# Big Bang Japan: the Ministry of Finance loses power

The institutional revolution after the crash: deregulation, the new Bank of Japan Law, Ministry of Finance scandals, the FSA, Okurasho’s fall, accounting reform, and Koizumi’s structural turn.

*This story parallel: The corporation*
*This story parallel: Parliament: its rise and how it gets hijacked*
*This story part of: Princes of the Yen: Japan built, bubbled, and broken*
*This story part of: Money and finance*

## 27 October 1986 — London Big Bang deregulation

The London Stock Exchange abolishes fixed commissions and opens membership to foreign firms, switching to electronic trading overnight. The Big Bang restores London's place as a top global financial center.

## 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

## 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

## 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

## 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

## 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 — 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

## 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

## 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 — 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 — 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

## 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

## 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

## 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

## 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

## 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

## 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

## 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