The Bank of Japan is the name of the central bank in Japan. The Bank of Japan Act established this entity. Unlike a number of central banks, Japan’s central bank is neither a private corporation nor a government agency.
The bank has several key objectives. These are to create and issue the country’s banknotes, to handle monetary and currency control, and to guarantee the normal settlement of funds between banks and financial institutions. They do this to help maintain the financial system’s stability in Japan.
The Bank of Japan Act gives the central bank its mandate for monetary and currency control. It is intended to help them achieve stability of prices so that the economy is able to develop normally. In January 2013, the bank began to interpret this price stability to be an inflation target of two percent. This means that they are looking for a change in the year over year consumer price index by a plus two percent increase. While they are committed to reaching this level of inflation as soon as they can, the bank has not yet succeeded.
Price stability is important to the Bank of Japan because they feel it is critical as a basis for the economic activity of the country. They state that as prices change significantly, it is difficult for companies and consumers to make the right investment and consumption choices. Unstable prices are also negative for fair income distribution.
To make the decisions on its monetary policy, the Bank of Japan holds eight Monetary Policy Meetings (MPMs) each year. Here the policy board considers the financial and economic situation in Japan and then chooses what money market operations they should pursue. All decisions are made by the majority vote of the nine members on the Policy Board.
The board is comprised of the Governor, two Deputy Governors, and six remaining members. Following each MPM, the bank releases to the public an assessment of prices and economic activity. They also divulge the monetary policy of the bank for that point and for the near future. This comes out with their guideline for money market operations.
The guideline that they decide on and release at the MPMs determines how many funds they will allow in the money market using their money market operations. The bank engages in funds-supplying operations by making loans to the country’s financial institutions. These are backed up by the collateral the banks submit to the central bank. Opposite transactions called funds-absorbing operations occur as the Bank of Japan issues and sells government debt in the form of bills.
In the Financial Crisis of 2008, the central bank chose three areas in which to expand monetary policy to help stabilize the economy and encourage economic expansion. They began by reducing their policy interest rate. They next took appropriate measures to make sure that Japanese markets had financial stability. As part of this effort, the Bank of Japan restarted purchasing bank stocks. It also engaged in offering additional loans to banks at subordinated interest rates.
Finally, the bank took various steps to facilitate struggling corporate financing. They created and designated special funds and operations to encourage lending to corporations in Japan. They also expanded the variety of collateral they would accept for corporate debt. For a year, they even purchased company’s commercial paper and corporate bonds in an effort to help companies find the financing they needed for normal operations.
The bank has also engaged in quantitative easing, creating money and using it to buy assets of banks and companies that needed support. They continue to pursue these policies in an effort to encourage growth and inflation in their economy.