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Briefing
Japan: Monetary Policy
Critical Issues
Bank of Japan Expands Asset Purchases, Provides Explicit Inflation Target
Trade Deficit Does Little to Weaken Yen or Reverse Japan's Deflationary Trend
Background:
The Bank of Japan (BoJ) sets monetary policy Japan. It was granted independence in 1997 but political influences remain, particularly with regards to currency intervention. Struggling with deflation for the past two decades, the BoJ introduced quantitative easing and kept policy rates at or near zero. The BoJ often faces political pressure to increase outright purchases of government debt in order to enable fiscal expansion. However, the BoJ's Banknote Rule since 2001 stipulates BoJ holdings of long-term JGBs shall not exceed banknotes outstanding. The BoJ set the cap to prevent the central bank from inflating away public debt rather than encouraging fiscal reform. BoJ defines long-term price stability as annual inflation between zero and 2.0%. Politicians insist on adoption of formal inflation targeting but BoJ governor Masaaki Shirakawa has so far resisted. Japan maintains a floating exchange rate regime, though authorities have intervened in the past to help offset disorderly market conditions.
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