Bank of Japan and its independence

Topics: Monetary policy, Inflation, Central bank Pages: 4 (1222 words) Published: September 27, 2013


PROJECT ESSAY

The Bank of Japan and its independence
When I was doing research for the Project on the Japan’s lost decade, I have come across news articles discussing the change in administration of the Bank of Japan. There are discussions on how Abe Shinzo, the newly elected prime minister, has forced the Bank of Japan to adopt a more aggressive monetary policy. When I first read about these news, I can’t help but felt sorry for the current governor Masaaki Shirakawa. By constitution, BOJ is independent from the government. He should be answering to no one except to the Policy Board of the BOJ. But lately, Mr. Abe has forced the BOJ to bend towards what he demands. He even threatened to strip BOJ of its independence if it fails to raise the original goal of achieving an annual inflation target from 1% to 2%. But after reading into the history and development of Japan’s economy, I begin to understand why Abe has taken such extreme measure.

The BOJ is not without fault. During the two decades of economic stagnation in Japan, the BOJ has clearly made some policy mistakes. Since the key and only objective of the Bank is to maintain price stability, it is evident that the BOJ tend to act more prudently than it should be when the government is trying to revive the economy.

Referring to Exhibit 1, Japan has never since the asset bubble burst in 1990s achieved an inflation rate of above 1% except for a short period of time in 2008. The economy was in a deflation mode for majority of the time and it could only be explained by two reasons. Either the BOJ is not doing a very good job in controlling prices or simply, its actual inflation target has always been around 0%.

Exhibit 1

Source: tradingeconomics.com

Even after the BOJ has explicitly announced its inflation target of 1% last year in February, the actual inflation rate reported has been consistently below 0.5%, with 8 out of the 12 months at the negative end. So, even BOJ has...
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