Bank of Japan

The Bank of Japan was reorganized in 1942[3] (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.[3]

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.[10]

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).[11]

A major 1997 revision of the Bank of Japan Act was designed to give it greater independence;[12] however, the Bank of Japan has been criticized for already possessing excessive independence and lacking in accountability before this law was promulgated.[13] 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. [14]

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.

Japan bonds

Inverted yield curve in 1990
Zero interest-rate policy started in 1995

  30 year

  20 year

  10 year

  5 year

  2 year

  1 year

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, a terrible earthquake happened and Japanese yen became stronger and 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. [15]

Japanese bond market
Negative interest rates started in 2014.

  40 year bond

  10 year bond

  5 year bond

  1 year bond

  1 month bond

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.[16]

In 2016, the BOJ initiated yield curve control (YCC).[17]

In 2016, the BOJ started its negative interest rates policy (NIRP).[17]

They are the largest owner of Japanese stocks.[18][19][20]

Following the election of Prime Minister Shinzō 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.[21] 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.[22] 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.[23]

As of 9 April 2023, the board responsible for setting monetary policy consisted of the following 9 members:[25]

1. Kazuo Ueda, Governor of the BOJ
2. Uchida Shinichi, Deputy Governor of the BOJ
3. Himino Ryozo, Deputy Governor of the BOJ
4. Adachi Seiji
5. Nakamura Toyoaki
6. Noguchi Asahi
7. Nakagawa Junko
8. Takata Hajime
9. Tamura Naoki