The Bank of Japan (日本銀行, Nippon Ginkō, BOJ) is the central bank of Japan.[4] The bank is often called Nichigin (日銀) for short. It is headquartered in Nihonbashi, Chūō, Tokyo.[5]
The bank is a corporate entity independent of the Japanese government,[1] and while it is not an administrative organisation of the state, its monetary policy falls within the scope of administration. From a macroeconomic perspective, long-term stability of prices is deemed crucial. However, the political sector tends to favour short-term measures. Thus, the bank's autonomy and independence are granted from the standpoint of ensuring long-term public welfare and political neutrality.[6]
Like most modern Japanese institutions, the Bank of Japan was founded after the Meiji Restoration. Prior to the Restoration, Japan's feudal fiefs all issued their own money, hansatsu, in an array of incompatible denominations, but the New Currency Act of Meiji 4 (1871) did away with these and established the yen as the new decimal currency, which had parity with the Mexican silver dollar.[7] The former han (fiefs) became prefectures and their mints became private chartered banks which, however, initially retained the right to print money. For a time both the central government and these so-called national banks issued money.
Foundation and early development
A period of unanticipated consequences was ended when the Bank of Japan was founded in Meiji 15 (10 October 1882), under the Bank of Japan Act 1882 (27 June 1882), inspired primarily by the National Bank of Belgium (est. 1850) which was viewed as one of the best-designed European central banks of its era. Since then, the Bank of Japan has been partly privately owned. Its stock is traded over the counter, hence the stock number.[8] A number of modifications based on other national banks were encompassed within the regulations under which the bank was founded.[9] In 1883, all national banks were stripped of their banknote issuance privilege,[10]: 34 and the Bank of Japan was given a monopoly on controlling the money supply in 1884. Still, it would be another 20 years before all previously issued notes were retired.[11]
Following the passage of the Convertible Bank Note Regulations (May 1884), the Bank of Japan issued its first banknotes in 1885 (Meiji 18). Despite some small glitches—for example, it turned out that the konjac powder mixed in the paper to prevent counterfeiting made the bills a delicacy for rats—the run was largely successful. In 1897, Japan joined the gold standard,[12] and in 1899 the former "national" banknotes were formally phased out.
The Osaka branch of the Bank of Japan is seen in the top right of this 1930 aerial photograph. The wide street in front of the bank is part of the Mido-Suji.
Since its Meiji era beginnings, the Bank of Japan has operated continuously from main offices in Tokyo and Osaka.
World War II and aftermath
The Bank of Japan was reorganized in 1942[4][13] (fully only after 1 May 1942), under the Bank of Japan Act of 1942 (日本銀行法 昭和17年法律第67号), promulgated on 24 February 1942. There was a brief post-war period during the Occupation of Japan when the bank's functions were suspended, and military currency was issued. In 1949, the bank was again restructured.[4]
In the 1970s, the bank's operating environment evolved along with the transition from a fixed foreign currency exchange rate and a rather closed economy to a large open economy with a variable exchange rate.[14]
During the entire post-war era, until at least 1991, the Bank of Japan's monetary policy has primarily been conducted via its 'window guidance' (窓口指導) credit controls (which are the model for the Chinese central bank's primary tool of monetary policy implementation), whereby the central bank would impose bank credit growth quotas on the commercial banks. The tool was instrumental in the creation of the 'bubble economy' of the 1980s. It was implemented by the Bank of Japan's then "Business Department" (営業局), which was headed during the "bubble years" from 1986 to 1989 by Toshihiko Fukui (who became deputy governor in the 1990s and governor in 2003).
A major 1997 revision of the Bank of Japan Act was designed to give it greater independence;[15] however, the Bank of Japan has been criticized for already possessing excessive independence and lacking in accountability before this law was promulgated.[16] A certain degree of dependence might be said to be enshrined in the new Law, article 4 of which states:
In recognition of the fact that currency and monetary control is a component of overall economic policy, the Bank of Japan shall always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government's economic policy shall be mutually harmonious.
However, since the introduction of the new law, the Bank of Japan has rebuffed government requests to stimulate the economy.[17]
Boom and bust cycles
Japan money supply and inflation (year over year)
M2 money supply
Inflation
When the Nixon shock happened in August 1971, the Bank of Japan (BOJ) could have appreciated the currency in order to avoid inflation. However, they still kept the fixed exchange rate as 360Yen/$ for two weeks, so it caused excess liquidity. In addition, they persisted with the Smithsonian rate (308Yen/$), and continued monetary easing until 1973. This created a greater-than-10% inflation rate at that time. In order to control stagflation, they raised the official bank rate from 7% to 9% and skyrocketing prices gradually ended in 1978.
In 1979, when the energy crisis happened, the BOJ raised the official bank rate rapidly. The BOJ succeeded in a quick economic recovery. After overcoming the crisis, they reduced the official bank rate. In 1980, the BOJ reduced the official bank rate from 9.0% to 8.25% in August, to 7.25% in November, and to 5.5% in December in 1981. "Reaganomics" was in vogue in America and USD became strong. However, Japan tried to implement fiscal reconstruction at that time, so they did not stop their financial regulation.
In 1985, the agreement of G5 nations, known as the Plaza Accord, USD slipped down and Yen/USD changed from 240yen/$ to 200yen/$ at the end of 1985. Even in 1986, USD continued to fall and reached 160yen/$. In order to escape deflation, the BOJ cut the official bank rate from 5% to 4.5% in January, to 4.0% in March, to 3.5% in April, 3.0% in November. At the same time, the government tried to raise demand in Japan in 1985, and did economy policy in 1986. However, the market was confused about the rapid fall of USD. After the Louvre Accord in February 1987, the BOJ decreased the official bank rate from 3% to 2.5%, but JPY/USD was 140yen/$ at that time and reached 125yen/$ in the end of 1987. The BOJ kept the official bank rate at 2.5% until May in 1989. Financial and fiscal regulation led to a widespread over-valuing of real estate and investments and Japan faced a bubble at that time.
After 1990, the stock market and real asset market fell. At that time BOJ regulated markets until 1991 in order to end the bubble.
In January 1995, the Great Hanshin earthquake occurred and the Japanese yen became stronger. JPY/USD reached 80yen/$, so the BOJ reduced the office bank rate to 0.5% and the yen recovered. The period of deflation started at that time.
In 1999, the BOJ started zero-interest-rate policy (ZIRP), but they ended it despite government opposition when the IT bubble happened in 2000. However, Japan's economic bubble burst in 2001 and the BOJ adopted the balance of current account as the main operating target for the adjustment of the financial market in March 2001 (quantitative relaxation policy), shifting from the zero-interest-rate policy. From 2003 to 2004, Japanese government did exchange intervention operation in huge amount, and the economy recovered a lot. In March 2006, BOJ finished quantitative easing, and finished the zero-interest-rate policy in June and raised to 0.25%.
In 2008, the financial crisis happened, and Japanese economy turned bad again. BOJ reduced the uncollateralized call rate to 0.3% and adopted the supplemental balance of current account policy. In December 2008, BOJ reduced uncollateralized call rate again to 0.1% and they started to buy Japanese Government Bond (JGB) along with commercial paper (CP) and corporate bonds.
[18]
In 2013, the head of the BOJ (Kuroda) announced a new quantitative easing program (QE). This program would be very large in terms of quantity, but it would also be different in terms of quality—qualitative easing (QQE). In other words, the BOJ would (and did) also purchase riskier assets like stocks and REITs.[19] In 2016, the BOJ initiated yield curve control (YCC),[20] and started its negative interest rates policy (NIRP).[21] The BOJ is also the largest owner of Japanese stocks.[22][23][24] In 2024, following announcements of about 5% wage growth by Japan's largest companies,[25] the BOJ ended eight year of negative interest rates by setting new short term targets of 0 to 0.1%.[26]
Curbing deflation
Following the election of Prime MinisterShinzō Abe in December 2012, the Bank of Japan, with Abe's urging, took proactive steps to curb deflation in Japan. On 30 October 2012, the Bank of Japan announced that it would undertake further monetary-easing action for the second time in a month.[27] Under the leadership of new Governor Haruhiko Kuroda, the Bank of Japan released a statement on 5 April 2013 announcing that it would be purchasing securities and bonds at a rate of 60-70 trillion yen a year in an attempt to double Japan's money base in two years.[28]
But by 2016, it was apparent that three years of monetary easing had had little effect on deflation so the Bank of Japan instigated a review of its monetary stimulus program.[29]
Operations
Objectives
The comprehensive revision of the Bank of Japan Act in 1998 clearly defined the objectives of the Bank of Japan as 'price stability' and 'financial system stability'. This revision affirmed the Bank's operation independent from the government (primarily the Ministry of Finance), and removed the provisions established in 1942, which had been problematic. The 1942 provision, enacted during the Second World War, stated the objective of the bank was to 'Ensure the Appropriate Exertion of the Nation's Total Economic Power, by Regulating Currency, Adjusting Finance, and Maintaining and Fostering the Credit System in Accordance with the Policies of the State (国家経済総力ノ適切ナル発揮ヲ図ル為国家ノ政策ニ即シ通貨ノ調節、金融ノ調整及信用制度ノ保持育成ニ任ズル。)'.[30]
BoJ's policies are decided at Monetary Policy Meetings (MPM, Kinyu Seisaku Kettei Kaigo, 金融政策決定会合), which are attended by the Policy Board and held every other month.[31]
Price stability
Stable prices are maintained by seeking to ensure that price increases meet the inflation target. The bank aims to meet this target primarily by adjusting the base interest rate (known as the bank rate), which is decided by the Policy Board.
As of 2024 the inflation target is 2%. Japan has long suffered deflation and disinflation since the 1990s, which has been blamed as one of the main causes of the long-term economic downturn of the once world's second largest economy. For the past two decades, the primary focus of BOJ policies has been to achieve a stable inflation.[32]
Financial system stability
Financial system is defined as the overall structure of receipt and payment as well as lending and borrowing of money, and its stability refers to 'a state in which the financial system functions properly, and participants, such as firms and individuals, have confidence in the system'.[33]
Functions
The aforementioned objectives are realised through the exertion of the functions mentioned below.[34]
As the sole issuer of banknotes of Japan, BoJ carries out the issuance and management of Bank of Japan notes.
BoJ facilitates transactions among financial institutions using its current accounts, effectively acting as a 'bank for banks'. (Individuals and corporations (such as general businesses) are not allowed to open accounts with BoJ.)
BoJ serves as the government's bank for the disbursement and receipt of public funds.
As a 'bank of banks', BoJ ensures the stability of the financial order through smooth fund settlements via domestic exchange transactions and providing system collateral (acting as the "lender of last resort") through facilities such as BoJ's special lending programme (Nichigin Tokuyu, 日銀特融). Transactions in deposits and loans are restricted to financial institutions designated in accordance with the Bank of Japan Act.
BoJ conducts international relations activities, including interventions in the foreign exchange market, with other central banks and public institutions worldwide.
BoJ collects and researches financial and economic information, and compiles and publishes economic statistics.
Financial holdings
Bank of Japan owns 4.7% of Japanese public stocks.[35] Since 2020 it has owned more domestic stock than any other body.[36]
Location and branches
The Bank of Japan is headquartered in Nihonbashi, Chūō, Tokyo, on the site of a former gold mint (the Kinza) and, not coincidentally, near the famous Ginza district, whose name means "silver mint". The Neo-baroque Bank of Japan building in Tokyo was designed by Tatsuno Kingo in 1896.
The Osaka branch in Nakanoshima is sometimes considered as the structure which effectively symbolizes the bank as an institution.
Bank of Japan
The head office of the Bank of Japan located in Nihonbashi Hongokucho, Chuo-ku, Tokyo
^Horiuchi, Akiyoshi (1993), "Japan" in Chapter 3, "Monetary policies" in Haruhiro Fukui, Peter H. Merkl, Hubrtus Mueller-Groeling and Akio Watanabe (eds), The Politics of Economic Change in Postwar Japan and West Germany, vol. 1, Macroeconomic Conditions and Policy Responses, London: Macmillan.
^Andrew Whiffin (1 April 2019). "BoJ's dominance over ETFs raises concern on distorting influence". Financial Times. Archived from the original on 30 November 2020. Retrieved 25 February 2021. the BoJ was ranked as a top ten shareholder in some 40 per cent of all Japan's listed companies last year, according to Nikkei.
Bank of Japan. Functions and operations of the Bank of Japan (Institute for Monetary and Economic Studies, 2nd ed. 2012), onlineArchived 24 February 2020 at the Wayback Machine
Cargill, Thomas F., Michael M. Hutchison and Takatoshi Itō. (1997). The political economy of Japanese monetary policy. Cambridge: MIT Press. ISBN9780262032476; OCLC 502984085Archived 28 May 2013 at the Wayback Machine
Hamaoka, Itsuo. A study on the Central Bank of Japan (1902) online
Ohnuki, Mari, Daisuke Murakami, and Masanori Takashima. "Research on financial and monetary history based on the records of the Bank of Japan Archives: a note." Financial History Review 17.2 (2010):273-280. DOI:10.1017/S096856501000020X
Sarasas Phra. Money and Banking in Japan (1940) online
Shizume, Masato. "A History of the Bank of Japan, 1882–2016." (Waseda University, 2016) onlineArchived 29 May 2020 at the Wayback Machine
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