Bank of Japan

History

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. 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. A period of unanticipated consequences was ended when the Bank of Japan was founded in Meiji 15 (October 10, 1882), under the Bank of Japan Act 1882 (June 27, 1882), after a Belgian model. It has since been partly privately owned (its stock is traded over the counter, hence the stock number). A number of modifications based on other national banks were encompassed within the regulations under which the bank was founded. The institution was given a monopoly on controlling the money supply in 1884, but it would be another 20 years before the previously issued notes were retired.

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, and in 1899 the former "national" banknotes were formally phased out.

Since its Meiji era beginnings, the Bank of Japan has operated continuously from main offices in Tokyo and Osaka.

Reorganization

The Bank of Japan was reorganized in 1942 (fully only after May 1, 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 February 24, 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.

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.

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; however, the Bank of Japan has been criticized for already possessing excessive independence and lacking in accountability before this law was promulgated. A certain degree of dependence might be said to be enshrined in the new Law, article 4 of which states:

However, since the introduction of the new law, the Bank of Japan has rebuffed government requests to stimulate the economy.

The trail of policies

When the Nixon shock happened in August 1971, BOJ should have appreciate d 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/$), and continued monetary easing until 1973. This created a greater than 10% inflation rate at that time. In order to control the stagflation, they raised the official bank rate from 7% to 9% and gradually skyrocketing prices ended in 1978. In 1979, when the energy crisis happened, they raised the official bank rate rapidly. BOJ succeeded in a quick economic recovery. After overcoming the crisis, they reduced the official bank rate. In 1980, BOJ reduced the official bank rate from 9.0% to 8.25% in August, to 7.25% in November, and to 5.5% in December in 1981. Reaganomics was set in America, and USD became strong. However, Japan tried to make fiscal reconstruction at that time, so they did not stop their financial regulation. In 1985, the agreement of G5 nations, known as the Plaza agreement, USD slipped down and Yen/USD changed from 240yen/$ to 200yen/$ at the end of 1985. Even in 1986, USD continued to fall and reached 160yen/$. In order to escape deflation, BOJ cut the official bank rate from 5% to 4.5% in January, to 4.0% in March, to 3.5% in April, 3.0% in November. At the same time, the government tried to raise the demand in Japan in 1985, and did economy policy in 1986. However, the market was confused about the rapid fall of USD. After Louvre Accord in February 1987, BOJ decreased the official bank rate from 3% to 2.5%, but JPN/USD was 140yen/$ at that time and reached 125yen/$ in the end of 1987. BOJ kept the official bank rate at 2.5% until May in 1989. The 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 1994, a terrible earthquake happened and Japanese yen became weaker and weaker. JPM/USD reached 80yen/$, so BOJ had to reduce the office bank rate to 0.5% and Japanese yen recovered. The long deflation for 20 years started at that time. In 1999, BOJ started zero-interest-rate policy, but they ended it despite government opposition when the IT bubble happened in 2000. However, Japan faced economic bubble burst in 2001, 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 qualitative 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 to bad again. BOJ reduced 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).

Curbing deflation

Following the election of Prime Minister Shinzō Abe, the Bank of Japan has, with Abe's urging, taken proactive steps to curb deflation in Japan. On October 30, 2012, The Bank of Japan announced that it has undertaken further monetary-easing action for the second time in a month. Under the leadership of new Governor Haruhiko Kuroda, the Bank of Japan released a statement on April 5, 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. By 2016 it was apparent three years of monetary easing had had little effect on deflation, and the Bank of Japan instigated a review of its monetary stimulus program.

Mission

According to its charter, the missions of the Bank of Japan are

Location

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.

Governors

The Governor of the Bank of Japan (総裁, sōsai) has considerable influence on the economic policy of the Japanese government. Japanese lawmakers endorse the Bank of Japan Governor Haruhiko Kuroda. He is seen to adopt Reflation policy as part of Abenomics.

Monetary Policy Board

As of October 2014, the board responsible for setting monetary policy consisted of the following 9 members:

1. Haruhiko Kuroda, Governor of the BOJ
2. Kikuo Iwata, Deputy Governor of the BOJ
3. Hiroshi Nakaso, Deputy Governor of the BOJ
4. Ryuzo Miyao
5. Yoshihisa Morimoto
6. Sayuri Shirai
7. Koji Ishida
8. Takehiro Sato
9. Takahide Kiuchi