International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

10
Central Banking:
A Japanese Perspective

SHIJURO OGATA

In 1950 when I joined the Bank of Japan, Japan was poor, but its central bank was domestically very powerful. In 1989, when Dewey Daane, a long-standing friend of Japanese central bankers, is retiring, Japan is no longer poor, but its central bank faces complex problems like its counterparts in other countries.

In 1950, Japan was still in the early phase of postwar reconstruction after the total defeat in World War II, where the income per capita was lower than its prewar level and its balance-of-payments position was extremely vulnerable, with heavy dependence on special procurements by U.S. forces in the Far East. The Japanese economy was financially isolated from the rest of the world by strict exchange controls, without easy access to foreign financial markets except through a limited number of resident foreign banks in Japan. The size of Japan's public sector was small, and its industrial corporations, which were decentralized under the Occupation policy, relied upon a handful of leading commercial banks, which were in turn heavily indebted to the Bank of Japan.

Under these circumstances, the Bank of Japan, with its governor even nicknamed "Pope," exercised strong monetary control over commercial banks, not only through interest rate policy but also through credit control called "window guidance." It was able to influence business activity, price performance, and balance of payments quickly and effectively. The weakness of early postwar cabinets in Japan and the support of U.S. occupation authorities to the central bank also helped strengthen its relative position.

Now in 1989, not only is Japan's external position quite different, but also the financial environment surrounding the Bank of Japan has drastically changed. First, the size of both the fiscal deficit and the public sector has been enlarged. Government revenue and spending have a large impact on economic activities, and government bonds issued to finance fiscal deficit have become important

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