All language subtitles for Princes.of.the.Yen.2014.1080p.WEBRip.x265-RARBG2_English

(keystrokes)

- [Voiceover] Long live the Imperial Army.

Long live the Imperial Army.

(people shout)

- I pledge allegiance to the flag

of the United States of America.

(explosion)

- [Voiceover] The atom bomb.

- [Voiceover] We will arrive
at Yokohama at 0930 hours.

We will arrive at Yokohama at 0930 hours.

Debarkation priority will be in accordance

with the debarkation schedule.

- [Voiceover] General Douglas MacArthur

arrived at Atsugi Naval
Aerodrome, near Yokohama

on August 30, 1945.

As he emerged from his aircraft,

he paused at the top of the steps,

stuck one hand in his hip pocket,

tightened his jaws
around his corncob pipe,

and surveyed the conquered lands.

This pose was repeated several
times from different angles,

so that all the press photographers
could get a decent shot.

Democracy was to be instilled
in the Japanese people

as though they had never heard of it.

- [Voiceover] Our problem's in the brain

inside of the Japanese head.

These brains like our
brains can do good things

or bad things all depending on the kind of

ideas that are put inside.

- [Voiceover] Kabuki plays
featuring loyal samurai

were banned or heavily censored,

as were books and films about the bombings

of Hiroshima and Nagasaki.

Satirical cartoons of
MacArthur and mention

of occupation censorship
were strictly forbidden.

- [Voiceover] The commission
finds you guilty as charged

and sentences you to death by hanging.

- [Voiceover] Yamashita
himself thanked the commission

for the fairness of his trial.

- [Voiceover] Prime minister at the time

of the war in the Pacific, General Tojo,

remarked during his trial

"None of those Japanese would dare act"

"against the Emperor's will."

The cross-examination was
immediately cut short,

and a week later Tojo dutifully stated

that the Emperor had always
loved and wanted peace.

- [Voiceover] General Hideki Tojo,

who assumed official
responsibility for the conduct

of the war and did everything possible

to exonerate his emperor.

- [Voiceover] MacArthur would later remark

to the U.S. Senate that in
terms of modern civilization,

the Japanese were like a 12-year-old boy.

- You are interested in the unknown,

the mysterious, the unexplainable.

That is why you are here.

- [Voiceover] When the war was over,

bank loan books had deteriorated.

The assets the banks held
were mainly war bonds

and loans to destroyed industries

as such the whole banking
sector was virtually bankrupt.

This problem was easily
solved by the Bank of Japan.

All it had to do was buy the
banking sector's bad papers

with newly created reserves
giving them good money

for assets which were often worthless.

The first two postwar
central bank governors

were nominated by the U.S. occupation.

Eikichi Araki was appointed
the first postwar governor

of the Bank of Japan,

but soon after taking up this post,

he was indicted by war crime's prosecutors

and had to resign.

Then in 1951 after a general amnesty

on suspected war criminals
filling public offices,

he was made ambassador
to the United States.

On returning from his post
as ambassador in 1954,

Araki was again made
governor of the Central Bank.

After the 1951 amnesty for war criminals,

much of the Japanese wartime bureaucracy

was returned to their wartime positions.

This included wartime politicians

and most home ministry bureaucrats

who had been in charge
of the thought police,

a number of which moved
to the education ministry.

- Japan is the key to
the fate of the Far East.

Once again for the second time

in the march of modern history,

those words have urgent reality.

- [Voiceover] In order to
avert the kind of rural unrest

that was helping the communists in China,

the Americans initiated the redistribution

of land from big landowners
to their tenants.

The capitalist elite in
Japan, known as the Zaibatsu,

were purged as supporters
of a criminal war

and prohibited from
further business activity.

- Basically the fascist
policies of the 30s

that the reformed fascist bureaucrats

could not implement during the war even,

the U.S. occupation managed to complete

like the land reform
and the Zaibatsu policy.

- Yeah, it's a very funny encounter

of Japanese wartime fascists

and American New Dealers.

- [Voiceover] The Diet,
home of Japan's Senate

and House of Representatives.

- [Voiceover] In Japan fanatic students

and leftist groups rioted for days on end,

seeking to block the mutual
defense treaty with America.

- [Voiceover] The socialist
deputies staged a riot

in the Diet itself.

The police in restoring order
also evicted the socialists.

(static and distorted voices shouting)

- [Voiceover] The speaker
was carried to the platform

and called to order the session
that approved the treaty.

- [Voiceover] In 1957 the former
class A war crime suspect,

Kishi Nobusuke became
prime minister of Japan.

He had been General Tojo's
Minister of Commerce and Industry

during the war

where his responsibilities had ranged

from munitions to slave labor.

- While Hitler's wartime war minister,

war economy minister,

was in Berlin Spandau
prison, Albert Speer,

his Japanese wartime colleague

was prime minister of the country.

- [Voiceover] Although
Kishi became a defender

of democracy after the war,

before and during the war
he had described himself

as a national socialist.

With money from crime syndicates,

industrial corporations,
and CIA slush funds,

Kishi built the Liberal Democratic Party

into a powerful political machine.

In Japan many of the
most important postwar

economic and political leaders

came from an elite group
of wartime bureaucrats,

the very same people who had
pushed Japan into the war.

The Liberal Democratic
Party stayed in power

for almost 40 years.

- [Voiceover] "Welcome home" in Japanese

to these American soldiers.

After a tour of duty in Korea,

they are returning to their base in Japan

where once a short time before

they were stationed as occupation troops.

And how do they return?

How are they received by the people

whose land they occupied?

Not as overlords.

Not as antagonists.

Not as men who are distrusted and feared

and resented but as friends.

(marching band music plays)

(people cheering)

- [Voiceover] In Tokyo's
Central Chiyoda Ward,

the Ministry of Finance
had its headquarters.

From here the ministry
controlled most aspects

of economic life in Japan.

- The Ministry of Finance was
the most powerful ministry,

and the Bank of Japan had to report

to the Ministry of Finance.

- [Voiceover] Ministry
of Finance officials

elicited deep and hushed
exclamations of awe and respect,

and former ministry bureaucrats
obtained influential posts

as heads of private and
public institutions.

(whistle)

But in one area the ministry
did not have actual control

and that was the quantity
of credit creation

and its allocation, which was decided

by the Japanese central
bank, the Bank of Japan.

- They told the Ministry
of Finance and the public

and the journalists,
"We run monetary policy"

"through interest rates."

And they let the Ministry
of Finance reign in

their interest rate policies.

But the rule was done through
not the interest rates,

which is the price of
money it was done through

the quantity of money.

- It worked this way.

It's called window guidance.

The Bank of Japan just told the banks

how much they were gonna lend,

they will have to lend
in the coming quarter,

and who, which sector of
the economy to lend to.

It's credit allocation, credit control.

- [Voiceover] The Bank of Japan
gave quarterly instructions

to individual banks on the value of loans

and which industrial sectors
they should be allocated to.

All loans were broken down
in sectors and sub-sectors,

and large-scale borrowers
had to be listed by name.

The Bank of Japan could
decide which projects

should be encouraged and
which should be discouraged

by dictating to whom and for what

banks could issue loans.

This was the war economy system,

adapted to the production
of consumer goods.

- [Voiceover] The 95
million people of Japan

now enjoy a national income second only

to the United States and
the more prosperous nations

of Western Europe.

- It's not a good system for capitalists,

you know, shareholders

but for the population it
created a lot of wealth,

very even income and wealth distribution,

very high growth, and very rapidly raised

quality of life and standards of living.

- [Voiceover] In 1959 alone
the economy expanded by 17%.

But a result of the war economy system

was that entire industrial
sectors would compete

not for profit but for market share.

Companies would fight until bankruptcy

to gain market share.

This phenomenon was soon recognized

and called "excess competition".

The solution was the creation of explicit,

or implicit cartels.

In the banking sector window guidance

acted as the cartel control mechanism

because the Bank of Japan could dictate

the number and value of
loans that banks issued.

As a result bank rankings never changed

during the postwar era
except after mergers.

According to one banker, "If it were not"

"for window guidance, we
would compete until Harakiri."

- [Voiceover] The U.S.
current account deficit

surges to its highest level in nine years.

The size of the increase took
many economists by surprise.

(soft somber music)

- [Voiceover] While cartels
controlled competition

within Japan there were no such limits

when it came to international markets.

Japanese corporations soon became dominant

in many markets in the world.

In America formal congressional
hearings were held

under the title

"Japanese Productivity
Lessons For America".

Leading economic theories
indicate that only

free markets can lead to success,

but Japan rose within decades to become

the second largest economy in the world,

without relying only on the
invisible hand of free markets.

Japan's postwar economy
was a fully immobilized

war economy with production shifted

from weapons to consumer goods.

Since the Bank of Japan presented itself

as a champion of free markets,

window guidance was an embarrassment.

Official publications
either failed to mention it,

or downplayed its role by
calling the credit controls

voluntary.

Whenever the Ministry
of Finance would inquire

about the Bank of Japan's credit creation

and allocation policy,

Bank of Japan staff would
engage in complex discussions

full of technical jargon
to make the process

appear impenetrable to non-experts.

In November 1965 the first batch

of Japanese government
bonds came onto the market.

From now on when politicians
wanted to spend more,

they would no longer put
pressure on the Bank of Japan

but instead exert it on
the Ministry of Finance.

So the ministry would ultimately preside

over an ever increasing
national debt mountain.

The 1980s was an era of
financial deregulation

in the industrialized world.

Most industrialized countries
lifted their restrictions

on the movement of capital.

In Japan, Tadashi
Sasaki, a former governor

of the Bank of Japan,
called for a five-year plan

for the transformation and liberalization

of the Japanese economy.

Then in 1986 the Advisory Group
on Economic Restructuring,

headed by the former
Bank of Japan governor,

Haruo Maekawa, proposed a 10-year economic

reform plan designed to
make the living standards

of Japanese more comparable
to those enjoyed in the West.

The proposal stated that,

The report read like a wishlist
by U.S. trade negotiators.

It started with calls
for administrative reform

and the abolition of bureaucratic powers.

The goal was the transformation
of the entire body politic,

the abolition of the war economy system,

and the introduction of a U.S.
style free market economy.

Those members of the advisory group

who uttered dissent were
relieved of their duties.

Reports in the press were highly critical.

Observers recognized the
radical nature of the plan.

It seemed far too ambitious.

It was calling for a wholesale revolution

of all parts of the Japanese economic,

political, and social system.

Although the report was
clear about what was wanted,

it was embarrassingly silent about

how these goals would be achieved.

The only clue hidden in the report was,

- The Bank of Japan has
always been on the record

arguing that this typical
Japanese system that we're

so familiar with should be scrapped.

It just should be entirely scrapped,

and U.S. style capitalism
should be introduced.

Now, whether you agree with that or not

is an entirely separate question

but the Bank of Japan certainly thinks

it should be scrapped.

Now the next question
is how do you do that?

Well, the Ministry of Finance
has been legally in control

for most of the postwar era.

We've got entrenched
bureaucratic structures,

politicians, and all
these cartels and so on.

That was the old system.

Well, history teaches a system changes

only fundamentally if there's a crisis.

- [Voiceover] The commission proposed

that monetary policy should be used

to promote a historic crisis

sufficiently large to
overcome the vested interests

of the Ministry of Finance,

politicians, and corporate Japan.

Every system has groups
that benefit from it,

and hence have no desire to change it.

There is probably no country in the world

that has changed its economic, social,

and political system in a
significant way without a crisis.

It is the crisis that convinces citizens

and interest groups of
the need for change.

- Well then how can you achieve this?

Um, well you need a crisis,

and the best way to create
it is to have a bubble

because that's how nobody stops you.

- [Voiceover] The Bank of Japan began

to significantly increase
window guidance loan quotas.

Average yearly loan growth
quotas were close to 15%

in the late 1980s.

One city banker would later remark,

"During the bubble we
wanted a certain amount"

"of loan increases"

"but the Bank of Japan
wanted us to use more."

- [Voiceover] The credit
boom caused not only

a boom in real estate but
also in the stock market.

Between 1985 and 1989

stocks rose 240%

and land prices 245%.

By the end of the 80s
the value of the garden

surrounding the Imperial
Palace in central Tokyo

was worth as much as the
entire state of California.

Although Japan is only 1/26
the size of the United States,

its land was valued at four
times that of the United States.

The market value of a single one

of Tokyo's 23 districts,
the Central Chiyoda Ward,

exceeded the value of the whole of Canada.

Economists who are trained to believe

in market outcomes tried to
justify the high land prices.

Some thought land scarcity was the reason.

Shiny new corporate
headquarters rose in Tokyo's

posh business districts.

The labor market boomed so much

that there was a genuine fear
of a serious labor shortage.

Companies started to invite final year

university students on expensive
trips to holiday resorts

to entice them to sign up.

- The politicians loved it.

The Ministry of Finance loved it.

We had a boom of tax revenues going up.

The companies loved it.

Everything was wonderful
in the bubble era.

- [Voiceover] With asset
and stock prices rising

inexorably even traditional manufacturers

could not resist the
temptation to try their hand

at playing the markets.

Soon they expanded their
finance and treasury divisions

to handle the speculation themselves.

These company hedge
funds, know as Zaitech,

used borrowed money to engage in property

and share speculation.

The frenzy reached such proportions

that many leading manufacturers,

such as the car maker
Nissan, made more money

through speculative investments

than through manufacturing cars.

Literally thousands of
articles were written

on the new Japanese miracle economy.

A common explanation by economists

was that high and rising productivity

explained the impressive
performance of Japan's economy.

Books on Japanese management techniques

became international bestsellers.

Western businessmen
read 17th century tracts

on samurai strategies.

In reality Japan's stellar
performance in the 1980s

had little to do with
management techniques.

Instead of being used to
limit and direct credit,

window guidance was used
to create a giant bubble.

- I conducted research
actually interviewing

Bank of Japan officers and bankers

both sides on, you know, on tape.

The result was the Bank of Japan

did continue its informal guidance.

In fact it was the Bank of
Japan that forced the banks

to increase their lending so much.

- [Voiceover] The Bank of
Japan knew that the only way

for banks to fulfill their loan quotas

was for them to expand
nonproductive lending.

In the words of one banker,
"If there is no demand"

"for credit from low-risk borrowers",

"and we want to use up the
quota, the risk gets worse."

Another banker is quoted as saying that,

"A side effect of the
window guidance rule"

"of loan increases was that
the banks increased lending"

"even when there was no loan demand."

Like all bubbles the Japanese bubble

was simply fueled by the rapid creation

of new money by the banking system.

Between 1986 and 1989 Toshihiko Fukui

was the head of the Banking Department

at the Bank of Japan.

This was the department
that was responsible

for the window guidance quotas.

When Fukui was asked by a journalist,

"Borrowing is expanding fast."

"Don't you have any
intention of closing the tap"

"on bank loans?", he replied,

- Why were the banks lending so much?

Well, they were lending
so much because they were

forced to do so by the
orders of the Bank of Japan.

- [Voiceover] Normally
banks choose clients

from among a large
number of loan applicants

turning down a significant percentage.

But from 1987 onward
the tables had turned.

It was the bankers who
were aggressively pursuing

potential customers.

Anecdotes abound about how the banks

were soliciting loans at
bargain interest rates

pursuing clients like street peddlers.

- [Voiceover] Bankers made
increasingly exaggerated

assessments of land value

so that the actual ratio
of land value to loan

often jumped to 300% or more.

To the public this was
a strange phenomenon.

People soon dubbed it "excess money".

Only economists, analysts,
and those working

in the financial markets
or for real estate firms

knew better.

They dismissed such simplistic analysis.

Land prices were going up due to

far more complicated reasons
than just excess money,

they claimed.

Ordinary people simply did not understand

the intricacies of advanced
financial technology.

When a country creates too much money,

some of that money spills out abroad

in the form of investment.

In the 1980s Japanese
capital flows multiplied

from a net inflow of more
than $2 billion in 1980

to an outflow of $132 billion in 1986.

Assets including art
objects and other valuables

all over the world became
targets for Japanese buyers.

There were high profile purchases

such as the Rockefeller
Center, Columbia Pictures,

and Pebble Beach Golf Course.

Japanese money bought a staggering 75%

of all United States Treasury
bonds auctioned off in 1986.

But it is not easy for a
country to just print money

and then go on a shopping
spree around the world.

Japan was able to do
this because the markets

did not devalue its currency.

The value of individual currencies

is set by currency dealers.

If the traditional indicators
that the currency dealers

watch do not pick up the
excess money creation

in the country concerned,

then creating large amounts of money

and trying to exchange it for
foreign currency can work.

Japan had pulled off the same trick

that the United States had
used in the 1950s and 1960s,

when U.S. banks excessively
created dollars.

Corporate America used this hot money

to buy up European corporations.

While the United States had the cover

of the dollar gold standard, Japan's cover

was a significant trade surplus.

An early warning indicator of the buildup

of systemic risk in the banking system

is a ratio of loans for
non-GDP based transactions

to total loans.

This ratio increases
significantly in most countries

that are subsequently
struck by a banking crisis.

It was this same process that fueled

the mortgage lending and house price booms

in the United States
and the United Kingdom

in the 1980s and the 2000s.

The same process also
created the Golden Twenties.

In the 1920s United States banks

lent with stocks as collateral.

The principle remains the same.

As each bank took the
stock price as a given

it created new money.

With more money in the stock market,

stock prices had to rise.

Each bank thought it was
safe accepting a certain

percentage of the value of
the stock as collateral,

but the actions of all banks together

drove up the overall market.

In Japan total private sector land wealth

rose from 14.2 trillion yen in 1969

to 2,000 trillion yen in 1989.

At his first press conference as the 26th

governor of the Bank of Japan in 1989,

Yasushi Mieno said that,
"Since the previous policy"

"of monetary easing had
caused the land price"

"rise problems, real
estate related lending"

"would now be restricted."

- He looked around, looked at the bubble

asset prices rising, the
gap between rich and poor

is getting bigger.

Let's stop it.

His name was Mr. Mieno and
he was a hero in the press

because he fought against
this silly monetary policy.

But the fact was he was Deputy Governor

during the bubble era,

and he was in charge
of creating the bubble.

- [Voiceover] All of a sudden

land and asset prices stopped rising.

In 1990 alone the stock
market dropped by 32%.

Then in July 1991 window
guidance was abolished.

This took the window guidance officers

at the Bank of Japan
themselves by surprise.

Bankers were left almost helpless.

They complained that they did not know

how to make their lending plans anymore.

In the past when a certain branch had said

they would like to lend more,

they would respond that
the window guidance quota

had been used up.

Now they couldn't do that anymore.

As banks began to
realize that the majority

of the 99 trillion yen in bubble loans

were likely to turn sour,

they became so fearful that they not only

stopped lending to speculators

but also restricted
loans to everyone else.

- Well it's a bleak
Christmas ahead for Japan,

the stock market on Monday sinking

to its lowest close in over two years.

Last week's collapse of
one of Japan's biggest

food traders was the ninth time this year

that a listed company went under.

- [Voiceover] More than
five million Japanese

lost their jobs and did not
find employment elsewhere.

Suicide became the leading cause of death

for men between the ages of 20 and 44.

- [Voiceover] Between 1990 and 2003,

212,000 companies went bankrupt.

In the same period the
stock market dropped by 80%.

Land prices in the major
cities fell by up to 84%.

Some economists seemed relieved.

The downturn was evidence
that Japan's economic system

was not so successful after all.

Meanwhile the governor
of the Bank of Japan

Yasushi Mieno said that,
"Thanks to this recession"

"everyone is becoming
conscious of the need"

"to implement economic transformation."

The Ministry of Finance
believing that interest rates

were the main policy tool put pressure

on the Bank of Japan
to lower interest rates

until the official rate reached 0.1%.

Most economists predicted
an economic recovery.

But despite frequent assertions
in the financial press

and by central banks
that lower interest rates

will stimulate growth,

and higher interest rates will slow growth

there is no empirical evidence
for this relationship.

- [Voiceover] Japanese
and American businessmen

are meeting here with a
plea from Japan's companies

for a lower yen.

Only 6% of Japanese
exporters can make profits

with the dollar at less than 100 yen.

On average they need the American currency

to rise above 117 yen to break even.

- [Voiceover] The Ministry of Finance

asked the Bank of Japan to sell

large amounts of yen and buy U.S. dollars

so that the exchange rate of the yen

would fall and exports would pick up.

- We all know that two of them

the Ministry of Finance, MOF, in Japan

and the Bank of Japan they
just don't get along well

and what has been happening also

again this month is that the Bank of Japan

has been sterilizing its own intervention,

well to be precise the
intervention ordered

by the Ministry of Finance.

The Ministry of Finance
tells the Bank of Japan

to go out and buy

well we had to figure roughly

20 billion worth of U.S. Treasuries

but the Bank of Japan is sterilizing this

which means it is
basically taking the money

from the economy to fund this purchase.

Most researchers agree
sterilized forex intervention

doesn't work.

The BOJ is again sterilizing.

That's why it doesn't work.

That's why the yen has remained strong.

- [Voiceover] A central
bank can withdraw money

from the economy by selling its assets

just as it can inject
money into the economy

by buying assets.

When central banks buy and sell assets,

they increase or decrease
the amount of money

circulating in the economy.

Officials at the Bank
of Japan ignored this,

and instead claimed that,

Independent observers suggested that

domestic demand had to be boosted

by government spending

and then loan demand would also rise.

For a decade the government
followed their advice,

boosting government
debt to historic levels.

Between 1992 and 2002,
10 stimulation packages

worth 146 trillion yen were issued.

- Mr. Richard Werner is Chief Economist

at Jardine Fleming Securities in Tokyo.

He joins us now to
share his views on where

the Japanese economy is heading.

Mr. Werner, good evening to you.

Thank you for joining us.

- The government was
spending with the right hand,

putting money into the economy

but the fundraising was
done through the bond market

and therefore it took the same money

out of the economy with the left hand.

There was no increase in
total purchasing power

and that's why the government spending

couldn't have an impact.

- [Voiceover] By 2011
Japan's government debt

would reach 230% of GPD
the highest in the world.

The Ministry of Finance
was running out of options.

Observers began to blame the
Ministry for the recession

and started to listen to
the voices that argued

that the recession was due
to Japan's economic system.

But how difficult would it have been

to solve the problems of bad debt

in the banking sector and deflation?

It turns out that this would not have been

so difficult after all.

- The financial system
always looks like catch 22.

There's no loan growth so
there's no economic growth,

so there's no loan growth so
there's no economic growth.

Well, there is one thing
that can break through that,

this circular argument.

That's the central bank.

The job of the central
bank in this situation

is to print money.

What we need now is more radical measures

and there are some painful ones,

but there're also painless ones.

The central bank could for example

just buy all bad debts at face value.

Japan would have the
strongest banks in the world.

- [Voiceover] To bail
out the banking sector,

a central bank can buy up the banks' bad

financial assets with newly created money,

giving them face value for assets,

which are often worth significantly less.

This is what the Bank of
Japan did after the war.

Alternatively money could
be transferred to the banks

by helping them make sizable profits.

One way this can be achieved
is for the central bank

to corner a market in effect
creating a mini bubble

in a certain market in
which banks invest heavily,

providing large profits for them.

This turns out to be a
relatively common technique

by central banks to help
their banking systems.

Other proposals include
measures to introduce

zero-risk borrowers to banks,

or introducing accounting changes

that help their balance sheets.

In Japan the authorities
and the Bank of Japan argued

as did the Western powers
almost two decades later

that the taxpayer should foot the bill.

- In March last year as you may remember

the government injected
a large amount of money

into some 15 major Japanese
financial institutions

and we were one of them.

That helped us write off bad debts

and also to beef up our capital base

so that we would be prepared to lend.

- [Voiceover] Tax money has been used

to recapitalize banks.

However there is no
evidence that taxpayers

have been responsible
for the banks' problems

therefore such policies have
likely created a moral hazard.

The money supply is
determined by the net increase

in money creation by banks
and the central bank.

If moral hazard dictates
that the banking sector

should not be bailed out
deflation and recession

can still be avoided by the central bank

to do this the central bank
can increase the money supply.

A central bank can increase
the amount of money

in an economy at any time without limit

by simply buying assets
from the private sector

and paying with newly created credit.

The Bank of Japan could for instance

have bought real estate and
converted it into public parks.

- And there is an opportunity here

to solve three problems in one stroke.

The economy needs money creation.

The banks need to get
rid of their bad debt.

And the real estate sector
needs some transactions.

Well, what you can do is
just have the central bank

print money, buy the land from the banks,

turn it into parks and actually
you solve another problem

quality of life in Japan.

- [Voiceover] Even if the Bank of Japan

had later sold these parks
at a fraction of the cost,

it would still have made money,

because it costs the central bank nothing

to create the money in the first place.

Another option for injecting
money into the economy

is quantitative easing.

Despite having all
these options available,

the Bank of Japan at every stage

refused to implement policies
that would resolve the crises.

- When I was at the
Bank of Japan, '92, '93,

as a visiting researcher I was convinced

that this recession was
gonna get really bad,

so any Bank of Japan guy who
I could get to talk to me

I would ask, "Why aren't
you printing more money?"

I noticed they were not
printing enough money.

I met one guy who was quite open about it

and he says, "Richard,
yeah sure we could have"

"printed more money."

"We could have created a recovery"

"but then nothing would have changed."

"Japan's economic structure
would not have changed."

Now at that time I still
wasn't ready to believe

that the Bank of Japan was seriously

prolonging the recession on purpose

in order to get structural changes

that just seemed a bit too wild.

- Finance Minister Masajuro Shiokawa

has turned to the Bank of Japan

asking it to help stop deflation

or fight deflation at least.

- [Voiceover] The Bank of
Japan consistently defied

calls by the government, finance minister,

and prime minister to create more money

to stimulate the economy
and end the long recession.

At times the Bank of Japan
even actively reduced

the amount of money
circulating in the economy

which worsened the recession.

The Bank of Japan's arguments always

came to the same conclusion

namely that the blame lay with
Japan's economic structure.

Central bank staff even
argued that significant

monetary easing could cause harm

by inducing a further
delay in the progress

of structural adjustment.

The early postwar Japanese leaders

knew that they were running a war economy,

but they chose not to talk
for political reasons.

The Cold War propaganda message was that

postwar Japan had adopted a U.S. style

political and economic system.

Unwilling to tell the truth
the early postwar leaders

took their intimate
knowledge about the origins

of Japan's miracle economy
with them to their grave.

A generation of bureaucrats
and politicians reigned

in the 1980s and 1990s
who did not understand

the true character and purpose of their

own country's economy.

A whole generation of Japan's economists

had been sent to the United States

to receive PhDs and MBAs
in U.S. style economics.

Since neoclassical economics assumes

that there is only one
type of economic system,

namely unmitigated free market

where shareholders and
central bankers rule supreme

many Japanese economists quickly came

to regurgitate the arguments
of U.S. economists.

- The U.S. and Japan closed two days

of insurance talks on Tuesday.

- Primary sector deregulation is needed

to overcome the entrenched interests

of large insurance
companies, life and non-life,

and the Ministry of Finance bureaucracy.

- They need to reach an
agreement before December 15.

After that date the U.S. has threatened

to impose trade sanctions.

- The key move analysts are expecting

the securitization of real estate.

But will the package be enough?

For more we are talking to Richard Werner.

- To have meaningful
securitization we need deregulation

and that's already the
answer to your question.

To get deregulation you
have to reduce the power

of the Ministry of Finance

and obviously the Ministry
was resisting that.

- [Voiceover] In the
1980s persons who could

introduce themselves with a business card

from the renowned Finance Ministry

elicited deep and hushed
exclamations of awe and respect.

But by the mid 1990s
attitudes had changed.

There now seemed little
doubt to most observers

that the Ministry of Finance
had caused the recession.

The frequent demonstrations were held

outside the Ministry's doors by citizens

disgusted by the bureaucrats' actions.

In early 1998 public
prosecutors for the first time

raided the most powerful
of Japan's ministries.

Both banks and their regulators
were heavily criticized

for their actions.

Scandals highlighted some
of the informal links

that existed between
Ministry of Finance officials

and bankers.

Many bank staff and even
some ministry officials

were arrested and imprisoned
and several committed suicide.

As central banker Masaaki
Shirakawa had explained,

"It is not easy to change
the institutional framework"

"and promote structural reform"

"since it necessarily
involves the vested interests"

"of all the related
individual economic agents."

While Yutaka Yamaguchi a Deputy Governor

of the Bank of Japan had said that,

From the mid 1990s onward the government

began to dismantle much
of the power structure

of the Ministry of Finance.

The Bank of Japan on the other hand

saw its influence grow significantly.

- You have written just
recently there's no doubt

in your mind the central
bank, the Bank of Japan

will be cut loose from
the Ministry of Finance

and become pretty much independent

putting it on a footing
with other central banks.

Briefly why are you so sure?

- Basically the Ministry
of Finance which had been

controlling legally at
least the Bank of Japan

I mean that's what the law says

has lost all credibility.

The Ministry of Finance is being blamed

for the creation of the bubble,

for the long recession and
for many other problems

we had recently in Japan,

whereas the Bank of Japan has been

out of the spotlight of public criticism

and it's using that now to say,

"Well, the MOF has been bad."

"We need independence now."

- Richard, thanks very much.

I have been speaking to Richard Werner,

Chief Economist at Jardine
Fleming Securities in Tokyo.

- [Voiceover] Soon after his retirement

from the position of
governor of the Bank of Japan

in 1994 Mieno embarked on a campaign

giving speeches to various associations

and interest groups.

He lobbied for a change
in the Bank of Japan law.

His line of argument was to subtly suggest

that the Ministry of Finance had pushed

the Bank of Japan into the wrong policies.

To avoid such problems in the future,

the Bank of Japan needed to be given

full legal independence.

According to Mieno making
central banks independent

reflected the human wisdom
that had been nurtured

by history.

In 1998 monetary policy
was put into the hands

of the newly independent Bank of Japan.

- So you're saying that politicians

as well as economists should
be putting more pressure

towards the Bank of Japan in
order to create more money

but a lot of critics are going to say that

that is intervening into the
central bank's independence.

What do you make of that?

- I think that's exactly right.

That is intervening in the
central bank's independence,

and that's exactly what we need.

- [Voiceover] The numerous
scandals that followed

the bursting of the
bubble also brought down

the 1955 system of one party rule

by the Liberal Democratic Party.

In the old system
politicians did not compete

by proposing different policies.

Policy was made by the bureaucrats,

and politicians merely
focused on appeasing

local constituencies with
public works projects.

In October 1997 for the first
time in postwar history,

all policy initiatives
to stimulate the economy

originated from politicians
not bureaucrats.

Then in early 2001 a
new type of politician

was swept to power.

- Japanese government bonds
staged their biggest rally

this month as Junichiro Koizumi emerged

as the hot favorite to
become the country's

next prime minister.

- [Voiceover] Junichiro
Koizumi became prime minister.

In terms of his popularity
and his policies,

he is often compared to Margaret Thatcher

and Ronald Reagan.

His message was simple,

"No recovery without structural reform."

At the Geneva Summit in July 2001 he said,

"Some say recovery comes
first without reforms"

"but if the economy
recovers the will to reform"

"will disappear".

"Therefore, after the
elections I will continue"

"with the plan of no growth
without structural reform."

During 2001 the message
of no economic growth

without structural
reform had been broadcast

on an almost daily basis
on the nation's TV screens.

- Now everyone believes we
need structural changes.

We need to scrap Japanese style capitalism

to get a recovery.

Why?

It seems we tried all the policies.

It seems we've tried everything.

Nothing works.

So the system itself the Japanese style

economic system must be to blame

so we'd better get rid of it.

- [Voiceover] Japan was
shifting its economic system

to a U.S. style market economy

and that also meant that
the center of the economy

was being moved from
banks to stock markets.

To entice depositors to pull
their money out of banks

and into the risky stock
market reformers withdrew

the guarantee on all bank deposits

while creating tax incentives
for stock investments.

As U.S. style shareholder
capitalism spread,

unemployment rose significantly.

Income and wealth disparities rose,

as did suicides and
incidents of violent crime.

Then in 2002 the Bank of
Japan strengthened its efforts

to worsen bank balance
sheets and force banks

to foreclose on their borrowers.

Until then Hakuo Yanagisawa,
minister for financial services

had resisted the Bank of
Japan inspired proposal

to inject tax money into banks

effectively nationalizing them,

taking over their management

and using this power to
call in loans from companies

thus triggering many
bankruptcies of large firms.

Mr. Yanagisawa was duly
sacked by the prime minister

and replaced with Heizo Takenaka.

Takenaka was a supporter
of the Bank of Japan's plan

to increase foreclosures of borrowers.

- Minister Takenaka was
trying to implement a policy

to actually dramatically
weaken the balance sheets

of the banks in order
to give him a free hand

and allow him to nationalize them.

- [Voiceover] Takenaka
appointed a task force

to oversee the banking policies

which included two former
Bank of Japan staff.

One of them, Takeshi
Kimura, immediately demanded

that accounting changes be implemented

which would worsen bank balance sheets

and render nationalization unavoidable.

Takuro Morinaga a well-known
economist in Tokyo

argued forcefully that the Bank of Japan

inspired proposal by
Takenaka would not have many

indigenous beneficiaries

but instead would mainly benefit

U.S. vulture funds
specializing in the purchase

of distressed assets.

These vulture funds had
faced the difficulty

that despite over 200,000 bankruptcies

few firms sufficiently
large for the vulture funds

to be interested were bankrupted.

When Kimura's and Fukui's
support for the bankruptcy plan

was voiced the former
operated a private company

that advised on the securitization
of distressed assets.

And the latter was an
advisor of the Wall Street

investment firm Goldman Sachs

one of the largest operators
of vulture funds in the world.

- Mr. Fukui also his mentor Mr. Mieno,

and his mentor Mr. Maekawa
and you've guessed it,

these are some of the Princes of the Yen

that the book is all about,

they have said on the record in the 80s

and also throughout the 90s

what is the goal of monetary policy?

It is to change the economic structure.

Now, how do you do that?

Well, you need a crisis

and that's really what they've done.

- Richard, we're just out of time.

I have to cut you off.

Thank you so much and we apologize.

- [Voiceover] The department responsible

for the window guidance
quotas of the Bank of Japan

was called the Banking Department.

- And who was in charge of this?

The man at the head of
this Banking Department

inside the Bank of Japan during the bubble

from '86 to '89 was Toshihiko Fukui.

Mr. Fukui the current
governor of the Bank of Japan

he's the man who created the bubble.

- [Voiceover] When Fukui
had become governor

of the Bank of Japan he would say,

"While destroying the high-growth model"

"I am building a model
that suits the new era."

- They have succeeded on all counts.

If you look at the list of
their goals and you know

it was more than a wishlist
it was more or less a plan

that they mapped out
they wanted to achieve

they've reached all those goals.

Destroy the Ministry of Finance.

Break it up.

Get an independent financial
supervisory agency.

Reach independence for
the Bank of Japan itself

by changing the Bank of Japan law.

And engineer deep structural
changes in the economy

by shifting from
manufacturing to services,

opening up, deregulating, liberalizing,

privatizing, the whole lot.

- [Voiceover] In the 1920s
Japan's economy in many ways

resembled today's U.S. economy

with fierce competition,
aggressive hiring and firing,

takeover battles between
large corporations

few bureaucratic controls,
strong shareholders

that demanded high dividends,
and corporate funding

from the markets, not banks.

Yet throughout the postwar era

Japan's economy had been the opposite

highly regulated with
cartels limiting competition,

bank financing and cross shareholdings

reducing shareholder power, no takeovers,

and a frozen labor market
with lifetime employment

and seniority pay.

It was claimed that to end the recession

and improve performance Japan must shift

from welfare capitalism back
to shareholder capitalism.

Yet it remains unclear why a country

that had run a consistent and significant

balance of trade surplus
would need to change

its economic system to
become more competitive.

Japan was not the only high performance

economy in Asia that in the 1990s

found itself in the deepest recession

since the Great Depression.

In 1997 the currencies
of the Southeast Asian

Tiger Economies could not
maintain a fixed exchange rate

with the U.S. dollar.

They collapsed by between
60% and 80% within a year.

The causes for this crash
went as far back as 1993.

In that year the Asian Tiger Economies

South Korea, Thailand, and Indonesia

implemented a policy of
aggressive deregulation

of the capital account
and the establishment

of international banking facilities

which enabled the corporate
and banking sectors

to borrow liberally from abroad

the first time in the postwar era

that borrowers could do so.

In reality there was no need
for the Asian Tiger Economies

to borrow money from abroad.

All the money necessary
for domestic investment

could be created at home.

Indeed the pressure to
liberalize capital flows

came from outside.

Since the early 1990s the IMF,
the World Trade Organization

and the U.S. Treasury had
been lobbying these countries

to allow domestic firms
to borrow from abroad.

They argued that neoclassical economics

had proven that free markets
and free capital movement

increased economic growth.

Once the capital accounts
had been deregulated,

the central banks set about creating

irresistible incentives for domestic firms

to borrow from abroad

by making it more expensive to borrow

in their own domestic currencies

than it was to borrow in U.S. dollars.

- Domestic local interest rates were high

were higher than the
U.S. dollar interest rate

and the exchange rate was

virtually fixed.

- It was the government and
the central bank that said,

"We will maintain the exchange rate."

- That's right, that's right.

Central banks of Thailand

and other East Asian countries

resisted exchange rate adjustment,

and they tried to send a signal

that they would protect the exchange rate.

- [Voiceover] The central banks emphasized

in their public statements
that they would maintain

fixed exchange rates with the U.S. dollar

so that borrowers did not have to worry

about paying back more in
their domestic currencies

than they had originally borrowed.

- When I went to Thailand I was actually

on an ADB mission as
an outside consultant.

I went straight to the Bank
of Thailand and asked them,

were there any informal
credit guidance schemes,

and they were surprised
that I asked this question.

Because of my study of Japan
I thought perhaps there's

something similar and they told me

it was a young staffer who
perhaps wasn't aware of the

politics involved.

He said, "Yeah, yeah, we have
this credit planning scheme."

- [Voiceover] Banks were
ordered to increase lending

but they were faced with less loan demand

from the productive sectors of the economy

because these firms had
been given incentives

to borrow from abroad instead.

They therefore had to resort
to increasing their lending

to higher risk borrowers.

Imports began to shrink
because the central banks

had agreed to peg their
currencies to the U.S. dollar.

The economies became less competitive

but their current account
balance was maintained

due to the foreign issued loans,

which count as exports in the balance

of payment statistics.

When speculators began
to sell the Thai baht,

the Korean won, and the Indonesian rupee,

the respective central banks responded

with futile attempts to maintain the peg

until they had squandered virtually all

of their foreign exchange reserves.

This gave foreign
lenders ample opportunity

to withdraw their money at
the overvalued exchange rates.

The central banks knew
that if the countries

ran out of foreign exchange reserves,

they would have to call in
the IMF to avoid default.

And once the IMF came in
the central banks knew

what this Washington based
institution would demand

for its demands in such
cases had been the same

for the previous three decades.

The central banks would
be made independent.

On the 16th of July, the
Thai finance minister

took a plane to Tokyo to
ask Japan for a bailout.

At the time Japan had
213 billion U.S. dollars

in foreign exchange reserves

more than the total resources of the IMF.

They were willing to help

but Washington stopped Japan's initiative.

Any solution to the emerging Asian crisis

had to come from Washington via the IMF.

- [Voiceover] After two
months of speculative attacks,

the Thai government floated the baht.

- Well the International
Monetary Fund to date

has promised almost $120 billion

to the embattled economies of Thailand,

Indonesia, and South Korea.

- [Voiceover] Immediately after arrival

in the crisis-stricken
countries the IMF teams

set up offices inside the central banks

from where they dictated what amounted to

terms of surrender.

The IMF demanded a string of policies,

including curbs on central
bank and bank credit creation,

major legal changes and sharp
rises in interest rates.

As interest rates rose
higher risk borrowers

began to default on their loans.

Burdened with large amounts of bad debts,

the banking systems of Thailand, Korea,

and Indonesia were virtually bankrupt.

Even otherwise healthy
firms started to suffer

from the widening credit crunch.

Corporate bankruptcies soared.

Unemployment rose to the
highest level since the 1930s.

- The role of the Fund
in coming to the rescue

of ailing nations has
been fiercely debated.

Some have even accused the IMF of actually

making Asia's economic crisis worse.

- Even if they have to subvert our economy

they will do so just to
prove that they are right.

The IMF has not been very helpful.

- [Voiceover] The IMF knew
well what the consequences

of its policies would be.

In the Korean case they even
had detailed but undisclosed

studies prepared that had calculated

just how many Korean
companies would go bankrupt

if interest rates were to rise
by five percentage points.

The IMF's first agreement
with Korea demanded

a rise of exactly five percentage
points in interest rates.

- The IMF policies are clearly not aimed

at creating economic recoveries
in the Asian countries.

They pursue quite a different agenda,

and that is to change
the economic, social,

and political systems in those countries.

In fact, the IMF deals prevent
the countries concerned,

like Korea, Thailand, to reflate.

- Interesting.

You're saying it's
making the crisis worse,

and you're suggesting that
the IMF has a hidden agenda.

- Well I mean it's not
very hidden this agenda

because the IMF quite clearly demands

that the Asian countries
concerned have to change the laws

so that foreign interests
can buy anything from

banks to lands

and in fact the banking systems
can only be recapitalized

according to the IMF deals
by using foreign money

which is not necessary at all

because as long as these
countries have central banks

they could just print
money and recapitalize

the banking systems.

You don't need foreign money for that.

So the agenda is clearly
to crack open Asia

for foreign interests.

- [Voiceover] The IMF
demanded that troubled banks

would not be bailed out
but instead closed down

and sold off cheaply as distressed assets

often to large U.S. investment banks.

- One positive coming out of Thailand

is that they'll be auctioning
off some major assets

from 56 finance companies.

In your view should

some of the owners from
the 56 finance companies

be allowed to buy back their assets?

- [Voiceover] In most
cases the IMF dictated

letters of intent explicitly
stated that the banks

had to be sold to foreign investors.

- Let me emphasize in that respect

that these reform programs are the key

the absolute key to restoring
financial stability.

- [Voiceover] For the
first time ever South Korea

closed five banks in a major step

toward meeting its IMF mandate.

- The number of commercial
banks has declined

has been reduced as a result of closure

mergers and acquisitions

and the foreign strategic
investors are now in

which is a remarkable change.

- [Voiceover] In Asia
government organized bailouts

to keep ailing financial
institutions alive

were not allowed

but when a similar crisis
struck back home in America

a year later the very same institutions

reacted differently.

The Connecticut based hedge fund,

Long Term Capital Management

which accepted as clients
only high net worth

individual investors and institutions

had leveraged its $5
billion in client capital

by more than 25 times

borrowing more than 100
billion U.S. dollars

from the world's banks.

When its losses threatened to undermine

the banks that had lent
to it with a possibility

of a systemic banking
crisis that would endanger

the U.S. financial system and economy

the Federal Reserve organized
a cartel like bailout

by leaning on Wall Street
and international banks

to contribute funds so that
it could avoid default.

- Yeah, you're right that
the views from Washington

and New York seemed
certainly quite flexible,

because soon after they told
all the Asian countries,

"No bailouts for financial institutions,"

when Long-Term Capital
Management a hedge fund

in New York almost went
bust suddenly a bailout

was organized just
contradicting what they'd said

to the Asian countries.

- But they said that no public money

used to LTCM.

- But the meeting was held famously

inside the Federal Reserve, right?

- [Voiceover] Why would the
United States make demands

on foreign nations in the
name of the free market,

when it has no intention
of enforcing the same rules

within its own borders?

The examples of the
Japanese and Asian crises

illustrate how crises can be engineered

to facilitate the redistribution
of economic ownership

and to implement legal,
structural, and political change.

Today similar events are at
work in the Eurozone area.

Countries within the Euro currency block

have forfeited their right
to a national currency,

and handed this power to
the European Central Bank.

- With me here in the
studio is Richard Werner.

He's a professor at
Southampton University.

Richard was an advisor
to the Bank of Japan

and the Ministry of Finance at the end

of the bubble era in the 1990s.

What's your advice to the ECB?

They meet tomorrow.

What would you be telling them?

- Um, well again they have to focus

on the quantity of credit
creation more than interest rates.

The ECB has a lot to learn
from its past mistakes,

because basically I think
it didn't really watch

carefully enough credit creation

where in Spain, Ireland we
had a massive credit expansion

under the watch of the ECB.

They didn't look at that.

Interest rates of course
are the same in the Eurozone

but the quantity of credit
cycle is very different.

There's one interest
rate for whole Euro area,

but in 2002 the ECB told the Bundesbank

to reduce its credit creation
by the biggest amount

in its history

and told the Irish Central Bank

to print as much money as
if there's no tomorrow.

What do you expect is gonna happen?

Same interest rate.

The same growth?

No.

Recession in Germany, boom in Ireland.

Which one tells you that, which variable?

Credit creation.

- [Voiceover] From 2004
under the ECB's watch

bank credit growth in Ireland, Greece,

Portugal, and Spain increased
by over 20% per annum

and property prices skyrocketed.

When bank credit fell
property prices collapsed,

developers went bankrupt,
and the banking systems

of Ireland, Portugal, Spain,
and Greece became insolvent.

The ECB could have prevented these bubbles

just as it could have ended the ensuing

banking and economic crises

but it refused to do so until major

political concessions had been made

such as the transfer of
fiscal and budgeting powers

from each sovereign state
to the European Union.

In both Spain and Greece
youth unemployment

has been pushed up to
50% forcing many youths

to seek employment abroad.

Greek doctors for whose
education Greek taxpayers

have paid now work in Germany.

The deliberations of the
ECB's decision-making bodies

are secret.

The mere attempt at influencing the ECB,

for instance through democratic
debate and discussion,

is forbidden according
to the Maastricht Treaty.

The ECB is an international organization

that is above and outside
the laws and jurisdictions

of any individual nation.

Its senior staff carry
diplomatic passports

and the files and documents inside

the European Central
Bank cannot be searched

or impounded by any police
force or public prosecutor.

The ECB is well known among economists

as one of the world's most powerful

and least transparent central banks,

yet its former president
Jean-Claude Trichet

dealt with this problem
by merely asserting

that there was no problem.

- [Voiceover] The gentleman over there.

Yes, please.

- My name's Richard Werner.

I'm an economist.

My question is for Monsieur Trichet,

who's also been for years a member

of the governing council of the ECB.

The question is where
in the Maastricht Treaty

or ECB statutes does it
say that it is the job

of the ECB to back structural reform

or any other political agenda?

- I said very very clearly
and we have all said

very very clearly that
we had no responsibility

in this domain.

We have a voice and we say in this domain

and in some others what we think

and perhaps if we can help
in explaining from our side

to the general people that
they would be better off

perhaps it would help Europe embarking

in this implementation
of structural reforms

which is so important and
there is a consensus on that.

The diagnosis again is a very very

very large consensus on this point.

- [Voiceover] The European
Commission an unelected group

whose aim is to build a
United States of Europe

with all the trappings of a unified state

has an interest in weakening
individual governments

and the influence of the
democratic parliaments of Europe.

It turns out that the evidence
for central bank independence

that was relied upon in
the Maastricht Treaty

derived from a single
study that was commissioned

by none other than the
European Commission itself

published in 1992 under the
name One Market, One Money.

The study purported to demonstrate

that central bank independence
led to low inflation.

James Forder an Oxford academic

has since demonstrated that this study

was manipulated to obtain
the desired result.

- The story we're being
told by the central banks

just does not add up

and there is evidence
that central banks work

differently from what they
would like us to believe

as to how they work.

- [Voiceover] The world over central banks

hold significant yet
little understood powers.

Often independent,
unaccountable, and obscure

central banks operate in the shadows

yet their actions affect us all.

- Central banks in almost
all countries worldwide

and the IMF has helped
a lot in achieving this

they've become totally independent

and in practice not accountable to any

democratic institution

and accountability to
parliaments is usually minor

and in practice meaningless.

- [Voiceover] Whether
it is the Bank of Japan,

the Federal Reserve, the Bank of England,

or the European Central Bank examples

of central bank deception abound.

In the United States in the 1920s

banks were encouraged to create money

and give it to speculators.

The resulting depression persuaded

the freedom loving Americans
that a decentralized

federal system without
strong national controls

could not work.

In the 1990s the Japanese were persuaded

that their economic system

which had brought considerable
prosperity and equality

needed to be changed into a
so called free market system.

And while Japan's transformation
was not yet complete

the central bankers struck again

with an IMF led raid on
the Asian Tiger Economies.

The present European debt crisis

is yet another example of
central bank deception.

To create a public consensus for the need

for structural reform by purposefully

creating a recession and
then needlessly prolonging it

must constitute an abuse of power.

Do citizens really want to be manipulated

in such a costly and dishonest manner?