Monetary policy in Japan

Monetary policy in Japan

Monetary policy in Japan is managed by a 9 member Policy Board, comprising of the Governor, 2 Deputy Governors and 6 other members. All members of the Policy Board need to be approved by both Upper and Lower House, and appointed by the Cabinet. Approval processes could be messy- in 2008, the Upper House, controlled by opposition parties, voted down candidates for the Governor and the seat remained vacant for almost 3 weeks.

Policy Board Meets at least once per month

The Policy Board meets at least once a month and sometimes twice a month. In 2012, 14 regular meetings were scheduled. In comparison, the US Fed meets less than once a month (8 regular meetings in 2012) and ECB once a month. The threshold to hold an emergency meeting also seem lower for the BoJ.

BoJ tends to shy away from its responsibility

The BoJ is considered to be charged with ensuring both growth and price stability. Article 2 of the BoJ provides that currency and monetary control by the Bank of Japan shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy. However, regrettably, the BoJ currently seems to feel that it does not have sufficient policy tools to realize these goals. In the recent policy meeting on Oct 30 2012, the BoJ issued a joint statement with the government. In the statement, the bank strongly implied that the goals cannot be realized by the BoJ alone. Throughout recent statements, the BoJ’s implied stance toward achieving its purposes are that the bank will do its best, but the purposes may not be achievable. In our view, such defeatist attitude is self-destructive as a central bank. Modern monetary policy literatures strongly emphasize the role played by expectations in monetary policy conduct. Central bank actions will have little power to influence expectations if the bank itself denies the effectiveness of its policy.

BoJ seem vulnerable against political pressure

While the BoJ law provides for its independence, the bank seems somewhat vulnerable against political pressure. In the past, whenever political pressure rises for the BoJ to act, the bank seems to feel its need to comply. Past mistakes may have made the BoJ aware of the political risk of going against political pressure. In August 2000, led by a strongly opinionated Governor Hayami, it tightened its monetary policy against strong government opposition.

Unfortunately for the BoJ, the decision is likely to have been a mistake. Japanese economy plunged into a recession in November 2000 and severe deflation returned to Japan.

BoJ and the media

Another feature of the monetary policy making in Japan is that a leakage of the likely decision by the Policy Board is rampant. The leakage could be coming from the government, as a means to pressure the BoJ into taking actions, or could be a deliberate leakage from the BoJ itself as a means to control the expectation.