Monetary policy: Japan - BOJ

Bank of Japan monetary policy instruments and operating targets

Operating procedures

In the past, discount window lending occurred at a below-market rate, entirely at the discretion of the BOJ, without formal discount quotas. In November 1962 the major city banks became subject to ceilings on BOJ credit, with penalty rates in the case of infringement of ceilings. Although Japanese money market rates have been substantially above the discount rate, there is a maximum or ceiling which is determined by the penalty on excessive borrowing and/or reserve deficiencies. From March 16, 2001 the discount window operates as a standby lending facility of the 'Lombard-type' (Complementary Lending Facility). Under this system, creditworthy banks are allowed access at a penalty interest rate, with further markups above the official discount rate for institutions that borrow for extended periods. Apart from a longer-term monetary policy signaling function, the discount rate did not have and will not have any effective role in actual interest rate policy.

From November 2008 the BOJ operates a Complementary Deposit Facility. Initially intended to be temporary. Interest paid on the daily excess reserves during each reserve maintenance period. Rate set as spread against the lowest O/N Call Rate Target value. Rate equals zero from March 14, 2011.

The BoJ executes open market operations (repos and outright transactions in bills) two or three times per day, during the morning.

Operating targets

Since 1998 the BOJ Monetary Policy Meetings produce a public guideline for money market operations. For most of the time this guideline has been written in terms of a target for the uncollateralised overnight call rate. This target is to be achieved with open market operations.

BOJ account balances target

Following its March 19, 2001 meeting the BOJ Policy Board announced a change in its operating target. Instead of a target for the overnight interest rate it announced a target for BOJ current account balances (i.e. bank reserves). Because of the substantial increase in reserves (25%, from 4trn Yen to 5trn Yen) this is widely perceived as effectively generating a zero interest rate. Alternatively, the policy is referred to as quantitative easing. To what extent this change in operating procedure is real or merely semantic (due to the somewhat embarrassing reversal of interest rate policy) remains to be seen. The BOJ returned to an interest rate target in March 2006.

Monetary base control

On April 4, 2013 the BOJ announced a substantial revision of its monetary policy framework. The BOJ abandoned the uncollaterilized overnight rate as its operational target and introduced 'monetary base control'. According to the statement: "The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen."

Bank of Japan monetary policy strategy

Japan exited the Bretton Woods system of fixed exchange rates in February 1973.

In 1975 the BOJ announced that it would start to pay close attention to money growth. Late 1978 it started announcing quarterly "forecasts" of M2 and later M2+CD money growth. Although frequently compared to monetary targeting strategies in various other countries around the same time, de facto, the money growth forecasts had little to do with a targeting strategy. I.e. targeting requires some compensating response to unexpected money growth and this is not in evidence. More accurately, money growth served the BOJ as an important information variable. Formal money growth forecasting ended in 1988Q4.

Despite leaving the BW regime of fixed exchange rates, the BOJ has always attached great importance to the Yen exchange rate.

On February 14, 2012, following its Monetary Policy Meeting, the Policy Board of the BOJ announced that it had decided on the following:

" "the price stability goal in the medium to long term" as the inflation rate consistent with price stability sustainable in the medium to long term. The Bank judges "the price stability goal in the medium to long term" to be within a positive range of 2 percent or lower in terms of the year-on-year rate of change in the CPI and, more specifically, sets a goal at 1 percent for the time being." ...

"The Bank will continue pursuing the powerful easing until it judges that the 1 percent goal is in sight on the condition that the Bank does not identify any significant risk, including the accumulation of financial imbalances, from the viewpoint of ensuring sustainable economic growth."

On January 22, 2013, the Policy Board announced the results of a review of its policy and introduced a 'price stability target' of 2 percent year-on-year change in the CPI (compared to the previous medium term price stability 'goal' of 1 percent or range of 0-2 percent).

On April 4, 2013, the Policy Board quickened the desired timepath to its 2 percent inflation target; to be achieved at the earliest possible time, with a time horizon of about two years.

Bank of Japan: Legislation, decision-making, transparency

The Bank of Japan (BOJ) was established in 1882. The BOJ was initially privately owned, but the Bank of Japan Law of 1942 mandated a 55 percent ownership by the state. Under the Bank of Japan Law 1942 (revised 1949) the BOJ was basically a tool of the Ministry of Finance. However, the BOJ always maintained that in practice monetary policy had been conducted independently. At least, the 1947 Finance Law limited the BOJs role in financing government debt (no underwriting of government bonds, no loans –with few exceptions- although underwriting short-term Finance Bills was allowed). The Bank of Japan Law stated that "The Bank of Japan has for its object the regulation of the currency, the control and facilitation of credit and finance, and the maintenance and fostering of the credit system, pursuant to the national policy, in order that the general economic activities of the nation might adequately be enhanced." The new Bank of Japan Law 1998 (effective April 1, 1998) strengthened independence and accountability of the BOJ. The wide ranging right of the government to issue general business directives was abolished and the remaining rights of the government became limited. The 1998 Law specifies that the BOJ objectives are “the pursuit of price stability, contributing to the sound development of the national economy” and “maintenance of an orderly financial system”. Restrictions on underwriting government bonds or extending loans have been removed.

The Bank of Japan Policy Board is formally the highest decision making body of the BOJ.

Since 1998 the BOJ Policy Board's Monetary Policy Meetings are held on a pre-announced but somewhat irregular schedule, usually around the 10th and 25th of each month. Monetary policy decisions are announced immediately after the meeting. Monetary policy directives are to be decided by a majority vote at Monetary Policy Meetings and must be accompanied by a high degree of transparency with detailed minutes published after the meetings (four to six weeks). There is no press conference and no further information or discussion. There is a Monthly Report of Recent Economic and Financial Developments that summarizes the economic information used in the discussions during the Monetary Policy Meeting.

HISTORICAL DATA, TABLES, SUPPLEMENTARY INFORMATION

BOJ Unconventional Monetary Policy Actions/Programmes

Current Account Balance or reserves targeting

Announced March 19, 2001. The BOJ announced an official target for the balance of current accounts held at the BOJ (bank reserves). To meet the CABs-targets, the BOJ used mainly purchases of long-term Japanese government bonds (JGBs).

19 Mar 2001: target for outstanding balance of the current accounts at the Bank of around 5 trillion yen.

14 Aug 2001: target raised from around 5 trillion yen to around 6 trillion yen.

18 Sep 2001: minimum target raised to 6 trillion yen.

19 Dec 2001: minimum target raised to 10-15 trillion yen.

30 Oct 2002: minimum target raised to 15-20 trillion yen.

25 Mar 2003: minimum target raised to 17-22 trillion yen (starting 1 April 2003).

30 Apr 2003: minimum target raised to 22-27 trillion yen.

20 May 2003: minimum target raised to 27-30 trillion yen.

10 Oct 2003: upper limit of the target balance of current accounts raised from around 30 trillion yen to around 32 trillion yen. The new target balance is around 27 to 32 trillion yen.

20 Jan 2004: The new target balance is around 30 to 35 trillion yen.

The policy of quantitative easing was terminated on 9 March 2006 and the level of excess reserves brought down. The target call rate was reinstated.

Asset Purchase Program

Announced October 5, 2010. Referred to as a policy of 'comprehensive monetary easing', in effect consisting of 3 elements: i) virtually zero interest rate, ii) commitment to maintain zero interest rate, iii) asset purchase program, covering corporate bonds, commercial paper, exchange-traded funds (ETFs), and real estate investment trusts (REITs), in addition to government securities, in an effort to reduce term and risk premia. Initial target volume of the APP Yen 5 trn. To confuse matters, the BOJ combined the new APP (Yen 5 trn) with the existing tool of 'fixed-rate funds-supplying operation against pooled collateral (Yen 30 trn). This created a total 'program volume' of Yen 35 trn.

14 March 2011 program total to 40 trn yen (APP from 5 to 10).

4 August 2011: 15+35 = 50 trn yen

27 October 2011: 20+35 = 55 trn yen

14 February 2012: 30+35 = 65 trn yen

27 April 2012: 40+30 = 70 trn yen

12 July 2012: 45+25 = 70 trn yen

19 September 2012: 55+25 = 80 trn yen

30 October 2012: 66+25= 91 trn yen

20 December 2012: 76:25= 101 trn yen *

Asset Purchase Program termined with 4 April 2013 policy change. In the new policy, the monetary base becomes the operational target, replacing the uncollateralized overnight rate. The BOJ continues to purchase JGBs, ETFs and J-REITS at annual rates and CP and corporate bonds to predetermined levels. [language of the statement is confusing]

Quantitative and qualitative monetary easing.

Announced April 4, 2013. Besides reframing the asset purchasing framework (annual rates of increase, rather than level targets), maturities of the JGBs to be purchased were extended (from slightly less than 3 years to approx. 7 years). The policy puts more emphasis on influencing longer-term interest rates.

Bank of Japan BoJ Homepage

Central Bank

• • About the Bank of Japan

    • Description of organisation, missions and activities.

  • The New Framework for Policy Board Meetings on Monetary Policy

    • Public Statement Bank of Japan, December 26, 1997

Monetary policy tactics

• • Honda, Y. and Y. Kuroki, Financial and capital markets' responses to changes in the central bank's target interest rate: The case of Japan,' Economic Journal, vol.116 (July) 2006: 812-42.

  • Ito, T., Japanese monetary policy: 1998-2005 and beyond, BIS Papers no.31 2006.

  • Miyanoya, A., A Guide to Bank of Japan's Market Operations, Bank of Japan Financial Markets Department Working paper 00-E-3 August 2000.

  • Bank of Japan, Establishment of " Principal Terms and Conditions for Complementary Lending Facility", February 28, 2001

Monetary policy strategy

• • Ito, T., 'Japanese monetary policy: 1998-2005 and beyond,' BIS Papers no.31, 2006.

  • Ito, T. and F.S. Mishkin, 'Two decades of Japanese monetary policy and the deflation problem,' in T. Ito and A. Rose (eds.) Monetary Policy with very low Inflation in the Pacific Rim. NBER-Univ Chicago Press. (NBER wp.10878 2004)

  • Miyao, R., 'The effects of monetary policy in Japan,' Journal of Money, Credit, and Banking, vol.34 () 2002: 376-92.

  • Hetzel, R.L., 'Japanese monetary policy: A quantity theory perspective,' FRB Richmond Economic Quarterly, vol.85 () 1999: 1-25.

  • Cargill, T. M. Hutchison and T. Ito, The Political Economy of Japanese Monetary Policy. MIT Press, 1997.

  • Okina, K., Monetary policy under zero inflation: A response to criticisms and questions regarding monetary policy, Bank of Japan Monetary and Economic Studies, vol.17 (3) December 1999:

  • Bank of Japan, Semiannual Report on Currency and Monetary Control (Summary)

Sources: Bank of Japan, http://www.boj.or.jp/en (monetary policy)

BoJ Reports and Statistics- Official discount rates http://www.boj.or.jp/en/type/stat/boj_stat/discount.htm

BoJ Monetary policy meetings decision announcements http://www.boj.or.jp/en/seisaku/04/seisak_f.htm