An Extended Review of “Princes of the Yen” by Professor Richard Werner

February 18, 2014 12:00 am Published by Leave your thoughts

1 Introduction

This review is an extended version of my review of this book on the website. In the paragraphs below I have inserted in italics (like this) the comments not made in the Amazon Review of this book. I have also added paragraph headings not present in the original review.

This is the best book ever written about the Japanese Financial-Industrial System (and I’ve read hundreds during the last 40 years).

Richard Andreas Werner is no minor economist. His Wikipedia Entry points out that he predicted, in his 1991 discussion paper,

“the imminent ‘collapse’ of the Japanese banking system and the threat of the “greatest recession since the Great Depression”.”

“Werner proposed a policy he called “quantitative easing” in Japan in 1994 and 1995.”

At the 2003 World Economic Forum in Davos, Werner was selected as a

“Global Leader of Tomorrow.”


Werner is no minor economist, and I am very surprised his contributions to economics are not more widely recognised.

2 Background

Among my other interests, I am an expert on the financial-industrial system of Japan, and I have co-authored two books with John Carrington and written another two, but this book escalated my detailed knowledge of that system by several orders of magnitude.

3 The key observations in “Princes of the Yen”

3.1 Money and credit is not just a neutral medium of exchange, it can help fund productive investments or it can fund asset bubbles, depending upon how it is focused. If it is not created at an appropriate rate by the central bank, the absence of credit will needlessly convert an economic recession into a long depression, which the Bank of Japan “Princes of the Yen” did in Japan

This is an astonishing, timely and well-written book. Not only does it set out the Ministry of Finance/Bank of Japan investment credit creating policies that lie at the root of the Japanese economic miracle, but it also explains how the Japanese asset price bubble happened because of BoJ speculative credit creation. It discusses how the “lost decade” of the 90s occurred because the “Princes of the Yen” running the Bank of Japan sat on their hands and did not create the credit that would have put an early end to that long depression. The “Princes” did that because the BoJ had the objective of “Structural reform” – of creating in Japan a US-style hire and fire economy, lowering average and median wages and prioritising profits, with privatisation and less welfare through reduced government spending – the entire inept and depression-creating neo-classical recipe for running an economy not for the benefit of the majority of its population. The book therefore corrects several prevalent misconceptions. Economists need to understand that money is not just a neutral medium of exchange, for the creation of money by the central bank is not neutral, it can be earmarked investment credit, stimulating productive investment and economic growth, or it can be speculative credit, forcing asset and land prices up and creating a subsequent misery-creating recession, with the possibility of the central bank not creating the necessary credit creation that can end depressions.

Werner’s observation that “Princes of the Yen” through their inactivity in creating investment credit in the 1990s, applies with great force to the current and similar inactivity of the Bank of England in the UK, the ECB in Europe and the Federal Reserve in the USA. The credit crunch has been and is being extended by the mistaken Western neo-classical mindset of nearly all the key players in the media, political, business and academic establishments. understandings The Western economies are about to lose the world to Asia, because China, Japan, South Korea and Taiwan all understand, and practise to different degrees, Shimomuran investment credit creation economics.

3.2 Central banks should be brought back under democratic control

Werner’s book argues that all central banks need to operate under democratic control and should not be independent, because if they are, they may (as the BoJ did) adopt and practise policies to the detriment of the economy and to all those who make their living by working in it.

3.2.1 Japan’s long 1990s depression was due to a failed attempt by the BoJ to achieve the OECD/IMF aim of “structural reform” in Japan

The failure of Japan’s growth during the 1990s was not, as many western commentators assume, the failure of the Japanese investment-credit-creating growth model, but the predictable failure of Western neo-classical economics when the BoJ tried to force these policies upon an unwilling Japan.

4 Other major topics covered

The additional topics that this book covers are many, but just to give a few headlines that can be covered in a brief review

  • This book illustrates a better investment-credit-creating method of running an economy;
  • shows how the boom-and-bust cycle, which is the blight of many economies, could be reduced by limiting the central bank’s credit creation for speculation;
  • Werner’s book names the names of those responsible at the BoJ for the “Look no hands” credit-reducing depression-lengthening policies of the 1990s;
  • indicates that the current AsIan zone of high economic growth are the countries which were occupied and controlled by the Japanese during the war, when the local leaders (mainly in South Korea and Taiwan) learned growth-accelerating investment credit creation during the wartime Japanese administration;
  • 4.5 Werner points out that the economic growth procedures adopted in post-war Japan were implemented by the same personnel who had piloted them during wartime while working in the Manchurian Railway Company;
  • Werner’s observations have a direct relevance to the European and American contexts.

The Reichsbank has been reborn as the ECB and its processes of credit creation are outside democratic accountability and control. Europe’s long recession is being extended by the ECB’s obsession with low inflation when, as Werner points out, the ECB should be creating earmarked investment credit to produce higher investment, growth and employment. Werner observes that the independent Reichsbank previously caused mass unemployment in 1930s Germany by insisting on the impossible – that firms which had invested bank loans in plant and equipment should nonetheless repay the loans earmarked for that purpose – with the inevitable result of bankruptcies, mass unemployment and the destruction of economic capacity.

5 Politicians, not central banks, should be in control of a country’s economic policy, for only they are democratically accountable

Werner argues that the independence of the central bank is no guarantee of their practice of appropriate policies and that inflation control is not the only economic objective. He concludes that whatever the failures of politicians, they are the elected authority which has the democratic right to determine the country’s economic policy. Central bank independence is unlikely to deliver that objective, because adequate investment credit has never been created by an independent central bank. The post-war German-Japanese financial-industrial systems created great economic growth.

6 The Post-War success of Germany was due to the Bundesbank’s subsidiarity to the German Government

Werner shows how the Bundesbank was successful not because of its independence from the government, but because of its reduced independence compared to the unaccountable Reichsbank: the postwar Bundesbank was made accountable to parliament (Bundestag) and its more recent legislation, such as the stability and growth law of 1967 Bank independence has not produced comparable results. The American Federal Reserve is similarly not subject to any democratic accountability except for Alan Greenspan’s and his successor’s occasional discussions with Congress.

7 Werner has used Granger Predictive Causality analysis tests to “Prove” the links between BoJ investment credit and Japan’s growth, and BoJ speculative credit creation and Japan’s asset bubbles

Above all, Werner uses the relatively recent technique of Granger Causality analysis to show that investment credit creation is the predictive egg that precedes the subsequent chickens of growth, and thus provides calculations of the predictive causality about how bank-generated finance can create real growth or speculative asset bubbles.

(Sir Clive Granger, along with his colleague Robert Engle, was awarded a Nobel Prize for contributions to economics, perhaps for his development of Granger Causality Analysis, which tests the validity of predictive causative links between two items of economic data).

It is one thing to propose that investment credit creation at the BoJ has a causative, predictive link running to the production of economic growth, as I and my co-authors have done for over 35 years. It is another thing entirely to show that there is a direct, causative predictive link between the central-bank created investment credit and economic growth, as Werner has done. This is a major finding and towering achievement and politicians, bankers and economists should not ignore it. But they will, at least to begin with. As I have discovered over many decades, the Western neo-classical mindset is a perfectly argued, logically consistent, and a great achievement of Western intellectual economic thought. It only has one major defect – its assumptions of perfectly logical individuals acting on perfect information in perfect markets – does not relate to reality. Smith’s hidden hand – the idea that each individual, acting from the most selfish motives, maximises the commonwealth and the public good – does not apply to bankers. Werner has also proven that interest rates have no Granger causation predictive link to economic growth, but that will not stop central banks acting as if they have, because that is what is meant to work according to neo-classical economics. The idea that it ought to do that, according to neo-classical economics, seems to have more influence than the observable and now-proven fact that there is no detectable relationship.

8 Although Werner was the first Shimomura Fellow, the Japanese concealed who Shimomura was and what Shimoura had done from Werner

The author of this book – Richard Andreas Werner – was the first 1991 Shimomura Fellow but the Japanese, following their usual practice of concealing Dr Osamu Shimomura’s (1910-89) great contribution to economic growth theory and practice from Westerners, apparently did not tell Werner who Shimomura was and why he was “Japan’s most influential post-war economist.” No matter – Werner has competently worked things out for himself, independently arriving at understandings similar to the Shimomura model of Japan, and producing these by inductive reasoning from the economic data and demonstrating their validity through the Granger calculations.

Werner’s book reports upon more extensive results than Dr Osamu Shimomura’s model of the Japanese economy does, because Shimomura deals with how BoJ investment credit creation increases economic growth while Werner also points out how growth in central bank credit creation can be misused to fund the speculation of an asset bubble, and how the lack of appropriate credit creation following a recession can create a long lasting depression. Werner’s work could not be more relevant to today’s economic circumstances.

9 I think this book is enormously significant

In my view, this book is probably one of the most significant contributions to valid economic thinking written during recent decades. Of course, my view is bound to be partly influenced by the fact that most of what I have written about during the last four decades or so has arrived at some similar conclusions to those now proven by Werner using Granger causation analysis. But the truth is like that – available to researchers and anyone who is prepared to look at the facts and, from observation, inductively arrive at results applicable in the real world – and the surprise for me has always been how many mindsets are content with the invalid dead end of that brilliant but unsound castle in the air of neo-classical economics.

If you are a student of economics, buy this book. Your teachers and lecturers, trapped in the prevalent neo-classical mindset, are unlikely to tell you anything as relevant as this book will. Challenge their complacency. And if you are a Professor of Economics, get yourself re-educated by buying, reading and understanding this book. If you are a member of the public or a civil servant or anyone interested in economic policy and how we could have a more flourishing economy, buy this book – it tells you about that. Finally, if you are a politician, please read this book, for it contains better growth-assisting policies than any being currently taught, reported upon, or practised in the West, and you should learn about these and how to to apply them.

10 Conclusion

A truly great book and a curtain-raiser for Werner’s “New Paradigm in Macro-Economics” which is equally excellent.

© George Tait Edwards 2014


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