Japan: Monetary & Fiscal Policy.

While the Bank of Japan (BOJ) has been around since the late 1800s, only recently did the BOJ gain independence from the Ministry of Finance (MoF).

It was only in 1998 that the Japanese government passed laws giving the BOJ control over monetary policy.

Take note that the Ministry of Finance (MoF) still remains in charge of foreign exchange policy, which has led to tension and continuous differences between the two.

Normally, the government and the central bank are independent of each other – one should not have any influence over others. This is not the case for Japan.

Even though the BOJ has gained independence from the government, there is a question of who really “wears the pants”.

The MoF has kept a watchful eye on the BOJ, pressuring it to pass policies that would help the yen hit the MoF’s foreign exchange targets.

Similar to other central banks, the BOJ’s main objective is that of price stability. The ninja bankers at the BOJ make use of open market operations and interest rate changes to meet their goals.

One thing you should know about the BOJ is that for a very, very long time, they have kept rates at low levels, with the current rate sitting between 0.00% to 0.10%.

Because the rate is already so low, the central bank cannot decrease the rate to stimulate growth or create liquidity.

For instance, in its efforts to fight deflation, the BOJ has whipped out its shurikens and has flooded the markets with money through unorthodox quantitative easing measures.

Quantitative easing measures are moves made by central banks in order to increase liquidity and money supply through the purchase of government securities.

This is sometimes called “printing money” because the central bank literally creates new money from thin air in order to buy back their government securities.

In theory, the BOJ believes that the increase in the money supply would lead to an increase in lending and spending.

Over the years, Japan has created liquidity in the markets by flooding the economy with various programs that let the BOJ buy or sell Japanese government bonds and bills.

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