to 1994 — Four massive fiscal stimulus packages Between 1992 and 1994 the Japanese government added four large fiscal stimulus packages totaling 45 trillion yen to regular spending, but without central bank credit expansion they failed to produce a recovery and only increased government debt. > "Between 1992 and 1994, four massive fiscal stimulus packages amounting to ¥45 trillion were added on to regular government spending." > — Princes of the Yen ## 1992 — High-powered money contracts despite falling rates Although interest rates had been falling since 1991, the Bank of Japan's supply of high-powered money contracted for most of 1992, leading economist Iwata to warn that the central bank would create a recession unless it expanded the money supply. > "Using this analysis, Iwata points out that the central bank tightened monetary policy too late and then failed to stimulate the economy for too long (while interest rates had been falling since 1991, the supply of high-powered money contracted for most of 1992).38" > — Princes of the Yen ## 1992 — Japan's decade of fiscal stimulation packages Beginning in 1992, Japan implemented ten fiscal stimulation packages totaling 146 trillion yen, with government spending contributing almost half of economic growth in the 1990s. > "Since 1992, ten fiscal stimulation packages amounted to ¥146 trillion." > — Princes of the Yen ## 1992 — Maastricht Treaty lays foundations for European monetary union The Maastricht Treaty of 1992 laid the foundations for monetary union in Europe and defined the role of a totally independent European Central Bank, becoming the model for central bank independence worldwide. > "The most forceful case in favor of central bank independence was made in the Maastricht Treaty of 1992, which laid the foundations for monetary union in Europe." > — Princes of the Yen ## 1992 — Sharp reduction in Japanese credit creation begins The author identifies a sharp reduction in credit creation beginning in 1992, triggered by bad debts in the banking system, as the cause of Japan's recession. > "It further demonstrated that the cause of Japan’s recession has been the sharp reduction in credit creation that began in 1992 and was triggered by the bad debts in the banking system." > — Princes of the Yen ## November 1992 — Bush loses reelection amid economic pessimism In November 1992 George Bush lost his bid for reelection to Clinton, with prevailing pessimism about the U.S. economy considered an important reason. > "The prevailing pessimism over the U.S. economy is generally considered an important reason why in November 1992 George Bush lost his bid for reelection and Clinton could move into the White House." > — Princes of the Yen ## 1993 — Hosokawa administration reforms the electoral system The 1993 Hosokawa administration changed Japan's electoral system, shifting political power away from over-weighted rural constituencies toward city voters. > "The 1993 Hosokawa administration changed the electoral system and thus politics, which is now catering more to city dwellers." > — Princes of the Yen ## 1993 — Japan's 1993 rice crisis After the government ran down its rice stockpiles to 194,000 tons by 1993, a bad harvest that year produced a widely covered rice crisis, allowing emergency imports of foreign rice and weakening domestic rice farmers. > "However, the government reduced stock piles further in 1992, to only 194,000 in 1993. This amounted to an abandoning of the counter-cyclical government stabilization scheme. The harvest was bad that year (entirely unexpected for the government’s crop experts?), and a major “rice crisis” was widely covered in the media." > — Princes of the Yen ## 1993 — Mieno links the recession to structural transformation In 1993, with the recession underway, Governor Mieno said the downturn was making everyone conscious of the need to implement the transformation envisaged by the Maekawa report. > "In 1993, when the recession had already started (triggered by window guidance), Mieno pointed out that thanks to this recession everyone was becoming “conscious of the need to implement such transformation,” as the Maekawa report had envisaged." > — Princes of the Yen ## 1993 — Rice market forced open In 1993 Japan's rice market was opened to imports after the government reduced official rice stocks to a postwar record low, letting bad weather create a shortage that swung public opinion toward liberalization. > "The rice market was forced open in 1993, thanks to the government’s reduction in official rice supply stocks to the lowest level on record in the postwar era." > — Princes of the Yen ## 1993 to 1996 — Surge of private capital inflows into Asia After capital account deregulation and central bank incentives, net private capital inflows into Asia surged from 54.3 billion dollars in 1993 to 98.3 billion dollars in 1996, largely as short-term foreign borrowing. > "Net private capital inflows into Asia surged from U.S. $54.3 billion in 1993 (sharply up from U.S. $20.9 billion in 1992) to U.S. $98.3 billion in 1996.11" > — Princes of the Yen ## 1993 — Telecommunications sector deregulated In 1993 Japan deregulated its telecommunications sector, creating a boom in mobile phones and a dramatic rise in information services employment. > "In 1993, the telecommunications sector was deregulated, which created a significant boom in mobile phones and boosted employment in the information services sector dramatically." > — Princes of the Yen ## 1993 — Thailand deregulates capital account and creates the BIBF In 1993 Thailand aggressively deregulated its capital account and established the Bangkok International Banking Facility, allowing Thai corporations and banks to borrow from abroad for the first time in the postwar era; Korea and Indonesia adopted similar policies around the same time. > "In that year, Thailand implemented a policy of aggressive deregulation of the capital account and the establishment of the Bangkok International Banking Facility (BIBF). This banking facility enabled the corporate and banking sector to borrow liberally from abroad—the first time in the postwar era that Thai borrowers could do so." > — Princes of the Yen ## 1994 to 1995 — Credit creation turns negative and nominal GDP shrinks Bank credit creation turned negative in late 1994, producing negative nominal GDP growth in early 1995, the first such contraction in postwar history and the first since 1931. > "Credit creation remained minimal and even turned negative in late 1994—resulting in negative nominal GDP growth in early 1995—for the first time in postwar history; indeed, the first time since 1931.14" > — Princes of the Yen ## 1994 — Mieno retires and lobbies for a new Bank of Japan Law After retiring in 1994, former governor Mieno devoted much of his public life to lobbying in speeches and meetings for a change in the Bank of Japan Law. > "The grounds for this argument had already been laid by Mieno, who had devoted much of his public life after his 1994 retirement to lobbying in numerous speeches and meetings for a change in the Bank of Japan Law." > — Princes of the Yen ## 1994 to March 1995 — Record foreign exchange intervention to weaken the yen In late 1994 MoF turned to exchange rate policy, ordering the BoJ to buy dollars: $7 billion in the second half of 1994 and $19 billion in February and March 1995, lifting Japan's reserves to a world-leading $131 billion. > "In the second half of 1994, this amounted to U.S. $7 billion. In February and March 1995 it reached U.S. $19 billion, one of the largest quarterly foreign exchange interventions on record." > — Princes of the Yen ## December 1994 — Matsushita appointed governor with Fukui as deputy In December 1994 MoF alumnus Yasuo Matsushita succeeded Mieno as Bank of Japan governor, with BoJ insider Toshihiko Fukui as deputy governor; the author reports Matsushita was shielded from decisions on credit creation. > "In 1994, Governor Mieno was followed by MoF man Matsushita. The deputy position went to BoJ insider Toshihiko Fukui." > — Princes of the Yen ## 1995 to September 1998 — First Japanese bond bubble Japan's first bond bubble began in early 1995 with benchmark yields at 4.7 percent and lasted until September 1998, by which time yields had fallen four hundred basis points to 0.7 percent, giving large banks significant capital gains. > "The first Japanese bond bubble began in early 1995, when benchmark bond yields stood at 4.7 percent, and lasted until September 1998, when bond yields had fallen by four hundred basis points to an extraordinary 0.7 percent.9" > — Princes of the Yen ## 1995 — Japan's overseas production exceeds exports In financial year 1995, for the first time, Japan produced more abroad than it exported from its own shores, reflecting the mass relocation of factories driven by the strong yen. > "In financial year 1995, Japan produced more abroad than it exported from its shores." > — Princes of the Yen ## 1995 — Product liability law favors consumers Japan's 1995 product liability law explicitly favored consumers for the first time, placing the burden of proof on manufacturers in disputes. > "Japan’s new product liability law of 1995 for the first time explicitly favors consumers. In case of dispute, the burden of proof has now been placed on the manufacturer." > — Princes of the Yen ## 1995 — Unemployment reaches a postwar high In the first quarter of 1995 Japanese unemployment reached a postwar high, with the actual number of jobless probably topping five million by early 1996 and recession-related suicides also at a postwar high. > "In the first quarter of 1995, unemployment had reached a postwar high, creating human misery. The actual number of jobless probably topped five million people in early 1996.13" > — Princes of the Yen ## 1995 — Yen surges to around 80 per dollar By mid-1995 the yen had risen to around 80 to the dollar, its peak coming in April 1995, squeezing exporters as Japan's recession dragged on. > "The yen had risen to around ¥80/$—unthinkable for many just half a year earlier. Exporters were under pressure, demand in the economy faltered, production growth slowed, inventories built up, and firms cut costs to stay in business." > — Princes of the Yen ## March 1995 — Yen hits postwar high of 79.75 In March 1995 the Bank of Japan oversterilized the Ministry of Finance's record foreign exchange intervention, sending the yen to its postwar high of 79.75 per dollar and dealing a severe blow to the economy. > "In March 1995, the central bank oversterilized and so sent the yen to its postwar high of ¥79.75. This delivered another severe blow to the economy and the ministry." > — Princes of the Yen > "he will have logged a little more than seven thousand classroom hours by the time he is ready for junior high school" > — Life in Classrooms ## April 1995 — Far-reaching deregulation package announced In April 1995, after the yen's historic high of 80 to the dollar and amid economic slump, reformers broke bureaucratic resistance and a deregulation package of one thousand items was announced, followed later that year by a Deregulation White Paper. > "The shock of the yen at ¥80/$ convinced even die-hard conservatives that Japan had no choice but to deregulate. Thus only weeks after the historic high of the yen, a far-reaching deregulation package was announced, consisting of a catalog of one thousand deregulation items." > — Princes of the Yen ## 19 April 1995 — Yen hits historic high of 79.75 per dollar Despite unprecedented intervention, the yen rose 20 percent from January to April 1995 and hit a historic high of 79.75 to the dollar on April 19, 1995, which the author attributes to the BoJ's sharp reduction of credit creation. > "During the months from January to April 1995, the yen rose by 20 percent, hitting a historic high of ¥79.75/$ on April 19, 1995." > — Princes of the Yen ## c. 1995 — Richard Werner coins 'quantitative easing' The German economist Richard Werner introduces the term quantitative easing (ryoteki kanwa) in Japan, arguing the central bank should expand credit creation directly rather than only cut interest rates. ## c. 1995 — Werner coins 'quantitative easing' as a way out Richard Werner coined the term quantitative easing in Japan, arguing the central bank should expand credit creation directly rather than only cut interest rates. He meant something broader than what the term later came to describe. The Bank of Japan formally adopted a policy under that name in March 2001, the first major central bank to do so. ## 1996 — Big Bang financial deregulation conceded By late 1996 the Ministry of Finance had lost the battle over regulation policy and had to concede full-blown deregulation of the financial sector, known as the Big Bang, which abolished the license system. > "By late 1996, MoF had lost the battle for regulation policy, having to concede a full-blown deregulation of the financial sector, known as the “Big Bang.” This abolished the license system, one of MoF’s main power bases." > — Princes of the Yen ## 1996 — Brief recovery of 1996 Unexpectedly, the Japanese economy staged a sudden recovery in 1996, growing around 4 percent, but the upturn was not sustained and the economy slumped again in 1997 and 1998. > "Unexpected by most observers, the economy staged a sudden recovery in 1996, growing by around 4 percent. But this was not sustained: The economy slumped again in 1997 and 1998." > — Princes of the Yen ## 1996 — Greenspan's irrational exuberance speech In 1996 Fed chairman Alan Greenspan gave his famous speech on irrational exuberance, publicly suggesting he wanted to slow the economy even as the Fed kept increasing credit creation. > "Thus Greenspan, through his interest rate policies, has publicly given the impression that he wanted to slow the economy most of the time from the mid-1990s onward, such as with his famous 1996 speech on “irrational exuberance.”" > — Princes of the Yen ## 31 May 1996 — Tokyo High Court rules against bid-rigging On May 31, 1996 the Tokyo High Court issued a landmark decision against bid-rigging in electrical equipment installation work ordered by the Japan Sewage Works Agency. > "In a landmark decision on 31 May 1996, the Tokyo High Court decided against bid-rigging involving electrical equipment installation work ordered by the Japan Sewage Works Agency (Accusation; March 6, 1995)." > — Princes of the Yen ## 19 July 1996 — Landmark EMEAP governors meeting in Tokyo On July 19, 1996, the Bank of Japan hosted a landmark meeting of all EMEAP governors in Tokyo, after which cooperation tightened to include annual governor-level meetings and working groups, with the Bank of Japan as temporary secretariat. > "Since a landmark meeting of all the governors hosted by the Bank of Japan in Tokyo on July 19, 1996, cooperation has been tightened further." > — Princes of the Yen ## 1997 to 1998 — Asian currency crisis erupts In 1997 the currencies of key Southeast Asian countries collapsed by 60 to 80 percent against the dollar, and Thailand, Korea, and Indonesia, facing possible national default, sought IMF emergency funding; their economies deteriorated throughout 1998. > "In 1997, the currencies of the key Southeast Asian countries could not maintain their fixed exchange rates with the U.S. dollar. They collapsed by between 60 and 80 percent within the year." > — Princes of the Yen ## 1997 — Asian financial crisis In 1997 investors pulled out of Korea, Thailand, and Indonesia while central banks forced commercial banks to restrict credit; the asset bubbles burst and by late 1997 all three countries were insolvent. > "In 1997, investors pulled out. Simultaneously, the central banks forced the commercial banks to restrict credit creation. The bubbles burst." > — Princes of the Yen ## 1997 — Bill to revise the Bank of Japan Law submitted In 1997 the Hashimoto coalition government, blaming MoF for Japan's troubles, submitted a bill to the Diet to revise the Ministry of Finance Establishment Law and the Bank of Japan Law. > "In 1997, the coalition submitted a bill to revise the Ministry of Finance Establishment Law and the Bank of Japan Law to the Diet." > — Princes of the Yen ## 1997 to April 1998 — BoJ reorganizes its credit control departments In 1997 the BoJ split its Credit and Market Management Department, and in a further reorganization in April 1998 the tasks of the former Banking Department were dispersed across several new departments, obscuring the center of credit control policy. > "In 1997, the Credit and Market Management Department was split into the Financial Market Operations and Surveillance Department. Another reorganization took place in April 1998." > — Princes of the Yen ## 1997 — Hashimoto administration's 1997 structural reforms In 1997 the Hashimoto government tightened fiscal policy and enacted structural reforms, including legal independence for the Bank of Japan, dismantling the Ministry of Finance, and creating an independent Financial Supervisory Agency. > "In 1997, it tightened fiscal policy and deemphasized monetary policy, while implementing structural reforms, including granting the Bank of Japan legal independence from the government, dismantling the Ōkurashō (Ministry of Finance), establishing an independent Financial Supervisory Agency, and rendering key government agencies directly responsible to the prime minister." > — Princes of the Yen ## 1997 — New Bank of Japan Law proposed The new Bank of Japan Law was proposed in 1997 as part of Prime Minister Hashimoto's administrative reform program. Deputy governor Toshihiko Fukui lobbied press and politicians in its favor. > "The new Bank of Japan Law was proposed in 1997 as part of Prime Minister Hashimoto’s administrative reform program." > — Princes of the Yen ## 1997 to 1998 — Post-reform contraction of 1997-98 After 4 percent growth in 1996, the 1997 reforms were immediately followed by the largest postwar contraction of nominal GDP and consumer prices. > "To the contrary, before the reforms, in 1996, growth recorded 4 percent. The 1997 reforms were immediately followed by the largest postwar contraction of nominal GDP and consumer prices." > — Princes of the Yen ## May 1997 — Thai baht crisis breaks in Bangkok The baht crisis broke in Bangkok in May 1997, prompting Thailand's leaders to seek bridge financing rather than IMF intervention. > "Soon after the baht crisis broke in Bangkok in May 1997, the Thai finance minister and the prime minister felt that they should simply borrow some more money to bridge the temporary balance-of-payments crisis and implement a bailout program." > — Princes of the Yen ## June 1997 to April 1998 — Revised Bank of Japan Law passed In June 1997 a revised Bank of Japan Law was passed, effective April 1998, giving the central bank independence from the Ministry of Finance after half a century of subordination. > "In June 1997, a revised Bank of Japan Law was passed, which became effective in April 1998. This finally gave the Bank of Japan what it had been struggling to gain for half a century—independence from MoF, and, for good measure, from anyone else (more on this in chapter 18)." > — Princes of the Yen ## 16 July 1997 — Thai finance minister seeks Japanese help in Tokyo On July 16, 1997, Thai finance minister Thanong Bidaya flew to Tokyo for urgent talks with senior Japanese government and Finance Ministry figures, seeking around 20 billion dollars to bridge the crisis. > "Hence on July 16, the Thai finance minister, Thanong Bidaya, took a plane to Tokyo. He met the most senior government and Finance Ministry figures and held urgent discussions." > — Princes of the Yen ## November 1997 — A banking crisis leaves zombie banks and firms The crash saddled banks with huge bad loans backed by land that was now worth far less. In late 1997 Hokkaido Takushoku Bank and Yamaichi Securities failed, and the Long-Term Credit Bank was nationalized the next year. Weak banks kept lending to insolvent borrowers to hide losses, creating zombie banks and firms that starved healthy business of credit. ## c. 1997 — Washington blocks Japan's Asian Monetary Fund proposal After Japan proposed an Asian crisis fund, with vice finance minister Sakakibara suggesting an Asian Monetary Fund to bypass the IMF, the United States forced Tokyo to withdraw the initiative and also barred Taiwan from lending to its neighbors. > "But Washington stopped Japan’s initiative. It unambiguously let Tokyo know that it was not allowed to rescue its Asian neighbors. Any solution to the emerging Asian crisis had to come from Washington via the IMF." > — Princes of the Yen ## 1998 — Bank of Japan granted independence In 1998 the Bank of Japan was granted independence in its operational and policy goals from the elected government, making externally imposed policy targets hard to implement. > "Since the central bank was granted independence in terms of its operational and policy goals from the democratically elected government in 1998, it may in practice not be easy to implement any of these suggestions." > — Princes of the Yen ## 1998 — Bank of Japan independence and creation of the FSA In 1998 monetary policy was placed in the hands of the newly independent Bank of Japan, and financial-sector regulation was given to the new independent Financial Services Agency, ending the Ministry of Finance's dominance. > "In 1998 monetary policy was put into the hands of the newly independent Bank of Japan and regulation of the financial sector was put into the hands of the independent Financial Services Agency (FSA)." > — Princes of the Yen ## 1998 — Bank of Korea reflates sharply In mid-1998 the Bank of Korea increased credit creation by the largest amount in twenty-five years, and Korean growth expanded sharply in the first quarter of 1999 with double-digit industrial production gains by mid-1999. > "Credit creation by the Bank of Korea in mid-1998 shot up by the biggest amount in twenty-five years—quite parallel to the BoJ’s reflation. As a result, Korean economic growth expanded sharply in the first quarter of 1999." > — Princes of the Yen ## 1998 — Big Bang financial deregulation begins A sweeping financial sector deregulation program known as the Big Bang began in Japan in 1998 as part of the Hashimoto reforms. > "The reforms also included a sweeping financial sector deregulation program (Big Bang), beginning in 1998." > — Princes of the Yen ## 1998 — Fukui resigns with Governor Matsushita Toshihiko Fukui, appointed deputy governor in December 1994 as long planned, had to resign together with Governor Matsushita in early 1998, after which he vied to succeed interim Governor Hayami. > "Although Fukui had to resign together with governor Matsushita in early 1998, he had since been vying to take over from interim Governor Hayami to resume his rule." > — Princes of the Yen ## 1998 — Hayami becomes BoJ governor after 1998 resignation scandal Masaru Hayami stepped in as Bank of Japan governor in early 1998 after deputy governor Fukui and governor Matsushita resigned over a scandal. > "Masaru Hayami had stepped in as governor when deputy Fukui and governor Matshushita had to resign in early 1998 due to a scandal." > — Princes of the Yen ## 1998 — Japanese suicides peak amid recession Suicides in Japan rose to 31,755 in 1998, a rise linked by observers to the recession. > "Suicides rose to 31,755 in 1998 (National Police Agency)." > — Princes of the Yen ## 1998 — Ministry of Finance stripped of its powers In 1998 MoF lost its monopoly on budgeting, control over banking supervision to an independent financial supervisory authority, its licensing power through the Big Bang deregulation, and monetary policy to the independent BoJ. > "The year 1998 went down in Japanese history as the year in which the Ministry of Finance lost its main power—its monopoly on budgeting. For the first time in the postwar era, it was politicians who drew up the stimulus packages." > — Princes of the Yen ## 1998 — Prosecutors raid the Ministry of Finance In early 1998, public prosecutors raided the Ministry of Finance for the first time, amid scandals, arrests of senior bureaucrats, and public demonstrations against the ministry. > "In early 1998, public prosecutors for the first time actually raided the most powerful of Japan’s ministries." > — Princes of the Yen ## March 1998 — BoJ sharply boosts credit creation In March 1998 the Bank of Japan suddenly boosted credit creation to its highest level since January 1974, which was followed by the sharp economic recovery and stock market rise of 1999 before the taps were turned off again. > "In March 1998, the Bank of Japan suddenly boosted credit creation sharply. Our index reached the highest level since January 1974, when the BoJ was supplying the funds for the 1970s real estate bubble." > — Princes of the Yen ## 31 March 1998 — Bank of Japan begins rapid money creation On 31 March 1998 the Bank of Japan suddenly began creating money at the fastest rate in a quarter century, one day before the new Bank of Japan Law took effect granting it legal independence; the injections drove the yen to 147 per dollar in mid-1998 and produced a surprise recovery in 1999. > "The Japanese economy recovered temporarily in 1999, because the Bank of Japan suddenly—and, as it turned out, temporarily—switched on the printing presses on 31 March 1998, creating money at the fastest rate in a quarter century. One day later, the new Bank of Japan Law became effective and the Bank of Japan had achieved legal independence." > — Princes of the Yen ## April 1998 — Bank of Japan stops publishing sectoral loan data In April 1998, upon gaining legal independence, the Bank of Japan stopped publishing the monthly sectoral bank loan data it had compiled since 1942 as the basis of its window guidance credit allocation. > "In April 1998, when it gained legal independence, the Bank of Japan stopped publishing the monthly data for sectoral bank loans, which it has been compiling and using as the basis for its credit allocation since 1942." > — Princes of the Yen ## April 1998 — Big Bang begins with foreign exchange deregulation Japan's Big Bang financial deregulation started in April 1998 with the liberalization of the foreign exchange law, symbolically ending the war economy that the foreign exchange laws of the 1930s had begun. > "The Big Bang started in April 1998 with the deregulation of the foreign exchange law. That, indeed, symbolizes the end of the war economy, because, as we saw, it was the foreign exchange laws that began the introduction of the war economy in the 1930s." > — Princes of the Yen ## April 1998 — New Bank of Japan Law makes the BoJ independent The new BoJ Law took effect in April 1998, stripping the Ministry of Finance of the power to set monetary policy and making the Bank of Japan legally fully independent. > "The new BoJ Law became effective in April 1998, stripping MoF of the power to set monetary policy and making the BoJ legally totally independent." > — Princes of the Yen ## June 1998 — Financial Supervisory Authority opens and closes LTCB and NCB Bank supervision was transferred from the Ministry of Finance to the new independent Financial Supervisory Authority, which began business in June 1998 by closing the LTCB and NCB banks. > "The new FSA began business with a vengeance in June 1998, closing two amakudari banks, LTCB and NCB." > — Princes of the Yen ## 15 June 1998 — Yen collapses to nearly 147 per dollar Amid the renewed slump of 1997-1998, the yen collapsed to nearly 147 to the dollar on June 15, 1998, about 80 percent weaker than its April 1995 peak, and was read as a sign of capital flight. > "It collapsed to nearly ¥147/$ on June 15, 1998, around 80 percent weaker than its peak in April 1995." > — Princes of the Yen ## 17 August 1998 — Russia defaults on domestic debt On August 17, 1998, Russia defaulted on its domestic debt as the Asian crisis spread to other emerging markets, with Brazil soon teetering on the verge of collapse. > "On August 17, 1998, Russia defaulted on domestic debt. Next, Brazil teetered on the verge of collapse." > — Princes of the Yen ## September 1998 — Call rate lowered to near zero In September 1998 the overnight call rate was lowered to about 0.3 percent while ten-year government bond yields dropped to 0.7 percent, sparking debate that interest rate policy had reached its limit. > "The lowering of the overnight call rate to about 0.3 percent in September 1998 coincided with a drop in ten-year government bond yields to 0.7 percent." > — Princes of the Yen ## September 1998 — Mahathir imposes capital controls in Malaysia In September 1998 Malaysian leader Mohammad Mahathir imposed controls on short-term capital movements, stabilizing the exchange rate while the central bank stepped up credit creation and the government cleaned up bank balance sheets without IMF-style reforms. > "But in September 1998, Mahathir imposed controls on short-term capital movements and hence stabilized the exchange rate. Simultaneously, his central bank stepped up credit creation and the government implemented a program to clean up the balance sheets of banks." > — Princes of the Yen ## September 1998 — New York Fed organizes LTCM bailout At the end of September 1998, New York Fed chairman William McDonough summoned the heads of major Wall Street and European banks and organized a cartel-like bailout of the failing hedge fund LTCM, averting a full-blown default. > "At the end of September, William McDonough, the chairman of the New York Fed, summoned some of the most powerful men of world finance to the boardroom on the tenth floor of the New York Federal Reserve." > — Princes of the Yen ## c. 1998 — Deflation and stagnation define the lost decades From the late 1990s Japan slid into mild but persistent deflation, with falling prices, weak demand, and near-zero growth. What was first called the lost decade stretched into two and then three. Government stimulus and public debt piled up while output barely moved. ## 1999 — Bank of Japan withdraws credit in 1999 The Bank of Japan sharply reduced its credit creation in 1999, actively withdrawing credit for most of the year; the yen returned toward 100 per dollar and the 1999 recovery stalled in 2000. > "The Bank of Japan reduced its credit creation sharply in 1999, actively withdrawing credit from the economy for most of the year. The yen moved back close to ¥100/$, and a year later the recovery of 1999 stalled." > — Princes of the Yen ## 1999 — BoJ credit withdrawal strengthens the yen despite record interventions In 1999 the Bank of Japan withdrew credit from the economy at a record pace, strengthening the yen to close to 100 per dollar by year-end and oversterilizing new record foreign exchange interventions ordered by MoF. > "This credit shrinkage strengthened the yen to close to ¥100/$ by the end of 1999, despite new record foreign exchange interventions ordered by MoF. The Bank of Japan again oversterilized them." > — Princes of the Yen ## 1999 to 2001 — Short-lived recovery of 1999 and relapse The economy staged a sharp recovery in 1999 with the Tokyo stock market rising more than 50 percent, but the market peaked in the first quarter of 2000 and both market and economy slumped again in mid-2000 and 2001. > "Yet most observers were once again surprised by a sharp recovery of the economy in 1999 and a more than 50 percent rise in the Tokyo stock market. But the stock market peaked in the first quarter of 2000 and both market and economy slumped once again in mid-2000 and 2001." > — Princes of the Yen ## 1999 — Tax money injected into Japanese banks Public tax money was injected into Japanese banks in early 1999, and the Koizumi government proposed further injections in late 2002. > "Tax money was actually injected into banks in early 1999. The Koizumi government proposed further tax money injections into banks in late 2002." > — Princes of the Yen ## 1 January 1999 — European Central Bank begins operations The European Central Bank, described by the Maastricht Treaty as independent of any government or elected assembly, started operations as scheduled on January 1, 1999. > "The treaty described the role and function of the European Central Bank (ECB), which started operations as scheduled, on January 1, 1999, and which is legally the most independent central bank in the world." > — Princes of the Yen ## February 1999 — Public money injected into Japanese banks In February 1999 Japanese banks received around 10 trillion yen in public and third-party money, part of the resources that allowed the bubble-era primary bad debts to be largely written off. > "Banks brought at least ¥33 trillion through derivatives and other methods onto their balance sheets, and they received around ¥10 trillion in public and third-party money in February 1999." > — Princes of the Yen ## February 1999 — Zero interest rate policy adopted In February 1999 the Bank of Japan let the overnight call rate fall to 0.1 percent, a stance called the zero interest rate policy, after cutting it to 0.33 percent in October 1998. > "Three years later, in October 1998, the Bank of Japan lowered the call rate to a new low of 0.33 percent. In February 1999, it fell to 0.1 percent—at the time called a “zero interest rate policy.”" > — Princes of the Yen ## February 1999 — Zero interest rate policy introduced In February 1999 the Bank of Japan guided the overnight call rate down to 0.1 percent, a stance dubbed the zero interest rate policy, after cutting it to a record low 0.33 percent in October 1998. > "In February 1999, it fell to 0.1 percent—what at the time was called a “zero interest rate policy.”" > — Princes of the Yen ## May 1999 to June 1999 — Asian leaders call for currency union In May 1999 the head of the Hong Kong Monetary Authority argued that Asia should move toward currency union, a call endorsed in June 1999 by the president of the Philippines. > "The head of the Hong Kong Monetary Authority argued in May 1999 that Asia should move toward currency union. This was endorsed in June 1999 by the president of the Philippines." > — Princes of the Yen ## 23 July 1999 — Omnibus Act abolishes cartel exemptions With the promulgation on July 23, 1999 of the Omnibus Act to Repeal and Reform Cartels and other exempted systems, the number of legal cartels in Japan basically reached zero. > "With the 23 July 1999 promulgation of the Omnibus Act to Repeal and Reform Cartels and other Systems exempted from the Application of the Anti-Monopoly Act under Various Laws, the number of cartels basically reached zero." > — Princes of the Yen ## 2000 — Hayami tightens monetary policy as the economy recovers In May 2000 Governor Hayami argued that a recovery might weaken pressure for structural reform, which the author cites as his justification for tightening monetary policy again in 2000. > "To this type of argument, Governor Hayami countered in May 2000: “When the economy recovers, as is now happening, it might well be the case that efforts for structural reform might be neglected due to a sense of security.”39 That was his justification for tightening monetary policy again in 2000." > — Princes of the Yen ## 2001 — Enron bankruptcy The 2001 bankruptcy of Enron, followed by other accounting and fraud scandals, blurred the distinction between Asian-style and U.S.-style cronyism. > "The 2001 Enron bankruptcy, followed by other high-profile accounting and fraud scandals, further blurred the distinction between Asian-style and U.S.-style cronyism.22" > — Princes of the Yen ## 2001 — German economy slows down When the German economy visibly slowed in 2001, politicians including finance minister Hans Eichel wanted stimulatory policies but found monetary policy in the hands of the independent ECB and fiscal policy constrained by the stability and growth pact. > "When the German economy started to slow down visibly in 2001, German politicians, including finance minister Hans Eichel, increasingly felt the need to implement stimulatory policies.5" > — Princes of the Yen ## 2001 — Japan adopts market value accounting Fiscal year 2001 was the first in which Japanese company books were calculated by U.S.-style market value accounting instead of book value, sharply accelerating the dissolution of cross shareholdings and the shift to shareholder capitalism. > "Fiscal year 2001 was the first in Japanese history that company books were calculated according to market value accounting." > — Princes of the Yen ## 2001 — Japan's national debt reaches record high New government borrowing of over 300 trillion yen during the 1990s pushed total outstanding debt to 522.1 trillion yen by end-2000, and with 2001 borrowing the debt reached a record 582.46 trillion yen, about 120 percent of GDP. > "Adding the new borrowing of ¥60.36 trillion during 2001, the most recent national debt figures record a new high of ¥582.46 trillion, about 120 percent of GDP." > — Princes of the Yen ## 2001 — Richard Werner argues the bubble was engineered by the Bank of Japan In his book "Princes of the Yen," a bestseller in Japan in 2001 and published in English in 2003, economist Richard Werner argued that the Bank of Japan deliberately created the bubble and then the crash. He points to window guidance, an informal system in which the central bank told commercial banks how much and to whom to lend. In his account the bank used this credit control to force a crisis that would push through structural change. This is a heterodox interpretation attributed to Werner, and mainstream economists dispute that the outcome was intended. ## January 2001 — Abolition of the Ministry of Finance (Okurasho) In January 2001 the Okurasho was abolished, ending over half a century of the ministry's dominance and leaving only a rump institution. > "In January 2001, the Ōkurashō was abolished. The remaining rump is a far cry from the powerful institution that it had been for over half a century." > — Princes of the Yen ## January 2001 — Abolition of the Okurasho name In January 2001 Japan's Ministry of Finance lost its historic name Okurasho as part of a government reorganization, ending a long institutional history. > "Not noticed by many English-speakers, to whom the old Ōkurashō was simply known as the Ministry of Finance, a long and illustrious history ended abruptly in January 2001." > — Princes of the Yen ## January 2001 — The Okurasho loses its historic name In January 2001 the Ministry of Finance lost its grand old name, the Okurasho, as part of administrative reform. > "To add insult to injury, in January 2001 MoF even lost its grand old name. Today, the Ōkurashō does not even exist." > — Princes of the Yen ## March 2001 — Bank of Japan announces quantitative easing The Bank of Japan officially announced quantitative easing in March 2001, and in May 2001 significantly boosted its credit creation in a policy rivaling its record 1998 reflation. > "We saw that in May 2001, later than its March 2001 official announcement of “quantitative easing,” the Bank of Japan once again boosted its credit creation significantly." > — Princes of the Yen ## 19 March 2001 — Bank of Japan adopts quantitative easing On March 19, 2001 the Bank of Japan performed a sudden policy U-turn and officially adopted quantitative easing, a policy it had claimed for a decade was impossible to implement. > "The central bank performed a sudden policy U-turn on March 19, 2001, now officially pursuing what it calls a policy of “quantitative easing” despite the fact that it had claimed for a decade that such a policy was impossible to implement." > — Princes of the Yen ## 19 March 2001 — Bank of Japan announces reserve targeting ('quantitative easing') On March 19, 2001 the Bank of Japan announced it would switch from targeting the overnight call rate to targeting the quantity of banks' reserve deposits, a policy commonly called quantitative easing; its actual credit creation nevertheless fell in the following months. > "On 19 March 2001, the Bank of Japan announced that it was switching from a policy of targeting the overnight call rate (they had already reached levels below 0.01 percent) and instead target the quantity of banks’ reserve deposits with the central bank (Bank of Japan [2001])." > — Princes of the Yen ## 19 March 2001 to 2006 — Bank of Japan launches quantitative easing The Bank of Japan becomes the first major central bank to adopt an explicit quantitative easing policy, targeting the level of bank reserves after interest rates hit zero. ## April 2001 — Koizumi becomes prime minister Junichiro Koizumi became Japan's prime minister in April 2001, giving prominence to reform plans such as privatizing publicly owned companies, most notably the post office. > "Many observers are still convinced that the reform plans of Junichiro Koizumi, who became prime minister in April 2001, would be positive for Japan." > — Princes of the Yen ## May 2001 — Bank of Japan reflates under Koizumi In May 2001 the Bank of Japan's purchases of commercial paper rose over 500 percent year on year and bond purchases increased rapidly, pushing its liquidity injections back toward the levels of March 1998. > "That is why the princes switched on the printing presses again. In May 2001, purchases of commercial paper rose by over 500 percent YoY. Bond purchases increased rapidly." > — Princes of the Yen ## May 2001 — Fukui's failed bid for the BoJ governorship In May 2001 Toshihiko Fukui, then head of the Fujitsu Research Institute, staged an attempt to take over from Governor Hayami as Bank of Japan governor, but Hayami refused to resign. > "In May 2001, in the same week this book was published in Japanese, Toshihiko Fukui, head of the Fujitsu Research Institute, staged an attempt to take over from Governor Hayami as the new governor." > — Princes of the Yen ## June 2001 — BoJ shifts to expanding the quantity of credit In June 2001 the Bank of Japan changed monetary policy again and sharply increased the quantity of its credit creation, which contributed positively to the economy in 2002 after the slump of 2001. > "In June 2001, the central bank changed its monetary policy once more and sharply increased the quantity of its credit creation.17" > — Princes of the Yen ## December 2001 — China joins the World Trade Organization China acceded to the World Trade Organization in December 2001. Membership accelerated its integration into the global economy and its rise as a manufacturing power. ## 2002 — ECB orders record shrinkage of Bundesbank credit creation In 2002 the ECB ordered the Bundesbank to shrink its credit creation by record amounts; as money circulating in the economy shrank, demand fell and Germany moved into recession. > "It ordered the Bundesbank to shrink its credit creation by record amounts in 2002. As the amount of money circulating in the economy shrank, demand fell and the economy moved into recession." > — Princes of the Yen ## 2002 — Surprise recovery in late 2002 Following the Bank of Japan's renewed credit creation of 2001 and the usual time lag, industrial production, consumption, and real GDP staged a recovery by late 2002 that surprised most observers. > "Given the normal time lag, this meant that by late 2002, industrial production, as well as domestic consumption, and hence real GDP, staged a recovery that surprised most observers." > — Princes of the Yen ## 1 January 2002 — Euro cash introduced; national currencies abolished On January 1, 2002, new euro paper money and coins were introduced across most of Europe as twelve countries, including Germany with its deutsche mark, gave up their national currencies. > "On January 1, 2002, new paper money and coins were introduced in most of Europe. What still seemed an unlikely scenario to many observers as recently as the mid-1990s happened without major obstacles or upsets: Twelve European countries gave up their national currencies." > — Princes of the Yen ## September 2002 — BoJ announces stock purchases; Yanagisawa replaced by Takenaka In September 2002 the Bank of Japan announced it would be prepared to purchase stocks from banks, a move that embarrassed Financial Services Minister Yanagisawa, who was sacked and replaced by Heizo Takenaka, a supporter of the bank's foreclosure plan. > "He paid for it with his job: in September 2002, the central bank surprised the world with its announcement that it would be prepared to purchase stocks from banks—ostensibly in order to help them." > — Princes of the Yen ## December 2002 — Koizumi pledges an anti-deflation BoJ governor In late December 2002 Prime Minister Koizumi stated that he would appoint as Bank of Japan governor only someone aggressive in fighting deflation. > "Perhaps as a result, Prime Minister Koizumi stated in late December 2002 that he would appoint as governor of the Bank of Japan only someone who is “aggressive in fighting deflation.”" > — Princes of the Yen ## 2003 — Toshihiko Fukui appointed Bank of Japan governor Toshihiko Fukui was appointed governor of the Bank of Japan in 2003, despite Prime Minister Koizumi's earlier contrary statements, which the author cites as proof of the princes' power. > "The fact that he was duly appointed, despite contrary statements by the prime minister and by an administration famous for surprise appointments, merely serves to demonstrate the extent of the power wielded by the princes." > — Princes of the Yen ## c. 2003 — The debate over what caused the lost decades Richard Werner argues the long slump was engineered, the intended result of a central bank steering credit to force reform. The mainstream view holds it was not designed but was the wreckage of a genuine asset bubble made worse by slow policy, weak banks, and an aging population. Both sides agree that the bubble and crash were real and that policy shaped the outcome; they disagree on whether the damage was intended. ## 2010 — China passes Japan as the world's number-two economy In 2010 China's output overtook Japan's, ending Japan's four-decade hold on the second spot behind the United States. China's rise rested on its own reforms, cheap labor, huge investment, and access to world markets. Japan, still wealthy, had spent two decades barely growing. ## c. 2010 — The claim that Japan was crushed to clear the way for China Some commentators argue that Japan's bubble and long stagnation were engineered to hold it down and let China take its place as Asia's rising power. Proponents tie this to the Plaza Accord pressure and Richard Werner's reading of Bank of Japan policy. Critics answer that Japan's slump and China's rise had separate causes: the strong yen after Plaza, the central bank's easy money and later tightening, Japan's aging population, and China's own independent reforms. The engineered reading is an interpretation held by its proponents, not an established fact.