The Bank of Japan serves as the central bank of Japan, established by the Bank of Japan Act. Unlike many central banks, it is neither a private corporation nor a government agency. Its primary functions include issuing the country’s banknotes, managing monetary and currency control, and ensuring the smooth settlement of funds between banks and other financial institutions. These duties are carried out to maintain stability within Japan’s financial system.
The Bank of Japan Act provides the central bank with its mandate for monetary and currency control to achieve price stability, allowing for normal economic development. In January 2013, the bank adopted a specific interpretation of price stability, setting an inflation target of two percent. This target is measured as a year-over-year increase in the consumer price index. While the bank is committed to reaching this inflation level as quickly as possible, it has yet to achieve this goal.
The Bank of Japan places great importance on price stability, viewing it as a critical foundation for the country’s economic activities. The bank argues that significant price fluctuations make it challenging for businesses and consumers to make appropriate investment and consumption decisions. Moreover, unstable prices can lead to unfair income distribution.
To formulate its monetary policy, the Bank of Japan conducts eight Monetary Policy Meetings (MPMs) annually where policy board evaluates Japan’s financial and economic conditions and determines the appropriate money market operations to pursue. All decisions are made through a majority vote of the nine-member Policy Board, which consists of the Governor, two Deputy Governors, and six additional members.
Following each MPM, the bank releases a public assessment of economic activity and prices, along with its monetary policy for the present and near future. This release includes their guideline for money market operations, which dictates the amount of funds the bank will allow in the money market through its operations.
The bank engages in funds-supplying operations by providing loans to domestic financial institutions, secured by collateral submitted to the central bank. Conversely, funds-absorbing operations involve the bank issuing and selling government debt in the form of bills.
During the 2008 Financial Crisis, the Bank of Japan expanded its monetary policy in three key areas to stabilize the economy and promote economic growth. First, they lowered their policy interest rate. Second, they implemented measures to ensure financial stability in Japanese markets, including resuming the purchase of bank stocks and offering additional loans to banks at subordinated interest rates. Third, they took various steps to facilitate corporate financing, such as creating special funds and operations to encourage lending to Japanese corporations, expanding the range of acceptable collateral for corporate debt, and temporarily purchasing commercial paper and corporate bonds directly from companies.
The Bank of Japan has also employed quantitative easing strategies, creating money to purchase assets from banks and companies in need of support. These policies continue to be pursued in an effort to stimulate growth and inflation within the Japanese economy.
