The Bank of Japan (BoJ) was formed in 1882 to provide central banking facilities and has been the subject of two major revisions in 1942 and 1997. The bank’s functions are defined under the Bank of Japan Act.
Bank of Japan Responsibilities
The Bank of Japan has three main responsibilities:
- Currency and monetary control
- Issuance of banknotes
- Financial system stability
Is the Bank of Japan Independent?
The Bank of Japan, in theory, has full operational independence surrounding its decision making following the 1997 Act, but there is still a very strong degree of co-operation with the Ministry of Finance, which also retains a strong degree of influence over policy decisions. In practice, the Bank of Japan has only limited independence.
The Bank Governor is very frequently called to testify in parliament, although the overall impact is often very limited given that parliament has little overall authority with power firmly in control of the Finance Ministry and overall Cabinet.
BoJ Monetary Policy Objective
The Bank of Japan Act states that the bank’s monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy. In 2013, the bank set the price stability target as achieving a 2% consumer inflation rate. The bank also made a commitment to achieving this target at the earliest possible time, although this time scale has effectively been pushed back after continued failures to make progress.
Monetary Policy Operation
The Bank of Japan adjusts monetary policy in order to achieve its inflation target of 2%. At present, this is achieved by targeting a specific annual expansion of the monetary base through the buying of government bonds through its quantitative easing programme. The Bank of Japan also changes the rate of interest rates on bank deposits, although it is not currently targeting the overnight lending rate.
The BoJ Policy Board
Any changes in monetary policy are agreed through the Policy Board at Monetary Policy Meetings (MPMs), which are held eight times per year.
The Policy Board is comprised of the Governor, two Deputy Governors and six other members. The decisions are made by a majority vote.
Following the meeting, the bank will issue a policy statement that summarises its decision. In contrast to other G7 central banks, there is no specific time for a policy announcement to be made, which increases potential volatility, although it is usually within a window of around 2 hours.
Governor’s Press Conference
Following the monetary policy statement, the Bank of Japan Governor holds a press conference to discuss the decision and any other aspects of the policy meeting that need to be highlighted.
MPM Summary of Views
The Bank of Japan produces a summary of its policy meeting around 10 days after the policy meeting with a brief summary of the discussion and policy views.
BoJ MPM Minutes
The full minutes of monetary policy meetings are released around 8-9 weeks after meetings and are usually released after the next meetings have taken place, which substantially diminishes any potential impact.
The Bank of Japan produces various reports on the economy including a monthly report on recent economic and financial developments. Reports are often released in Japanese first with translations available slightly later.
Bank of Japan Speeches
The Bank Governor makes speeches during his time in office. These are important in setting out his thoughts on the economy and potential trends in interest rates, especially if prepared comments are followed by a Q&A session. Comments from other bank members tend to have little overall impact.
The Finance Ministry and Bank of Japan tend to work in close co-ordination with each other and the Finance Minister often makes remarks to the press.
The Bank of Japan produces a number of data releases relating to credit and money supply. It also produces the current account data and the Tankan survey on business confidence.
The Bank of Japan has three stages of intervention in the market, although the decision on whether to actually intervene in the market comes under the control of the Finance Ministry.
- There is the potential for verbal intervention with warnings by the bank and Finance Ministry that there could be action to stabilise markets.
- In the next stage, the Bank of Japan can then check rates at commercial banks and prepare to intervene without actually taking action.
- In the third stage, the Bank of Japan can then actually intervene in the market. This can be aggressive and sustained on occasions and inevitably triggers a substantial market reaction.