The Shoguns

Japan for decades has struggled to combat structural deflation, resulting in new experimental forms of monetary policy. This is all due to the Princes of the Yen.

In the wake of World War II, Japan was in tatters. With her major industrial cities burned to the ground and the military dismantled, the country appeared destined to be shoved back into the shadows of obscurity. The United States, seeing the emerging power of the Soviet Union, grew concerned and quickly developed a plan to pull Japan out of the quagmire and rapidly re-build its economy, so as to have a key ally in the Asia-Pacific theater.

The US guaranteed military security for Japan, and limited her military force to a small self-defense group, a fraction of what it was pre-WWII. Japan could now focus exclusively on the task of rapid economic development, which meant a complete re-imagination of the economy. The post-war economic miracle was achieved because the economy remained fully mobilized and maintained a war footing. This was feasible due to the US Occupation's decision, driven by the threat of advancing communism in Asia, to retain the wartime production capacity and its personnel.

In the book Princes of the Yen, Richard Werner describes how the post-war disappearance of the military triggered a power struggle between the Ministry of Finance and the Bank of Japan for control over the economy. While the Ministry aimed to preserve the controlled economic system that fueled Japan's post-war economic miracle, the central bank sought to revert to the free markets of the 1920s.

Despite the Ministry's dominant legal status, the central bank held a huge advantage: control over a secret monetary mechanism—a wartime legacy. The US Occupation had placed central bank insiders in their positions, but these insiders misused their power to form a small elite within the bank. This elite held significant control over companies, entire industries, and the economy, and had no qualms about wielding this power. They selected and trained their successors, known as 'Princes.' Operating behind the facade of traditional interest rate policies, these five Princes ruled post-war Japan unaccountably, with no oversight from the prime minister, the Ministry of Finance, or even their own governor.