Monetary Policy

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Outline of Monetary Policy

The Bank of Japan, as the central bank of Japan, decides and implements monetary policy with the aim of maintaining price1 stability.

Price stability is important because it provides the foundation for the nation's economic activity.

In implementing monetary policy, the Bank influences the formation of interest rates for the purpose of currency and monetary control, by means of its operational instruments, such as money market operations.

The basic stance for monetary policy is decided by the Policy Board at Monetary Policy Meetings (MPMs). At MPMs, the Policy Board discusses the economic and financial situation, decides the guideline for money market operations and the Bank's monetary policy stance for the immediate future, and announces decisions immediately after the meeting concerned. Based on the guideline, the Bank sets the amount of daily money market operations and chooses types of operational instruments, and provides and absorbs funds in the market.

  1. "Price" here denotes the overall level of prices of various goods and services.

Price Stability and the "Price Stability Target" of 2 Percent

The Bank of Japan Act states that the Bank's monetary policy should be "aimed at achieving price stability, thereby contributing to the sound development of the national economy."

Price stability is important because it provides the foundation for the nation's economic activity. In a market economy, individuals and firms make decisions on whether to consume or invest, based on the prices of goods and services. When prices fluctuate, individuals and firms find it hard to make appropriate consumption and investment decisions, and this can hinder the efficient allocation of resources in the economy. Unstable prices can also distort income distribution.

On this basis, the Bank set the "price stability target" at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) in January 2013, and has made a commitment to achieving this target at the earliest possible time.

For details, please see The "Price Stability Target" under the Framework for the Conduct of Monetary Policy [PDF 18KB] (released on January 22, 2013). Also, the Bank released the statement titled "Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth" [PDF 14KB] with the government in January 2013.

Monetary Policy and Money Market Operations

The Bank's Policy Board decides on the basic stance for monetary policy at MPMs. The Policy Board discusses the economic and financial situation and then decides an appropriate guideline for money market operations at MPMs. After every MPM, the Bank releases its assessment of economic activity and prices as well as the Bank's monetary policy stance for the immediate future, in addition to the guideline for money market operations.

According to the guideline for money market operations decided at MPMs, the Bank controls the amount of funds in the money market, mainly through money market operations.

The Bank supplies funds to financial institutions by, for example, extending loans to them, which are backed by collateral submitted to the Bank by these institutions. Such an operation is called a funds-supplying operation. The opposite type of operation, in which the Bank absorbs funds by for example issuing and selling bills, is called a funds-absorbing operation.

For details on the Bank's current guideline for money market operations, please see Statements on Monetary Policy.

Monetary Policy Meetings (MPMs)

MPMs are held eight times a year, each time for two days. At the MPMs, the Policy Board members discuss and decide the guideline for monetary market operations. The monetary policy decisions are made by a majority vote of the nine members of the Policy Board, which consists of the Governor, the two Deputy Governors, and the six other members.

In addition to in-depth research and analysis on economic and financial conditions, the Bank studies and examines various matters concerning monetary policy, such as monetary policy strategies and instruments as well as the financial system. The Bank makes use of its research findings as the basis for deciding monetary policy.

Independence and Accountability to the Public

The experience of a number of countries shows that conduct of monetary policy tends to come under pressure to adopt inflationary policies. For this reason, it has become the norm throughout the world for monetary policy to be conducted by a central bank that is neutral and independent from the government, and equipped with the requisite expertise.

The Act states, "The Bank of Japan's autonomy regarding currency and monetary control shall be respected." Of course, it is important that the Bank's monetary policy and the basic stance of the government's economic policy be mutually harmonious, and thus it is stipulated that the Bank shall "always maintain close contact with the government and exchange views sufficiently."

Monetary policy has a significant influence on the daily lives of the public, and thus the Bank should seek to clarify to the public the content of its decisions, as well as its decision-making processes, regarding monetary policy. In view of this, the Bank immediately releases its decisions on monetary policy, such as the guideline for money market operations and its views on economic and financial developments, after each MPM. In addition, regular press conferences by the chairman of the Policy Board -- the Governor -- are held to explain details of the monetary policy decisions. The Bank also releases the Summary of Opinions at each MPM and the minutes of MPMs, and releases their transcripts ten years later, to clarify points discussed by the Policy Board in the process of reaching decisions. In addition, the Bank prepares and submits the Semiannual Report on Currency and Monetary Control to the Diet, in June and December each year, and explains its policies. Furthermore, the Governor and other executives appear before committees of both houses of the Diet, the House of Representatives and the House of Councillors, when requested and answers questions regarding the conduct of the Bank's policies and operations.

It is very important to present the Bank's basic thinking on the conduct of monetary policy and evaluation of the developments of the economy and prices in a timely and lucid manner, from the viewpoint of fulfilling the Bank's accountability to the public. In addition, since monetary policy works through financial markets, the effects of monetary policy will permeate more smoothly if market participants gain a deeper understanding of the Bank's thinking. For details on the current conduct of the Bank's monetary policy, please see "Price Stability Target" of 2 Percent and "Quantitative and Qualitative Monetary Easing with Yield Curve Control."