Bank of Japan

By virtue of the National Bank Act of 1872 (amended in 1876), the Japanese government allowed national banks to issue their own banknotes. The Bank of Japan, established as the central bank in 1882 by the Bank of Japan Act, started issuing its own banknotes in 1885, which were convertible to silver (and later to gold) by the Convertible Bank Note Regulations (1884), at which point national banks lost their ability to issue their own banknotes, although their banknotes continued to be used until 1899. The Bank of Japan was originally under the direction of the Ministry of Finance and therefore had little role in the regulation and supervision of the financial system. In 1897, Japan joined the gold standard, but in the end broke away in 1931. Japan gradually moved to a managed currency system, and in 1941 the specie reserve system was abolished. In 1942, the Bank of Japan Act was revised, but the Bank was still under the Ministry of Finance. The Bank of Japan Act was drastically amended in June 1997 and was enforced in April 1998 (see Schiffer, 1962; Tamaki, 1995; Cargill et al., 1997; Tsutsui, 1999).

One of the important changes brought about by the latest round of amendments con- cerned the autonomy of the Bank of Japan and the transparency of its monetary policy and business operations, which were strengthened in the Act of 1997. The Policy Board is the highest decision-making body of the Bank of Japan (one-board system). It is com- posed of nine members: the Bank of Japan's Governor, two Deputy Governors, and six Members of the Policy Board. The Board members, whose appointment is subject to the consent of the House of Representatives and the House of Councillors, are appointed by the Cabinet for a five-year term of office. In order to make decisions on matters related to monetary policy, the Policy Board holds Monetary Policy Meetings once or twice a month, where proposals are decided by a vote of the nine members of the Policy Board, although government representatives can attend and express opinions, submit propos- als concerning monetary control matters and, in addition, request a postponement of a Board vote on a specific proposal. The right of postponement was exercised by govern- ment representatives once at the Meeting of August 2000. The announcement of deci- sions of each Monetary Policy Meeting are released immediately after each meeting, the minutes are released after the next meeting and the transcripts are released ten years after the meeting took place (see Shirakawa, 2008; Umeda, 2011; Institute for Monetary and Economic Studies, 2012).

As regards the policy rates of interest, the Bank of Japan used the official discount rate until 1994. The so-called "unconventional monetary policy" in Japan started, ahead of other countries, in February 1999, when the Bank of Japan set the policy target of zero for the uncollateralized overnight rate of interest in the call market, which was kept at almost zero until August 2000. This zero interest rate policy was adopted again later. The quantitative easing policy started in March 2001 and ended in March 2006, during which period the Bank of Japan set the outstanding balance of current accounts as its policy target (see Shirakawa, 2009; Umeda, 2011; Institute for Monetary and Economic Studies, 2012). The Bank of Japan set a 2 percent inflation target rate in January 2013, and in April 2013 announced the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index with a time horizon of about two years (see Kuroda, 2013).

Regarding prudential policy, for risk-based supervision of individual financial institu- tions, the Bank of Japan has conducted on-site examination of financial institutions, which the Bank had no legal basis to undertake until the Bank of Japan Act (1997) was enforced. For compliance-based supervision by the Banking Act, the Financial Services Agency conducts on-site inspections. As the lender of last resort, the Bank prepares several fund-supplying measures. Tokuyu (special loans) is the provision of uncollateral- ized loans to financial institutions, which the Bank of Japan makes at the request of the government in order to prevent systemic risk from materializing. After World War II, the Bank has provided Tokuyu in only two cases in the 1960s, but 17 cases in the 1990s, and six more cases in the early 2000s (see Kumakura, 2008, p. 51). In order to deal with non- performing loan issue in Japan, the Bank of Japan began to purchase stocks from finan- cial institutions in November 2002 (until September 2004, and between February 2009 and April 2010). In October 2010, to ensure financial system stability, the Bank of Japan extended its fund-supplying measures to include the purchase of various financial assets, such as Japanese government bonds, commercial papers, corporate bonds, exchange- traded funds, and Japanese real estate investment trusts (see Institute for Monetary and Economic Studies, 2012).

See also:

Banking supervision; Inflation targeting; Lender of last resort; Quantitative easing; Reserve requirements; Zero interest-rate policy.