Kojo: First of all, speaking of the Ministry of Finance around the time of the yen exchange rate decision in Showa 24 (1949).... I think you were in the Budget Bureau at the time... what was the reaction in the Budget Bureau to the decision by government headquarters to set the rate at 360 yen/dollar? Did it have any influence on the 1949 budget decisions?
Kashiwagi: The rate change came directly to my area in the bureau. We made an example budget that would "dodge" the change which produced a budget for Japan that was in deficit. In order to suppress the inflation that had been constantly present since the end of the war and put Japan on the path to reconstruction, we got rid of what had always been a plural rate and made it a simple rate. When the simple rate began, we were not sure what would happen to the support funds for price adjustment, the support funds that maintained price stability. When I speak of "prices", I mean the prices of Japan's basic imports, especially rice. Japan still imported a lot of rice at the time and we wondered what would happen to rice prices with the rate change.
From April of 1949 the new budget could be made and from 2 or 3 months before that, as a preparatory step, one dollar was made equal to 330 yen. This was not done by the Budget Bureau, or even the Ministry of Finance, but by the places like the Agency of Prices and the Headquarters for Economic Stability which negotiated with the international powers and then sent the results our way.... they recommended a rate of 330 yen per dollar and that is where we set it. At that time, at the 330 yen rate, Japanese rice prices were about half of prices overseas. Therefore, it was obvious that prices would rise terribly if rice from America were imported and distributed to the population unless the price support money were used. Similarly, there were many other commodities, like fertilizer, steel, and coal, that also would need to be stabilized. We called it miscellaneous replenishment funding.... I've forgotten all of it but there were small boats and other things.... anyway, when the rate was at 330 yen, the full estimated budget was 600 billion yen and the price adjusted budget was 200 billion yen. A full one third of the budget went to ensuring price stability.
That may seem like a lot, but I've heard that Russia's budget was often like that. Also, China's budget is supposed to be about one third used for price adjustment. It seems that in command economies that kind of ratio is common. So essentially, all through the war Japan had a command economy and when it returned to a market economy after the war, it tried to decrease the price correction as much as possible. I only understand these things because they were my responsibility at the time.
The rate was set at 360 yen on April 25 and just before that day, we got the message from the same place as before that it had been decided to change the rate from 330 to 360 yen. Simply put, at 360 yen, there was not enough money in the budget. You see, we had figured everything on the assumption of a rate of 330 yen and at 360 yen there just wasn't enough and we had no idea what to cut. We couldn't make that decision so quickly so we just got them to acknowledge that we could make some cuts after the budget was put into effect.
So, back to the question, did this have an influence on the 1949 budget? As I just said, this was something that was decided by those in higher levels in the government and they coordinated its implementation, it was not a clean slate. It was a budget that was worked out with a 330 yen per dollar rate. What did we do about rice and other things that were already budgeted? We simply changed things so they would work with the new rate. I think that Japan did remarkably well in this area.
Kojo: In 1949 England depreciated the pound. When other countries followed, did talk of yen depreciation come up in the Ministry of Finance?
Kashiwagi: This was the time when the European currencies all together fell 15% relative to the dollar. At that time, Japan did not follow along. The reason for that, as I learned later from a source that was high up in the government, was that between the government's Agency of Prices and those foreign governments, although there had been an understanding to keep the yen at 330 yen per dollar, Japan made it 360 yen per dollar at the last minute. This had the effect of cheapening the yen. It was a type of cushion for Japan. Japan knew that it was about to enter a difficult period so its attitude was that it would be smart to give itself a bit of leeway by cheapening the yen just a bit. That happened on April 25 or so.
A problem arose with the September depreciation of the pound because many of Japan's exports went to regions that used pounds. It was the period of "dollar short" so there were not so many exports to areas where the dollar was used. Basically, there was the problem of what to do because depreciating the yen in response to the depreciation of the pound would make it very difficult for Japan to export. Because the originally expected 330 yen rate was bumped up to 360 yen, Japan had roughly a 10% cushion, and during this period when Japan was working so hard, it was said that Japan could succeed with a 360 yen rate so it did not change.
Looking back, I think it was a great success. Japan as a participant of the IMF has never once depreciated its currency. In contrast, all of the other countries, including Germany, did so at this time. They have all experienced depreciation. Japan, however, had a 360 yen rate to the bitter end and at the time of the Smithsonian agreement actually raised the value of the yen. The yen has never been devalued.
Kojo: About Japan's policy of international earnings and expenses in the 1960s: when Japan's current account balance went into the red, it practiced tight fiscal and monetary policy but was there not any political resistance to the choice of this policy?
Kashiwagi: The main cause of Japan's limitation at the time was the current account balance so the supreme policy was to hold fast to the yen exchange rate. Therefore, it stayed the same all the way up to the Smithsonian accord when it finally changed. So, there was a period of protecting the yen at 360 per dollar followed by Japan's history of raising the yen's value.
Tadokoro: To look at an example, I think Germany raised the value of their currency three times in the 1960s. Looking at that, it seems like it would have been easy and natural for Japan to follow the same kind of policy.
Kashiwagi: There was some of that later. There was a big push to protect the current account balance but Japan repeated the same things every time. It wasn't "home-made" every time but it was done according to each specific situation.
The most obvious case was in 1954. This happened before the situation we've discussed but in 1954, Japan made it through its troubles with a policy of tight money. There weren't many countries who were doing this. For example, there was the one trillion yen budget. Anyway, a budget of one trillion, 100 billion yen, made prices rise but that was stopped at about 10%. I had responsibility over the budget section of the ministry of Agriculture and Forestry's public industry section so I know all about this. We made the budget just inside of one trillion yen, at about 999.5 billion. That was 1954.
In 1958, indirect finance was the key policy and it was very effective in holding back the economy. Because it was an era of indirect finance, in an effort to hold the economy back, the current account balance was dealt with by using a macroeconomic fiscal policy.
In effect, we tried monetary and fiscal means. By 1962, I was the International Finance Bureau's Planning Department Chief. At that time, we reinforced the management of currency exchange. Monetary and fiscal policy were important, of course, but what really held things under control was the management of currency exchange.
1966 was when all of this was put together and the whole program was implemented. This wasn't a policy that could be implemented piecemeal and we could not simply continue on a course that economically exceeding our means. We avoided slowing things down so much that it caused a sudden rise in interest rates. Also, opportunities for currency exchange management gradually became less and less frequent so they didn't work very well. We did all of these things together. 1966 was....
Iokibe: So when Sato controlled politics, did Fukuda control economics?
Kashiwagi: I believe that public bonds were issued just before that time, right?
Kojo: Japan was much less prepared for foreign currency than other developed nations. Under these circumstances when Japan's current account balance went into the red, were any other policies considered besides slowing monetary policy?
Kashiwagi: The main reason for that policy was that we had done it before. In 1966 we implemented that policy along with a fiscal slow-down and the management of currency exchange.
Iokibe: So the public bonds were added to that list of policies?
Kashiwagi: I think they were one part of the monetary policy.
Kojo: In 1968, the current account balance shifted into the black. There was acknowledgment from overseas that Japan had a structural surplus... what did the Ministry of Finance think of that? Was the fact that the Ministry did not admit to the structural nature of the surplus due to an effort to avoid pressure to raise the value of the yen?
Kashiwagi: More than to avoid this pressure to raise the yen's value that you just mentioned, we worried at the time that the potential existed for a weakening of the yen. Regardless of whether this was good or bad, we tried to increase growth and raise per capita income in order to benefit all Japanese citizens. This was the gist of our orders, at least. Therefore, free trade policy and other policies were, at the time, still on the back-burners. We talked about them later, and this has been the cause of all sorts of problems.
Therefore, other policies were tried but our first priority was to maintain market prices and keep the yen from weakening below the 360 yen per dollar level. It was a period where if the yen stayed at 360, everything else seemed all right. However, there was little talk of strengthening the yen either. The Nixon Shocks were in 1971, right? Two years before that, in 1969, (this was also in the newspapers) Mr. Hayashi, who was vice-chief of the International Finance Bureau and had been vice chief of the Investigation Department, claimed that it was necessary to raise the market prices and called it the "Alpha Operation." At the time, as the Finance Commissioner, I got together with my vice-commissioner, the director general , and the investigation department director that I mentioned, and the four of us, along with Mr. Okamura, who was in the International Finance Bureau and was later made an honorary president of the Sakura Bank, investigated the possibility of the Alpha Operation. I was the most strongly against it. Before doing something like that, I argued that we should free-up trade, ease regulation, and get rid of the other factors that were artificially causing the surplus. I guess by strongly asserting that it was a mistake to immediately deal with the market price, the voice of the Finance Commissioner ended up being pretty strong. (Laughter)
Tadokoro: In this debate, of course Mr. Hayashi was the one who pushed for the Alpha Operation, did you have the strongest feelings of opposition in the group?
Kashiwagi: The international finance director general was also against it. In fact, the international contingent all opposed it. We couldn't see any merit in it at all. What was the point of it anyway? In effect, the main policy of the Ministry of Finance was growth. It was not like Ikeda's income doubling plan, but we did strive very hard to find a way to improve the situation of all Japanese citizens. The central point to this was the current account balance, so it was obvious that we had to increase exports so they would overtake imports. However, wouldn't it be better to establish a system of free trade before trying to change the exchange rate? I always think that I am right in arguments.... therefore, I have never lost one. I'll tell you more about that later, but for that reason, I felt no pressure to raise the value of the yen.
Tadokoro: Did anyone formally say that there was any pressure?
Kashiwagi: I avoided the pressure to raise the value of the yen so it didn't exist for me. (Laughter) It was wrong. Maybe it was that an economist was telling me that in my head, but there wasn't really any pressure.
Tadokoro: However, in May of 1971, there were the eight yen countermeasures. Were they intended to get ahead of the movement to raise the yen and to promote a policy of free trade and liberalization?
Kashiwagi: That is written about in there. During Golden Week in May, there was the big disturbance with the German mark. I happened to be in Paris at the time and got to see things first hand. I realized that this was not simply a problem for the mark. It was a dollar problem. It was the collapse of the dollar. Therefore, it had terrible repercussions for the yen as well. I returned to Japan and advised Mr. Fukuda that Japan had to protect the dollar by providing the yen countermeasures. I said that if Germany had that big of a problem, what would happen to Japan? With that we came up with the eight measures to protect the dollar. Please read about them carefully. The book tells all about how macroeconomic policy was used to increase demand, deregulate, and liberalize the economy. All of these things were the premises upon which we could ignore the pressure to raise the value of the yen. Also, like I just said, there was little talk of foreign pressure, it mostly regarded macroeconomic supply and demand and said that if we would just wait for it, the yen would strengthen itself. It's hard to say whether we ignored the pressure or actually eased it.
Kojo: About the free capital of the 1960s.... what was the role of the Finance Ministry's International Finance Bureau with regard to free capital? How did the Ministry gain the understanding of industry on this issue?
Kashiwagi: The International Finance Bureau was the center of things.... it pushed free capital. It is very clear why it pushed free capital.... it did it because the OECD said that in order to participate, Japan must have a system of free capital. Japan simply said, "OK, we'll do it."
About the implementation of free capital, the first thing was to regulate Japan's exchange rate. That was my first job after I became director general and after my predecessor, Suzuki Hideo had dealt with the freedom of capital receipts. I came to be in charge of freedom of direct investment. This was something that the Ministry of Finance pushed but all of the other Ministries, especially MITI, Agriculture and Forestry, and Transportation were against. Economic circles also opposed it. To decide exactly how to accomplish the task, we put together the Committee on the Introduction of Foreign Capital.
This committee was set up to consider each individual case of the introduction of foreign capital and decide whether or not to grant permission in each individual case. It was decided that the Committee would do this so it was strengthened and Mr. Kobayashi Tadashi was made Committee chief. There was no way that he could have done it all by himself, though, so he asked to admit three other managers: Messrs. _________, Kobayashi _____, and __________. It was just the right composition of people. This group set up meetings of consideration and, to put it rudely, used them as a cloak to hide behind. They held individual hearings for each case of foreign capital entering Japan and made sure it was done freely. It was a given that if the Ministry of Finance was in charge there would be controversy. Because we knew that the Ministry of Finance would fight with MITI, the Ministry of Agriculture and Forestry, and the Ministry of Posts, we used the Committee on the Introduction of Foreign Capital and Mr. Kobayashi to hold a series of hearings and establish a free capital code in 1967.
This will seem like a proud thing to say but as I saw the failure of free trade, I realized that it was not something that a country could implement little-by-little each year over a long period of time. Therefore, I suggested that we try to liberalize the system in 5 years so that we would achieve perfect freedom in this area on the fifth year. Before that we just did a little bit at a time. This time, we decided to begin with small steps and steadily accelerate the program of liberalization. This acceleration actually caused us to achieve free capital in Japan in three years, not five. At first, though, the voices of opposition were extremely strong saying things like, "the black ship has returned." All the other ministries were passionately against it. There was Mr. Kumagaya, however, a MITI director general who had been a vice minister and then left to become the president and chairman of Sumitomo. He cooperated beautifully to help us succeed and I think that this made it a great success.
Trade liberalization, from a long time before, had problems. For example, Japan's rice was priced at about one half of foreign rice so even with "free trade," no rice entered the country. In actuality, the Ministry of Agriculture and Forestry and others thought of trade liberalization from a very businesslike point of view.
Tadokoro: Are you still speaking about the 1960s?
Kashiwagi: The end of the 1940s. You see, it is bad to lose track of the period of time. It is best, when possible, to set a plan over a long period of time and work to achieve it. If you negotiate the plan and dispute it every single year, nothing will get done. That is my proud comment.
Kojo: It seems that you feel that the capital liberalization went much better than trade liberalization in Japan. What reasons can you suggest for that success?
Kashiwagi: Like I just said, I think it was because it was able to overcome the objections of the business community. After Kobayashi Tadashi, all the people who dealt with the capital liberalization were extremely knowledgeable members of the business world. Also, we worked in a very organized way to enlist the support of MITI and the other ministries. Furthermore, we didn't try to accomplish everything at once but did things according to a multi-year plan with the initial steps being very slow and momentum slowly building after that. I think that that method of operation was very beneficial to us.
Kojo: Regarding yen appreciation, wasn't there any explicit counsel from America during the last part of the 1960s to appreciate the yen?
Kashiwagi: There was not even one case of explicit direction to do so. To put it simply, 1971 was the year of the Nixon Shocks, right? That spring, I was the vice-chair of the OECD economic policy council. (The chairman was an American member of the CEA named McClarken.) He said that we should eat dinner together sometime. I explained to him why Japan refused to appreciate the yen even though Germany had done so with the mark and after that I think he understood, or at least he never said anything else about it. However, even after that, I think the American side felt that it was necessary to adjust the yen exchange rate. It was the same thing that Germany had already done. I can't recall whether this happened in March or April but it was before the problem with Germany. I do think that the Americans thought a lot about yen appreciation at the end of the 1960s and the beginning of the 1970s.
Kojo: At the end of the 1960s, the Bretton-Woods system began to tremble and Japan joined in international cooperation. Was Japan's policy one of cooperation with America?
Kashiwagi: Harmony with America was, of course, very important but, what I understood after going to the Smithsonian talks was that America's influence on yen appreciation was strong. In other words, the adjustments made at Smithsonian were many sided but among those sides, Japan was most important. At the end of the Smithsonian talks, Japan and the U.S. held some meetings and, in essence, decided that the yen should be set at 308 per dollar. That decision was bounced off of everyone at the occasion of the conference... that the yen would be set at 308 per dollar. It was decided with that development that the mark would change 13%, the ruble 9% and that France's currency adjustment would be 8% weaker. After Japan made the decision, everyone else decided at once. So I guess the Smithsonian accord is an example of U.S.-Japan harmony, isn't it.
However, saying that this was all done with the purpose of achieving that harmony is wrong. We didn't figure things out and make a decision until we were actually there. It came as a surprise that Japan's currency and economy were so important to the other countries. When we realized that, I think that we decided to join the international community and cooperate on this issue. I believe that the Smithsonian negotiations make a jump in the international status of Japan. None of us felt that Japan was so important at the time. The Japanese negotiators were still strongly engaged in trying to discover how best to protect the Japanese economy but after negotiating with Schiller, he asked them to decide on a yen rate first and wondered what the percent difference between the two countries should be. The negotiation consisted of statements like, "if the yen is at this percent, then we'll do this, if it's here, then we'll do this," and so on. All of the other countries' negotiators were the same. Everyone basically knew the others' position. The problem, though, was figuring out each value relative to the yen. Japan and the U.S. were asked to quickly determine the yen-dollar relationship first.
There had been no public or private debate about the yen to this point so we were extremely inexperienced in the matter but we quickly understood its importance. We tried to calculate from that exactly how far Japan could go. Specifically, the number that I received from Prime Minister Sato that he felt could be ceded was 15%. 17% wasn't far from that so when I called him later and said I was sorry but it had been set at 16.88%, he gave me the OK. Prime Minister Sato said the number wasn't so important, as long as it had been worked out.(laughter)
Iokibe: Did Sato say that it would be all right to go as far as 20%?
Tadokoro: We heard as much from Mr. Mizuta.
Kashiwagi: I did not hear that. The last instructions that I received were to go as far as 15%.... that anything better than 15% would be a success. I think our goal at the start was a fairly good one. From that time, though Japan began to study about exchange rate problems at a furious pace.
Tadokoro: This next question is about your recollections of the people that were called the currency mafia in the 1960s. How important and helpful would you say that these personal relationships of trust were at the negotiations?
Kashiwagi: The negotiations could not have been completed without them. Things weren't out in the open then like they are today. I mean, today everyone knows the exchange rates and there is so much more data available. Government's weren't completely secretive at the time but this subject was very secret. Not in just Japan either, every country was like that.
Tadokoro: When you went to the G10 or WP3 meetings, did you always know your counterparts by their first names?
Kashiwagi: Japanese first names are hard to use. Can you read my first name? It is not read Yusuke! (Laughter)
Tadokoro: So you would become very close to these people, what about the things that you would talk about? What kinds of things did you discuss, seeing that you would see them every few months? For example, did you say things like, "the pound is in danger, it's time for an urgent aid package," or talk about the fact that the lira was in trouble, etc.? On a day to day basis, what kinds of information did you discuss that made close, trusting relations with the others so important?
Kashiwagi: We met every two months in the WP3. The G10 deputies entered into those meetings and the people who went to them were always the same. There were also bilateral negotiations. Today, it's harder to adjust schedules and most of this is done by telephone. Back then, though, we seldom used the phone and if we needed to talk, we would meet. One conference would last two or three days because of that. The discussions that took place were mostly about the structural problems at hand. We discussed things like how to adjust current account balances and the like.
Tadokoro: Did you speak about things like how best to change the IMF agreement of the time?
Kashiwagi: No, we spoke of things like how much we should take currency rate fluctuations into consideration and how much we should adjust the exchange rate. Basically, we spoke of monetary policy concerns.
Tadokoro: So, you spoke of current account balance harmonization and subjects of that kind?
Kashiwagi: To use a current example, global macroeconomic policy adjustment has a lot of problems. At that time, though, we actually achieved it. It may be unkind to talk about this in front of scholars, but it was the scholars that advised us to adjust the currency exchange rates. You often hear about the ________ group. That group was formed when a Princeton professor named ________ got together about ten experts. We didn't know much about the realities of what we were doing and we came up with mostly abstract arguments but we did get together at the deputy's place and have a series of one-time discussions. That was the ________ group. It was assembled in 1966-1967.
With those meetings I began to understand that the scholars really didn't know what they were talking about. They didn't put out many figures and I couldn't comprehend their thought processes. They didn't know what someone who had to actually manage currency devaluation had to think about. Therefore, no matter how much they talked about currency adjustment across the board or that their own countries were free to do it, they didn't know how other countries would react to the adjustment. Over and over they would assert that exchange rates were determined by supply and demand so they were really flexible and that having a fixed rate was nonsense. Anyway, after listening to all of this, the Ministry came to the basic conclusion that the scholars didn't know much of anything. They only spoke of empty theories and arguments and didn't really understand the real-life market situation. I assume it's basically the same today. (Laughter) We wondered how it would be possible to maintain order and achieve stable world economic growth without a fixed exchange rate. This was not only a Japanese problem, America also had to deal with it.
Thus, the adjustment that happened with the Smithsonian agreement was a currency adjustment but not a fundamental change of the system. This change came in 1973 when the floating exchange system crumbled and fell. I said at the time that the floating system was wrong. It was a system that had to be adjusted over and over again and when it broke down one time, it was impossible to get back to where we had been. Even though attempts were made to go back, that kind of thing is very difficult for a government. Did the floating system solve the problem? Not even a little bit as far as I'm concerned.
Iokibe: Do you still think that today?
Kashiwagi: Yes, I think that Europe going with the EMU is a case in point. Freely moving rates seem to be all bad.
Tadokoro: Can you think of any examples of the Bank of Japan and the Ministry of Finance disagreeing with each other on international currency diplomacy?
Kashiwagi: There were, of course, individual cases of disagreement, but President Maekawa and Mr. Inoue were almost exactly our counterparts. They were mostly in total agreement. Especially during the Smithsonian talks when the fact came up that there was no way to maintain the yen at 360 per dollar and the discussion turned to whether or not to open the currency market. Both of them were against closing the market. They both wanted intervention. They both considered how they could alleviate some of the public financial burden and decided that stabilizing the marketplace would be their guiding principle. We felt the same way about it. The Budget Bureau, however, felt differently and they cried over this a lot. Thinking about it afterwards, I realized that if you think about it from the public's point of view, it was only a little bit of money. There is no reason that that amount of money should not have gone out. I had been in the Budget Bureau for a long time and I knew that they had that kind of money.
Tadokoro: During the international currency negotiations of the 1960s, I think Japan had a rather small presence. What would you say were the main matters of concern for the Japanese delegations to these negotiations.
Kashiwagi: During the Smithsonian negotiations, I understood at once why Japan's delegation was comparatively small. Simply put, the yen was important only after the dollar negotiations were finished. When the dollar negotiations finished, however, the yen was important for quite some time.
As in the past, Japan's concerns were about how to provide controlled growth for the Japanese economy.... whether or not it could maintain its relatively high growth rate.
Tadokoro: In order to achieve that, what did you determine was the best way to avoid going into deficit?
Kashiwagi: This, like the discussion we just had about Japan's weak preparation for foreign currency, boils down to the fact that there was no more efficient country at the time than Japan.
Tadokoro: With only a little preparation....
Kashiwagi: The fact that Japan only had to use about 20 billion dollars shows that it was very much in control of the situation. Because Japan had the confidence that it could control its current accounts balance, it was able to do it with a small amount of money. Today, we can no longer use the brake of foreign currency preparation. It is zero so, conversely, there is 1800 billion in foreign currency preparation. What the scholars should say is that this 1800 billion is a loss as far as private citizens are concerned.
Tadokoro: So, it's like it has been sleeping?
Kashiwagi: What would happen if that money was distributed to everyone? It is rude to say so, but the scholars are a little bit late on this one. (Laughter)
The matters that concern Japan most have been slowly changing. Other than just increasing capital income and distributing it fairly to all, now we hear very different talk about quality of life, environmental protection, and welfare. Japan has accumulated this large surplus. Before, while it wasn't exactly a matter of eating or starving, we concentrated on how we could make things better. You won't understand this but to those of us with wartime experience when we didn't know where the next meal would come from, the income doubling plan was extremely appealing. We felt that everyone was entitled to improve their lives. I think that this was a great success. Now, everyone in East Asia is following Japan's example from that period and trying to figure out how to improve their lives. China is even doing it now but Japan was the first.
Tadokoro: This is a question about how you became an authority on international finance. Did the Finance Minister at the time pick a few specialists to specifically deal with the problems of international finance?
Kashiwagi: The result turned out that way but there certainly wasn't a specific plan to do so. Like I mentioned before, there were still in place some of the currency management regulations from Noguchi's era in the 1940s. In fact, of all of the things left over from that period, most regarded international finance and were in the form of currency management. Finance in the period around Showa 6 was completely free. There was absolutely no management of currency. The opening of the money system didn't go well and was a mistake that lead into the system of currency management which is the part of the wartime economy that remained. It probably should have been stopped a lot sooner. So, the reason for the small number of specialists is that proclamations from the International Finance Bureau carried a lot of weight.
Tadokoro: When the protection of the dollar became a problem in the latter half of the 1960s, was there an effort to link it with the protection of Japan's security?
Kashiwagi: I never had anything to do with the security issue.
Tadokoro: For example, in Germany's case, in 1967, Breshing and Martin used the burden of U.S. protection as a reason for formally telling the U.S. that Germany would not exchange its dollar balance for gold. Did America try to get Japan to do anything similar to that?
Kashiwagi: I was in the embassy from 1958 to 1961 and....
Tadokoro: The embassy in America, right?
Kashiwagi: At that time, Japan had finally begun to obtain foreign currency reserves. The director general of the International Finance Bureau at the time recommended that because Japan had few gold reserves and because that fact could become a problem, Japan should obtain gold reserves. From that point, we slowly began to buy gold. Soon thereafter, I was at a party at the embassy and someone from the U.S. Department of the Treasury came up and said, "Mister Kashiwagi, it seems that Japan has been buying gold, do you need a loan from the World Bank or the U.S. EX-IM Bank?" It was a bald threat.
Tadokoro: So he meant that if you were going to do something as unnecessary as buying gold...?
Kashiwagi: If you want to call it that... he basically wanted an arrangement where Japan borrowed U.S. dollars to buy gold. You see, before the security protection guarantee by the U.S., Japan couldn't have bought gold. Japan had tried to figure out how to secretly buy it, but the U.S. had raised a fuss about it and Japan could have bought it anyway. In Japan, civilians were buying gold. They bought gold bars and gold coins. The government, however, still hadn't bought much.
Tadokoro: So the gold reserves were very small then?
Kashiwagi: Japan did not make any commitment that it would cheat on its security relations with the U.S. by trying to buy gold. It just tried to bring as much foreign capital into the country as possible and make the best of the World Bank and EX-IM Bank loans. Also, the real state of affairs was that while it was increasing its debt, Japan did not have the means to buy gold.
Tadokoro: Before the Nixon shock, what kind of forecast had you made regarding the appreciation of the yen?
Kashiwagi: As I mentioned before, this was the "alpha strategy," there were some who felt that the yen would appreciate, but those in the International Finance Bureau were against it.
Tadokoro: Were they for complete free market policy?
Kashiwagi: We were bureaucrats so we tended to try to increase the figures for per capita income and we were not against putting this as our number one strategy. We basically decided that if the decision was made to appreciate the yen, we would go along with it.
Tadokoro: When you heard about the notification by Volcker by telephone on August 16, 1971 about the Nixon shock, what was your initial understanding of what it meant?
Kashiwagi: Well, I felt like, "Oh, so it has happened."
Tadokoro: At that point, did you realize that this announcement would lead to yen appreciation?
Kashiwagi: It was a dollar shock. Like I mentioned before, in May, when Germany came aboard, the dollar slumped badly and weakened. America withstood it and it probably brought about the separation of the dollar from the gold standard. At least that is how I took it.
Iokibe: So you realized in May that it would happen this....
Kashiwagi: When the dollar weakened, the yen strengthened. Therefore, it was a situation in which something had to be done and the solution that was proposed was dollar protection. With that in mind, it was fairly obvious why America went off the gold standard. That actually happened on Monday morning. I knew that there had been a meeting at Camp David on Saturday but I had already quit. At that point I was just a consultant but I read about it somewhere and thought, "it looks like something's up." But I was leaving on a vacation on Monday and I figured that this would be something for my successor to deal with.
Tadokoro: We have also spoken about this with Mr. Hosomi, and he said that at the time, he became the new finance commissioner with the understanding that you could continue to deal with the complicated particulars of international finance meetings and the like.
Kashiwagi: He was brand new at international finance so there was no way he could do it. That was why I set myself up in the position of consultant. Basically, it was decided that I would help out for a period of time. Mr. Gyoten was just under Hosomi, an attaché to the finance commission, so it would be best to ask him about it. He worked the most closely with Mr. Hosomi.
Iokibe: If you understood what would happen when you heard about the Camp David meeting, how did you deal with that knowledge?
Kashiwagi: You see, though, I didn't really understand. They said that I should come to a conference in London where they would explain the American position but that was over ten hours away so we had the former minister attend it instead.
Tadokoro: And didn't _______ from the Bank of Japan go as well?
Kashiwagi: Yes, he went to London and attended for us. However, we were in Tokyo and really didn't know what was going on. We told him to go on Tuesday but on Monday the European market had already abruptly closed. We decided to keep the market open in Japan and on Tuesday morning, in the cabinet council, the Finance Minister had to try to explain over and over what had happened. Afterwards, Prime Minister Sato said, "I understand what you've been saying but what will happen from here? What should we do? Yes, yes, Kashiwagi has been dealing with these matters so let's send him." With that, on Tuesday afternoon, after the cabinet council meeting, I heard and prepared to leave. Of course, I had to cut my vacation short and I left on Wednesday.
Tadokoro: So before that, on Monday, you told people in the Finance Ministry to keep the Japanese currency markets open. I believe that Kaneyama was still arguing that they should be closed, is that all correct?
Kashiwagi: Exactly. There was a big debate in front of the minister and Kaneyama ended up taking a business trip to Osaka.
Iokibe: He was sent there because of it?
Kashiwagi: No, he had planned to go but he argued until he left. The Minister took charge but the vice minister and the previous finance commissioner kept fighting about it. I personally thought that it was obvious that the currency market would remain open.
Tadokoro: At this juncture I'm sure that you hoped to avoid currency appreciation, but did you really expect that you would be able to avoid it?
Kashiwagi: Like I mentioned before, currency adjustment is a strong tool and to some degree we were able to control how much currency was in the marketplace at a given time. It wasn't a deliberative system like it is today and we could foresee what the currency level would be and manipulate it. Therefore, every day we would intervene in the market a few million dollars. Look at the results. From that Monday it was left open for two weeks and we knew exactly how much would be bought each day. It wasn't like today when there are hundreds of billions bought every day, at most it was only about ten billion a day. It didn't even rise to 30-40 billion.
Tadokoro: So it was that kind of thing... it never exceeded 100 billion.
Iokibe: In this type of situation, when they were opposed to each other, was the finance commissioner more influential than the vice minister?
Kashiwagi: I think that depended mostly on their particular personalities. (Laughter) The vice minister didn't have any power to make decisions, in that way he was like the rest of us.
Iokibe: Who had the ultimate decision making authority?
Kashiwagi: The minister, because he was the head of the conference.
Iokibe: And that was Mr. Mizuta at the time, right?
Kashiwagi: In reality, I doubt that Kaneyama himself had the ability to think that deeply about the subject of yen appreciation but there was a man in the secretariat named Mr. ______. He has written about this somewhere I think. He had held an assignment in Germany and he and Hayashi (whom we spoke about before) were both advocates of appreciation.
Iokibe: I see, they worked with the German model.
Tadokoro: Was Mr. _____ (Sajo?) the chief of the secretariat?
Kashiwagi: No, he was in the minister's examination secretariat. I think he got his knowledge on the subject from his service in that institution. So you see, the one talking was Kaneyama, but ______ was the brains behind the words. When I spoke, it was really what I thought. I was in the International Finance Bureau but I never spoke for others ideas.
Tadokoro: So, of course, Mr. Hosomi was also in on these discussions about appreciation?
Kashiwagi: Yes, I think he was present.
Tadokoro: Did he say anything?
Kashiwagi: I have no recollection of him saying anything. Gyoten may have been there also but I can't remember. I only recall the things that I said personally. (Laughter)
Tadokoro: I'll bet your recollection is very precise. When we asked Mr. Hosomi about what he said, he replied that you and Vice Minister Kaneyama argued back and forth and Hosomi just sat back and listened thinking, "Oh, so this is what it's all about."
Kashiwagi: It was a big argument. You see, during the [Beragio] group that I mentioned before, my academic debate skills became much stronger. I got a lot of good training. Even though the debates had only been with scholars, I armed myself with a strong theoretical base questioning things like: 'Why does the situation have to be settled?', and 'Why must we stabilize the market rate?' I felt like I had really done my homework on this issue.
Iokibe: Was America's intention to depreciate the dollar and keep it low?
Kashiwagi: America was very clear about what it sought; it wanted Japan to appreciate the yen just as Germany had with the mark.
Iokibe: Was it something that Japan could do, even with strong U.S. pressure? Was currency manipulation still easily accomplished at the time?
Kashiwagi: This is something that happened later, but I think that Japan did try its hardest to meet the U.S. demands. However, after traveling around Europe, I came to clearly understand that this was not only a Japanese problem. It was a problem with the dollar's exchange rate with all other currencies and it had to be solved with a many faceted approach. The person who best taught me this principle was the OECD Secretary General Van Renep. I met with him and we spoke for over two hours while eating lunch together. He hit the nail on the head when he told me, "Mister Kashiwagi, this is the issue of dealing with the exchange rates of all currencies with the dollar, it is not merely a Japanese dilemma. Everyone is wondering what to do and what the best policy will be regarding their exchange rates versus the dollar but it has also caused confusion over the mark-frank, mark-pound, and mark yen relationships. No one has had to deal with this kind of complicated situation before so it will take some time to be worked out. It could be Christmas before we come up with any solutions." With that I understood much better.
From there, I went to America and spoke with the managing director of the IMF and the chief financial commissioner and they endorsed Van Renep's view. They agreed that this was a complex problem with many sides and that it would take time, but they also convinced me that it would be wrong for the yen to escape unscathed and that some appreciation was necessary.
Tadokoro: In fact, Mr. Ushiba was ambassador at the time and according to his records, you and he had a big debate at the embassy. Do you recall any of that?
Kashiwagi: None at all.
Tadokoro: So what you are saying is that your meeting with Van Renep in Paris was what convinced you that yen appreciation was inevitable?
Kashiwagi: Yes, yes. I went from Tokyo to Paris and landed in the morning, right. Without staying over, that afternoon I went straight to New York and then to Washington where I finally got to go to bed. However, from each place I stopped I called Tokyo and told them how I saw things at that point. I got back to Tokyo and went straight from Haneda Airport to the Ministry of Finance and reported what I had learned. I said that there was no other path but appreciation and that the solution would have to involve complex, many faceted adjustments. What were we going to do about it?
Tadokoro: But, if you realized at the point of your meeting in Paris that appreciation was inevitable, did you think at all about calling Tokyo and having them close the market down and changing to a floating exchange system?
Kashiwagi: I did not think of that at all. There was no need to close it down.... why would we want to close it?
Tadokoro: So if it was a case of realizing that a many-sided approach needed to be taken, did Japan switch to a floating system after you got home from the trip?
Kashiwagi: The floating system was an expedient further adjustment and either way we had to make a new system. Every country had to work out how much their currency would appreciate or depreciate relative to the dollar.
Tadokoro: So did you set the rate at 360 yen per dollar until a mutual rate could be agreed on....?
Kashiwagi: No it was a floating rate.
Tadokoro: In that case, at this early juncture, did you send your decision to Tokyo before you got home and have the system changed to a floating rate?
Kashiwagi: I didn't send any recommendations to Tokyo but I made my rounds on the trip and then came straight home on Monday. On Sunday there had been a Finance Ministry executive meeting. Hosomi probably knows the most about this. At that meeting they brought together the various information and came up with the decision that it was necessary for Japan to appreciate the yen. Because we didn't know how much appreciation would be necessary, we would float the currency until then. That was the thing that was most difficult; we didn't think that the floating rate was a good thing, it was a necessary evil.
Tadokoro: So you felt that it was expedient to float the currency until you could come up with a new fixed rate, right? From Sunday when you decided to change to a floating rate until it was actually implemented on Saturday it took that one week, correct? What was the reason behind waiting for that whole week?
Kashiwagi: That was not my choice, the Bank of Japan will have to explain that. What I have often heard is that the Bank asked for a little time to correct its imbalances and try to be fair to its customers.
Tadokoro: So you received a request to wait from the Bank of Japan....?
Kashiwagi: Yes, I believe they did ask us. I think that it was the result of the way they operated. They moved in the direction of a floating rate, and as a result of consulting with many countries involved, decided to come up with a new system. Until they made that decision, though, they chose to float the currency. They tried to avoid dropping from 360 yen per dollar to a little over 300 all at once. Rather, they attempted to drop to 350, then 340, then 330, and slowly appreciate the yen.
Tadokoro: Step by step, then.
Kashiwagi: During that time of appreciation, they said that they would get an increasing number of complaints about intervention and that is exactly what happened. The Budget Bureau was made to take the brunt of the complaints.
Kojo: So, at least to a degree, was your evaluation of the effects this would have on the banking industry correct?
Kashiwagi: The Bank of Japan made all of the specific decisions about this. We pressured them to decide when they were going to float the currency and after several days they finally came back and asked us to please give them some time. After a few days, though, the dollars that were bought on the spot market continued to enter Japan and various other things also kept happening. In that setting, on Friday, the Finance Ministry proclaimed that it was wrong to be so undecided about the issue and that on Saturday the floating rate would begin. To my recollection, with that, the rate began floating on Saturday. I really didn't have much to do with that at all, though, you really should ask Hosomi about it.
Tadokoro: One other subject that I'd like to discuss with you regards the relationships of trust that you developed with others in your field from other countries during the many negotiations of the 1960s. Especially, I've heard that the American negotiating team of Volker and Connally basically turned upside-down everything that the American side had said before and had a very rough and overbearing negotiating style. In particular, Connally was said to have had a bad mouth. When you witnessed these negotiations, did you have the feeling that these were a new breed of very different negotiators from the United States? Or, on the other hand, did you just figure that all international negotiations were essentially like that?
Kashiwagi: I guess my feeling was that this kind of personality also exists in international negotiations, doesn't it.(Laughter) I definitely didn't think that all international negotiations were like that, but I must have been pretty surprised at their style, now that I think about it. I had the experience of directly negotiating with Connally. Mizuta had a problem with the language but I didn't notice. It wasn't a problem because I had studied and prepared myself very well.
During the negotiations, the last instructions were to go from 310 yen to 308. When we decided for a rise of 17 percent, Mizuta said, "17 percent is no good. Inoue Junnosuke was killed politically for a 17 percent appreciation, I don't want to die." He didn't forget.(Laughter) With that we exercised some wisdom and set it at a 16.88 percent change. No, really. We went with that decision and that is why only Japan had a non-round number rate in relation to the dollar. All other countries set their rates as a round percent of the dollar, but Japan had it's rate as the integer 308 yen.
Tadokoro: So, according to your previous explanation, America never formally requested that Japan appreciate the yen. In light of this, do you think that the negotiations could have been successfully concluded quietly soon after it was understood that a multilateral solution was necessary, thus avoiding the necessity of randomly issuing a disruptive statement like Japan did in the end?
Kashiwagi: If America had said that it would readjust the price of gold at the beginning, I think things would have been considerably different.
Tadokoro: Would things have been different if you had determined that it was acceptable to depreciate the yen?
Kashiwagi: Yes, there is a famous story that the Americans met with DeGaulle on an island in the middle of the Atlantic and acknowledged that the price of gold would be readjusted. Japan did not have similar influence to persuade America to do such a thing.
Tadokoro: In retrospect, the price of gold was not much of a problem to Japan despite the fact that gold convertibility was not restored. Japan had few reserves and was happy just to maintain the dollar rate where it was. The gold issue burned between Japan and Europe, however, and I think it was one of the main reasons that the Smithsonian talks were delayed. Don't you think it is kind of strange that Japan got itself in so much trouble over the gold problem?
Kashiwagi: Well, what did Japan do about the gold problem before the Smithsonian talks? There were many problems including the gold pool problem. Everyone tried hard to collect gold because if the price of gold were to rise, it would be unfair to Japan if it had no gold pool.
Tadokoro: Because the countries that were rich in gold would make a large profit, right?
Kashiwagi: Therefore, in Europe this was a big problem.
Tadokoro: So to the countries of Europe was the gold problem very.....?
Kashiwagi: Yes, I think it was. Japan had very little gold. Even though it wanted to get gold, it couldn't. Even by the time of the Smithsonian talks, Japan still fundamentally depended on foreign currency reserves. Japan's mentality remained that of a capital importing country, not a capital exporter. I imagine that it would have been better if we could have begun the process of growth a little bit sooner.(Laughter)
Tadokoro: One last subject. We talked before about the philosophical stance behind the system of fluctuating market prices. We have now had this system for twenty-something years, and when you think about it, that is roughly the same length that we had the Bretton-Woods system of fixed prices. Looking back, it is often said that the oil shocks created an atmosphere in which it became impossible to return to the fixed rate system. If there had been an effort to return to a fixed rate system before that, do you think that we would have been able to maintain it until now?
Kashiwagi: As we saw with the Smithsonian talks, when there is an international crisis, a fixed rate cannot be maintained. There is only meaning in trying to get back to the original levels.
Tadokoro: Sometimes countries cannot help adjusting the exchange rate?
Kashiwagi: Adjustments will be made. Because the system is adjustable, there will be unilateral and multilateral adjustments made. I think this kind of system was much more desirable for international stable growth. I also believe that it is better today. It seems much more desirable to both Japan and the U.S. to be in a period when the yen does not abruptly fall to 80 per dollar. That situation would be more significantly a dollar slump than it would be just a yen appreciation to 80. People often make the mistake of looking at it as a movement of the yen but it is really a movement of the dollar.
However, I don't think that it is very desirable to have the dollar, which is the international currency, move about so much. In order to avoid that, it seems best for everyone to cooperate. I think that simply leaving it all up to market forces is irresponsible. However, I think that there are many ways to adjust the rate, whether it be direct government intervention or macroeconomic policy adjustments. In contrast to these methods, completely relying on the "market knows best" philosophy will cause problems, I think.
Tadokoro: In that case, won't the Tokyo Bank have a problem because of the foreign currency....?(Laughter)
Kashiwagi: Right now I have no responsibility for things so I can't answer that question. However, I don't think that there have been mistakes as large as you hear right now. If you think about it, Japan has done very well in this area over the past 20 years. Even during the period of floating currency, Japan has found a path that has allowed it to prosper. That opinion is, however, quite prejudiced.
What I would really like to say is that if someone ever comes up with a really effect currency market price system, they will win the Nobel Prize. No one even dares write about it at present.
Tadokoro: Don't you think that economists realize that they probably cannot live up to the expectations that are placed on them in this area?
Kashiwagi: But it is completely a problem of economics so I feel like there should be more discussion about the topic among economic circles.
Tadokoro: Thank you very much.