Hazards at the Heart of the Economy: Book Lays Bare the Threat to Bank of Japan Independence

Disregarding the Principle of an Independent Central Bank

During its eight years in office, Abe Shinzō’s second administration exemplified a global shift to governance driven by public opinion. This book is a detailed examination of political interference in appointments at the Bank of Japan, exploring what it means for a central bank to be independent. Underlying this analysis is the author’s probing inquiry into the nature and purpose of democracy itself.

Perhaps the most marked characteristic of Abe’s 2012–20 period in office was the way the prime minister sought to use his string of electoral victories to exert influence in areas that had previously been seen as off-limits. To implement his policies, he replaced the commissioner of the Cabinet Legislation Bureau and interfered in the appointment of the prosecutor-general. He justified these moves by claiming that they reflected popular opinion as expressed at the ballot box. The book quotes him as saying: “It is not the commissioner of the Cabinet Legislation Bureau who is subject to the judgement of the electorate, but me as prime minister.” It was a simple, not to say simplistic, argument—but one that was surprisingly persuasive in the context of widespread frustration at economic stagnation and dwindling optimism about the future.

Appointments of the Bank of Japan’s governor and policy board members, the focus of this book, illustrated this trend perfectly. Previously, these involved behind-the-scenes discussions between the bank and officials from the Ministry of Finance, following which a candidate (inevitably someone who had come up through the ranks at the BOJ or MOF, or both) would be put forward for formal approval by the prime minister. The author concedes that this “elitist” approach was hardly perfect. But he argues that it played an important role by guarding against the fickleness of public opinion. The Abe government was the first to intervene directly with this decision-making process, when Abe moved directly as prime minister to have Kuroda Haruhiko appointed as governor.

The author builds his account on interviews with people involved, as well as drawing on evidence from a wide selection of books, newspaper articles, and the parliamentary record. Particularly striking is his description of the moment in 2012 when Abe began to move to ensure that the appointment of the next governor would go according to his wishes. Under the previous governor, Shirakawa Masaaki, the BOJ had stubbornly resisted Abe’s proposed “Abenomics” platform, one of the pillars of which was an ambitious program of monetary easing.

Abe responded by instructing his close confidant Honda Etsurō, as special advisor to the cabinet, to draw up a list of suitable candidates for governor. Honda suggested Kuroda and Iwata Kikuo, a professor at Gakushūin University. Kuroda, formerly an official at the Ministry of Finance, was president of the Asian Development Bank at the time, where he had been strongly supportive of Abe’s calls for monetary easing. Abe was impressed by this support, later recalling: “At a time when I was being bombarded in the media and by economists, Kuroda recognized the merit in my ideas. This was especially notable since he was governor of a bank aligned with the government, and I was head of a party in opposition at the time.”

Eventually, Iwata decided to pass on the top job, saying he would be happy as deputy governor—only for Abe to suggest to Honda that, “maybe it doesn’t need to be Iwata after all.” Descriptions like this allow the reader a glimpse behind-the-scenes at the uncertainties and underlying motives of the people involved. It is also clear that the BOJ and Ministry of Finance were left totally out of the loop at this critical time. No consideration was given to the role of the central bank or the importance of its independence from the government of the day. The choice of governor was based entirely on the interests of a single leader looking to advance his own pet policies.

From Democracy to Demagoguery?

Why is a central bank’s independence so important? In the generally accepted account, this has to do with the bank’s main mission of achieving price stability. In pursuit of this aim, the judgement of the bank may differ from that of the government, which tends to be focused on immediate economic conditions. If the bank starts to prioritize the short-term economic climate in the same way, with voters in mind, it will struggle to control inflation. In the long term, this brings significant drawbacks for society and the economy. Experience has taught that keeping the central bank independent works well to minimize this risk. This principle was made explicit in the revised Bank of Japan Act, which came into law in 1998.

In the second part of the book, the author details the process by which the bank’s autonomy was fatally undermined. One important part of the framework that supposedly guarantees the bank’s independence is the monetary policy board. At the monetary policy meetings, the six members of the board, along with the governor and two deputy governors, hold one vote each. The book shows how Abe worked to subject board members to his will. But perhaps the most striking revelation concerns something that happened a little earlier, at the monetary policy meeting in April 2013, immediately after Kuroda took over as governor.

Members who had supported Shirakawa in his opposition to Abenomics still made up more than half the board. Considering the independence of board members and consistency of policy, there was no reason why they should necessarily have gone along with the policies of the new governor and deputy governors. As it turned out, however, the safeguards in the system were surprisingly weak. Kuroda proposed an ambitious monetary easing program that would see the bank conduct money market operations “so that the monetary base will increase at an annual pace of ¥60 trillion–¥70 trillion.” The proposal was approved, 7 votes to 2. Board members who once backed the Shirakawa policy had flipped and now endorsed everything they had always opposed.

What made them give in so easily? The testimony the author has drawn from those directly involved for his book is eye-opening. One member says: “I didn’t even think about opposing the proposal . . . I took the view that it was something that couldn’t be helped, as a member of the organization.” Another confesses: “In the general election the previous December, Abe and the LDP had won convincingly on a pledge to implement ambitious monetary easing. The idea had been democratically endorsed by the public. There was no alternative.” In other words, even financial experts sufficiently prominent in their field to be appointed as policy board members did not fully understand the importance of keeping the central bank independent of the government.

The author raises fundamental doubts about the implications: “This would make election results more important than the independence of the central bank. Is that really what the revised Bank of Japan Act intended?”

Perhaps even more shocking was that many senior officials in the Bank of Japan—the very people who supposedly embodied the bank’s autonomy—suddenly performed a volte-face when the new government came in and worked behind the scenes to persuade recalcitrant policy board members to go along with the Kuroda proposals.

The noble objective of an independent central bank set out in the revised Bank of Japan Act crumpled in the face of ruthless political players determined to have things their own way.

The popular will is a crucial safeguard against dictatorship and autocratic rule. However, modern history has shown that even democratic systems are vulnerable to abuse if certain areas are not insulated from the vagaries of public opinion. When politicians lack a proper understanding of this aspect of governance and begin making appointments for their political convenience—justifying their actions by pointing to electoral mandate—these intricately balanced democratic systems can falter. This, in turn, may increase the likelihood of autocracy—the very danger that democracy is meant to prevent. While public-opinion-driven policymaking has its strengths, it also poses significant risks. This meticulously researched book explores this dilemma with unflinching clarity.

(Originally published in Japanese. Banner photo: The Bank of Japan in Chūō, Tokyo. © Reuters.)