by Nomi Prins
The news propelled the yen to a thirteen-year high against the dollar, at ¥95.77.13 Some traders saw this as an opportunity to buy dollars, while investors questioned the wisdom of keeping dollar-denominated assets at all. Japan was trapped in a tricky position: it was a main Asian superpower but dependent on the US economy and dollar movements.
In response, the BOJ flooded the banking system with $4.1 billion to promote liquidity. Japan’s Nikkei 225 index rose 1.5 percent to 11,964 on the injection; but that was after an 8 percent decrease that pushed the index to its lowest level since 2005.
Fear of another episode reminiscent of the late-1990s banking crisis in Japan was palpable, and domestic disputes over how to avoid it intensified.14 That period coincided with a major change in the leadership at the BOJ. Sitting BOJ chairman Toshihiko Fukui ended his term on March 19, 2008, after a forty-year tenure. An impasse over the next governor followed in which politics dictated the path of monetary policy. It was a matter of grave embarrassment to the government that it couldn’t agree on a central bank leader, especially when the role and power of developed country central banks were so prominent.
Still, Japan’s prime minister Yasuo Fukuda of the Liberal Democratic Party (a center-right to right-wing party) could not easily find a replacement who would be approved by the opposition party.15 The party didn’t like his suggestion of Koji Takami, a Ministry of Finance bureaucrat; they wanted to avoid government influence over the BOJ. In the end, they chose Masaaki Shirakawa because he was a career central banker and trusted enough by all parties. Many observers saw him as the mastermind behind the unorthodox policy of quantitative easing that the central bank had introduced in March 2001.16
Shirakawa was born in Fukuoka, Japan, on September 27, 1949, the year the Tokyo, Osaka, and Nagoya stock exchanges opened. He studied law as an undergraduate at the University of Tokyo. After graduating, he was hired by the BOJ in 1972. Inflation shot to 25 percent shortly afterward. The prevailing high-inflation period coupled with oil price shocks stuck with him. He became wary of asset bubbles and later the risks of the QE strategies that he would create.
In 1977, he received a master’s in economics from the University of Chicago, known for its free market ideologies; this was the same year that World Bank chief economist Paul Romer and Obama adviser David Axelrod earned their undergraduate degrees there.17 In 1995, he spent time in New York City as the BOJ’s general manager for the Americas.
At the BOJ, he held a variety of monetary policy and financial stability positions, including executive director between 2002 and 2006, and was one of the key architects of the quantitative easing programs designed to combat the domestic banking crisis. After he left in July 2006, he taught at the Kyoto University School of Government until March 2008.18 According to Reuters, “Those who have worked for Shirakawa describe him as a workaholic and a perfectionist. His few pleasures outside work include listening to the music of the Beatles and catching an occasional movie.”19
Shirakawa assumed his role as the thirtieth governor of the BOJ on April 9, 2008. From the start, he was troubled about the extent to which credit conditions in Japan were already beginning to constrict, as they were in the United States. He kept the overnight call rate at 0.1 percent, but he made it clear, albeit cautiously, that he would take action to provide liquidity to the Japanese markets if he had to. “As with private-sector economic entities, complacency is the most dangerous risk for central banks,” he said. “We need to be humble as numerous challenges await the global economy. My colleagues and I at the Bank of Japan will continue to come to grips with these challenges, working in cooperation with fellow central bankers, and financial supervisors and regulators. In finishing my remarks, I would like to request you in the private sector for your continued support and assistance, so that central banks can continue to progress.”20 As worried as he was about the environment, he believed that there could be no solution to its pressures without collaborating, or colluding, with other central banks.
On May 23, 2008, while addressing Japan’s National Press Club, Shirakawa talked up the barrier between the health of Japan and the chaos from the United States. He said, “It seems that Japan’s economy has become more resilient to negative shocks than in the past [and] is expected to return to a moderate growth path.”21 The world was getting more frenetic and Japan could not sit by idly and wait for a financial bomb to drop.
By August 2008, the BOJ emphasized it “would implement appropriate policies in an accordingly flexible manner.”22 It hadn’t taken long to go from publicly expressing confidence in the Japanese economy to adopting the Fed’s policies of injecting money into its financial system.
The September 16, 2008, collapse of Lehman Brothers catapulted the yen up against the dollar, as a safe haven, causing it to log its highest daily gain since 2002.23 Meanwhile, the Dow experienced its biggest fall since September 11, 2001.
The US government decided not to save Lehman Brothers from bankruptcy. Other measures were put forth in efforts to enhance the stability of the international financial system, which was losing the confidence of the public and the institutions composing it. For the first time in ninety-five years, the Fed decided to accept equities as collateral for cash loans. It expanded emergency lending programs, while other key central banks, such as the ECB and Bank of England (BOE), injected money into their own financial systems.
On September 29, the US House of Representatives rejected a proposed $700 billion rescue package for banks, unleashing international panic.24 As a result, the Standard & Poor’s 500 stock index fell almost 9 percent and the DJIA decreased nearly 778 points (almost 7 percent) to 10,365.4. The Nikkei shed about 500 points. Three European banks went bankrupt.25
The allied central banks moved to jointly cut rates on that fateful day, October 8, 2008. As part of the coordinated measure, the Fed lowered its target for the federal funds rate by 50 basis points to 1.5 percent.26 The ECB cut rates by 50 basis points.27 The BOJ said it “welcomes the policy decisions made by six central banks” and engaged “in decisive actions of liquidity supply, ranging from the uninterrupted provision of ample yen liquidity in the market to the introduction of US dollar liquidity operations.”28 It didn’t cut rates yet. They were already too low.
As Shirakawa told the joint annual gathering of the IMF and World Bank in Washington on October 13, 2008, “In response to elevated strains in the global financial market, the Bank of Japan, with other central banks, has taken coordinated action to provide US dollar liquidity, and it has supported interest rate cuts implemented by other major central banks.”29
Nine days later, the yen hit another high against the dollar on risk aversion capital flows (a thirteen-year record) and the euro (a six-year record).30 An emerging markets crisis deepened. Many developing countries were in talks with the IMF about financing in case of a liquidity squeeze. Some central banks, such as Brazil’s, were forced to intervene to boost liquidity.
On October 27, amid the turmoil, the yen became a target. The G7 chose to express dissatisfaction with the stronger yen, considering it a threat to international stability, because it could have adverse implications for economic stability.31 It was a ridiculous stance given the fact that the United States had just shown itself to be reckless in managing its financial system, so castigating Japan for being the recipient of speculative capital was misplaced criticism—Japanese money was simply returning to Japan from emerging markets, and speculators were riding the wave. Of all the issues caused by the rashness of the US banks, the G7 body considered yen appreciation to be the culprit harming developed nations’ way of managing the international economy. Specifically, the G7 was “concerned about the recent excessive volatility in the exchange rate of the yen” and its “adverse implications for economic and financial stability.”32
The Fed had its own problems, with a US banking system lacking internal confidence and starved for liquidity. On October 29, the Fed cut rates another 50 basis points—to 1 percen
t for the federal fund rates and 1.25 percent for the discount rate.33 It noted, “Coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems should help over time to improve credit conditions and promote a return to moderate economic growth.”
Then came the kicker. Two days later, for the first time in seven years, the BOJ announced it would cut rates. This was one day after the Japanese government announced a $51 billion stimulus package. The key interest rate (uncollateralized overnight call rate) dipped from 0.5 percent to 0.3 percent. The Nikkei fell 5 percent and the yen appreciated counterintuitively after the announcement.
According to Shirakawa, “A reduction in policy interest rates and a further increase in the flexibility of money market operations were necessary to maintain accommodative financial conditions.”34 He likened the situation to the Great Depression of the 1930s.
He explained, “The turmoil in financial markets that began in the summer of 2007 as well as its impact on economic activity were, at first, limited to the US and European economies, but have since gradually spread to Japan as well as to emerging economies. This global turmoil has now become the largest problem facing the world economy.”35
The central bank moves so far weren’t enough to restore confidence to the markets or to ordinary people watching their pensions dwindle and home prices dive. On December 16, the Fed cut the federal funds rate to 0.25 percent. It was the first time it cut rates below 1 percent.36 That caused the dollar to fall sharply against the yen to levels last touched in July 1995.
The BOJ was widely expected to swing into even bolder action. And that’s exactly what it did. On December 19, it slashed the uncollateralized overnight call rate by 20 basis points to 0.1 percent. The motivation reflected the alarming speed with which the US banking collapse spread to the world economy. “Exports have been decreasing, reflecting a slowdown in overseas economies, and domestic demand has become weaker against the background of the declining corporate profits and the worsening employment and income situation in the household sector.”37 The BOJ increased purchases of government bonds from ¥1.2 trillion to ¥1.4 trillion per year.
Shirakawa denied this was a return to the old QE policy.38 After the 1990s banking crisis, a 1998 law officially declared the BOJ independent from the government to promote “price stability.” Shirakawa was trying to preserve that independence and not yield to government pressure to go full throttle on QE in order to accommodate the Fed.
WORSENING WORLD
What Shirakawa set into motion was enough to reinforce his participation in the Fed’s collusive efforts. Developed countries’ central banks increased their use of conjured money over the following year as a means to inject liquidity into the markets and help their biggest banks access capital. They did not necessarily hold these private banks to account for neglecting to lend that cheap money to ordinary people or small or midsized businesses. The money went toward subsidizing big banks and companies, not to social or infrastructure development. Even as rates dropped, the availability of cheap money didn’t filter into the world economy.
Meanwhile, the BOJ did its part and applied near-zero interest rates and QE in combination. This did not dampen the “safe-haven” attraction of the yen for international speculators, a situation hampering profits of several key Japanese companies.
On January 28, 2009, digital camera maker Canon announced an 81 percent fall in quarterly profit and predicted a fourteen-year annual profit record low for the year.39 A week later, Panasonic Corporation said it would post an annual loss of $4.2 billion and cut fifteen thousand jobs because of the stronger yen and reduction in global demand.40
Conditions fared no better in the United States. On January 30, the DJIA and S&P 500 lost 1.8 percent and 2.3 percent, respectively.41 US firms announced a hundred thousand jobs cuts that week amid rumors that the Republicans could stop Senate approval of an $819 billion stimulus plan.
Because of the US-caused meltdown, Japan was experiencing a double-digit economic slowdown, the biggest drop since 1974. Corporate bankruptcies had increased for eight months, and banks were limiting their extension of loans. In the middle of the financial crisis, a political crisis in the cabinet led to the resignation of Shoichi Nakagawa, the country’s finance minister. This further damaged Prime Minister Tarō Asō’s already unpopular government. Japanese politics was caught in a choke hold of US banks and Fed collusion.
Japanese exports fell by half compared to exports in the same period the previous year.42 Car exports hit a ten-year low. As a consequence, Japan posted a trade deficit record of ¥952 billion (US$9.82 billion), the biggest deficit since 1980. To attempt to stem the drop, on February 19, the BOJ announced it would buy ¥1 trillion (US$10.7 billion) in corporate bonds and increase purchases of commercial paper to pump money into the local system.43 These actions were extended until September 2009, six months longer than originally planned.
Between February 16 and 18, Hillary Clinton took her first official trip to Asia as US secretary of state. In Tokyo, she met with foreign minister Hirofumi Nakasone.44 Her official mission was to discuss how to “step up the bilateral alliance” between the United States and Japan.45 But these were choppy times, and she had an ulterior demand.
With the US financial system staggering, she needed to ensure that diplomacy with Japan translated into a continuation of the BOJ buying US Treasury bonds. The situation was dire. By March 5, 2009, the price of a Citigroup share fell below $1 for the first time in history, after the firm posted $37 billion of losses over fifteen months.46
Shortly thereafter, two money-conjuring events happened on opposite sides of the globe. On March 18, 2009, the BOJ announced its bond-buying program would be increased by nearly 30 percent, from ¥1.4 to ¥1.8 trillion.47 And the Fed announced it would purchase $1.2 trillion worth of debt securities to support movement in the credit markets and the nonexistent economic recovery. It would buy long-term government debt and expand purchases of mortgage-related assets.48
More such actions loomed. On April 6, 2009, four central banks—the Swiss National Bank (SNB), ECB, BOE, and BOJ—all agreed to cooperate further by providing $287 billion to the Fed in the form of currency swaps to be used as credit lines to financial institutions.49 Those arrangements supported Fed operations to provide liquidity of up to SF 40 billion (Swiss francs), €80 billion, £30 billion, and ¥10 trillion. Big US banks remained strained.
And if the US banks were crippled, the Fed would keep doing whatever it had to do to support them. This didn’t sit well with the world. Japan, like other countries, began to seek non–US dollar alliances as a hedge against the US system. On July 23, 2009, the BOJ announced the first Tripartite Bank Governor’s Meeting of the BOJ, PBOC, and Bank of Korea (BOK) leaders (Masaaki Shirakawa, Zhou Xiaochuan, and Seong-Tae Lee) in Shenzhen, China. The purpose of the group was “to strengthen their mutual cooperation and communication and better safeguard economic and financial stability in the region.”50
A month later, on August 27, for the first time in sixteen years, it became cheaper to borrow in US dollars than in Japanese yen.51 This reflected the consequences of loose monetary policy pursued not only by both countries but also by other developed economies, as well as a lack of confidence in the Fed and the US dollar. Japanese exporters grew increasingly worried.
Japan had maintained rates at a considerably low level relative to other countries even before the crisis. However, coordinated measures to deal with this crisis had rendered interest rate differentials between countries less significant than before 2008. The Dollar Index fell to 75.2. It had sunk by 15 percent since March 5, as investors abandoned the dollar for higher returns.
On November 11, 2009, Treasury secretary Geithner confirmed the US government’s commitment to a strong-dollar policy before Japanese reporters: “It’s very important for the US and the economic health of the US that we maintain a strong dollar [to] sustain confidence not just among Ame
rican investors and savers but investors around the world.”52
Geithner knew Japan well. His undergraduate degree from Dartmouth College was in government and Asian studies, and his master’s from Johns Hopkins University was in international economics and East Asian studies. He had served as an assistant attaché in Tokyo before becoming a special assistant, and later Treasury undersecretary, for Larry Summers during the Clinton administration.53
However, Geithner offered no concrete plan for enforcing a higher dollar. Indeed, a weak dollar benefited the US economy because it boosted exports, which would have meant that US workers engaged in the production of exported goods would benefit, but because the United States ran a deficit with most nations, it was arguably better to have a stronger dollar so consumers and businesses that relied on imports would benefit.
It is possible the US Treasury, Fed, and White House chose not to interfere, letting the dollar decline because they found it suitable to US economic recovery while verbally adopting a counterstance because, in the end, one population group benefited from a lower dollar and one from a higher dollar anyway. Simply, a weaker dollar meant there was less money for people, social programs, universities, and research and more money for bankers and big corporations. Instead of turning more money into the families’ economy, this policy turned more money into corporations, which proved unsustainable with the second crisis in 2012.
On November 20, 2009, the Japanese government reported the Japanese economy was “in a mild deflationary phase.” The BOJ provided a more optimistic assessment. At a monetary policy meeting press conference that same day, Shirakawa defended his policy, yet he affirmed that monetary policies were not the only solution to the nation’s price issues, augmenting tension between the BOJ and government. He said, “The cause of sustained price falls is a lack of demand… when demand itself is weak, prices won’t rise just through liquidity provision.”54
