Princes of the Yen: Japan's Central Bankers and the Transformation of the Economy, and: Japan's Fiscal Crisis: The Ministry of Finance and the Politics of Public Spending, 1975-2000 (review)

Japan's "lost decade" begs for explanation: how could an economy that outperformed the rest of the developed world year in and year out during the 1980s, on almost any dimension, stumble so badly? Holding the reins, as they themselves claimed, were the Ministry of Finance (MOF) and the Bank of Japan (BOJ). It is natural to ask whether they allowed the economy to wander unbridled or spurred it at the wrong time or in the wrong direction. While examining the bubble is the explicit purpose of only one of the books reviewed here, Richard Werner's account of the Bank of Japan's monetary policy, it nevertheless hovers in the background of Maurice Wright's analysis of the budgetary politics and powers of the Ministry of Finance.

Each of these books shows off deep knowledge and reflection about formal institutions and politics. Each also has fundamental flaws, flaws that reflect the dilemma of all analysis, the trade-off between a clear but constraining framework and a nuanced treatment offering multiple perspectives. Too narrow a purview results in a two-dimensional story, easy to grasp but lacking depth. Too ambitious and the details pile up into a shapeless jumble. Werner's book is of the former sort, with a clear skeleton but little meat. In contrast, Wright's is encyclopedic in every sense of the word, from heft to organization; it has no consistent argument and no bottom line, a mass of flesh with no bones to give it substance. Both books, of course, have their strengths; I highlight one area where they overlap, an emphasis on the importance of "fast track" careerists in supposedly egalitarian Japanese bureaucratic organizations. But I must also document their many defects.

Werner is the clearer, typical of a bank's "house" economist or an independent analyst (he began as the former and is now the latter). His book is loaded with nice anecdotes, and his prose is more quotable than mine. That is to be expected; the job of such individuals is to help sell a product. Along with good writing, they require a message, preferably one that makes good editorial page copy and differentiates them from rivals. It thus pays to be idiosyncratic, hyperbolic, and simple of story. Werner knows where his bottom line lies.

First, Werner poses as a purveyor of idiosyncratic views. He claims, for example, to have a novel focus on "credit" and likewise claims to be distinctive in stressing the role of "window guidance." These are hard to take at face value. The role of credit was well known by the late nineteenth century, when "business cycle" and "credit cycle" were used interchangeably; indeed, central banks were founded in part to try to dampen the credit component of such cycles. Likewise, "window guidance" is hardly a novel concept (in the United States it is called "moral suasion") and has been central to English-language descriptions of Japan's banking system since at least the early 1960s. His real claim is that it is better to use credit than the more common monetary and interest rate measures in formal models, as detailed in the book's empirical appendix. Unfortunately, the data he utilized are not tightly tied to his model, and the manner in which he combines two equations biases his crucial "beta" parameter to take the predicted value. His measure may be valuable, but he fails to make the case that it supplants rather than supplements existing approaches.

Second, the book is full of hyperbole, sometimes to the point of sloppiness. That is...