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Missions and Activities of the Bank

The Bank of Japan's missions are to maintain price stability and to ensure the stability of the financial system, thereby laying the foundations for sound economic development. To fulfill these two missions, the Bank conducts the following activities.

Issuance and Management of Banknotes

The Bank of Japan issues banknotes (officially referred to as Bank of Japan notes) as the nation's sole "issuing bank." It employs a wide range of measures to prevent counterfeiting, including watermarks, special inks, and micro-lettering.

Worn and soiled banknotes make it more difficult to distinguish genuine notes from counterfeits, which may proliferate as a result. Therefore, the Bank of Japan checks the validity and cleanness of each of the banknotes which return to the Bank, destroying badly worn notes and putting only those that are in good condition back into circulation.

Because banknotes are used in all kinds of transactions, the Bank pays close attention to the control of the physical quality of banknotes so that the public is able to use the notes with confidence.

The Conduct of Monetary Policy

What if the prices of your daily necessities and food were to rise continuously? You would need to spend more money to buy the same basket of goods. In other words, the purchasing power of your money would go down. If the prices of various goods rose, people would naturally have a harder time making a living.

On the other hand, what if the prices of goods were to decline continuously? A decline in prices appears to be favorable to consumers as they can buy the same basket of goods more cheaply. But if prices were to decline continuously, both the sales and profits of firms that produce or sell goods would decrease. As a result, the salaries of workers at those firms would decrease and the number of unemployed persons might increase.

A continuous rise in the prices of goods and services is generally referred to as "inflation," and a continuous decline in prices is referred to as "deflation." As you can see from the above, both inflation and deflation are a threat to our daily lives.

When the economy enters a period of inflation in which the purchasing power of money is gradually eroded, people's confidence in money will diminish. If many people considered that the prices of goods and services would continue to rise in the future, they would rush to buy goods and services before prices rose even further. This would create upward pressure on prices, thus increasing the likelihood that the anticipated rise in prices would actually take place. In contrast, if people considered that prices would continue to decline in the future, they would wait to make their purchases until prices had declined further. Thus, they would spend less and save more and economic activity might eventually be endangered. Both inflation and deflation distort the distribution of income and assets across the economy, and disrupt financial transactions, which involve the lending or borrowing of money.

The Bank of Japan's mission is to pursue price stability, in other words to maintain an economic environment in which there is neither inflation nor deflation.

The Bank controls the overall volume of money in the economy and interest rates on a daily basis through money market operations, i.e., through its sales/purchases of money market instruments such as Japanese government securities (JGSs) to/from private financial institutions. The Bank's policy to stabilize prices, thereby contributing to the sound development of the national economy, is called monetary policy. For example, if Japan's economy weakened so that sales of goods declined and there was downward pressure on prices, the Bank would buy money market instruments such as JGSs from private financial institutions, thus increasing the volume of money in the economy and lowering interest rates. More money in circulation and lower rates enable firms to borrow money more easily and act as a spur to economic activity: more people purchase goods and services, and thus prices are less likely to decline.

Conversely, if economic activity heated up, with goods selling too well and upward pressure on prices, the Bank would reduce the volume of money in the economy and would raise interest rates. Accordingly, economic activity would be dampened and prices would be unlikely to rise.

As noted above, the Bank conducts monetary policy to achieve price stability, thereby contributing to the stability of the economy as a whole. The Bank believes that price stability is a prerequisite for stability in our daily lives and for realizing sustainable and balanced economic growth.

Providing Settlement Services and Ensuring the Stability of the Financial System

The term "financial system" refers to the collective mechanisms through which financial institutions intermediate funds between depositors and investors and provide payment and settlement services, such as funds transfers between accounts. The financial system constitutes a fundamental social infrastructure that supports our daily lives, as is the provision of electric power, water, and gas. The Bank of Japan conducts various activities to maintain this particular infrastructure.

Provision and Maintenance of the Settlement System

Financial transactions between financial institutions are settled by transferring funds across the current accounts held by each institution at the Bank of Japan. Because it offers accounts to financial institutions, the Bank is often referred to as the "banks' bank."

The amount settled across the accounts at the Bank of Japan totals over 300 trillion per day. In order to facilitate such funds transfers, the Bank operates an electronic settlement system, the Bank of Japan Financial Network System (BOJ-NET), and is constantly working to upgrade and improve the efficiency of the settlement system.

Monitoring and Examination of the Financial and Management Conditions of Financial Institutions

The sound management of individual financial institutions is a prerequisite to the stable functioning of the financial system. The Bank of Japan thus closely monitors trends in the loans and deposits of financial institutions, and the Bank's staff regularly visits financial institutions to carry out an "on-site examination" to review their financial and management conditions.

Function as the Lender of Last Resort

When a financial institution becomes insolvent and this is likely to pose a threat to the financial system, the Bank of Japan may provide emergency liquidity to the troubled institution in its role as the "lender of last resort" in an effort to prevent financial disorder.

Treasury and Government Securities-Related Operations

As the "government's bank," the Bank of Japan handles receipts and disbursements of treasury funds, including acceptance of tax monies and payment of public works expenditures and public pensions. It also conducts accounting and bookkeeping for government agencies.

In addition, the Bank deals with the entire business of Japanese government securities, namely issuance, registration, interest payment, and redemption. Settlement of funds and Japanese government securities arising from the above operations are facilitated by the BOJ-NET.

International Activities

The Bank of Japan engages in the following international activities.

International Financial Transactions and Operations

The Bank provides yen accounts to central banks and governmental institutions overseas. It also makes capital subscriptions and loan extensions to international organizations such as the Bank for International Settlements (BIS) and the International Monetary Fund (IMF).

Intervention in the Foreign Exchange Markets

The Bank closely monitors exchange rate developments. It intervenes in the foreign exchange market as an agent of the Minister of Finance, when necessary.

International Exchange of Views

The Bank of Japan frequently participates in discussions held at various international forums, such as the meetings at the BIS, the G7, and the IMF. Topics of discussions range widely, from monetary policy and the foreign exchange markets to bank supervision and settlement systems. Exchange of views with overseas central banks is important in strengthening cooperative relationships among the central banks.

Compilation of Data, Economic Analyses and Research Activities

To ensure appropriate implementation of monetary policy, the Bank of Japan must have an accurate understanding of the overall economic and financial conditions in Japan. To this end, the Bank compiles various statistics, including the Corporate Goods Price Index, the Corporate Service Price Index, and money stock. It also conducts a regular business survey known as the Tankan-- Short-Term Economic Survey of Enterprises in Japan. Based on these and a wide variety of other statistical data, including those prepared by government agencies and other organizations, the Bank reviews Japan's financial and economic conditions. In addition, the Bank's head office and branches make direct contact with a large number of firms to directly receive their views on the economy. The Bank also conducts opinion polls of the public when necessary, to which Bank's careful attention is paid. The Bank explains its view mainly through the publication of results of these analyses. Additionally, the Bank is able to receive the public's views and opinions through the Public Relations Department.

Further to the above activities, the Bank is also engaged in theoretical research from a longer-term perspective, on issues such as monetary policy and the financial system.