How does the Bank decide and conduct monetary policy?
At Monetary Policy Meetings, the Bank's Policy Board discusses the economic and financial situation, and decides the guideline for money market operations and the Bank's monetary policy stance for the intermeeting period.
During normal times, the Bank conducts monetary policy by encouraging money market rates to remain at the target level mainly through open market operations. Depending on the circumstances, the Bank may employ other means to conduct monetary policy, such as (1) setting the target at the amount of funds supplied directly by the Bank -- the monetary base, defined as the sum of the outstanding balance of financial institutions' current accounts at the Bank, banknotes in circulation, and coins in circulation -- and controlling the amount to achieve the target; and (2) encouraging longer-term market rates to rise or fall.
With the introduction of Quantitative and Qualitative Monetary Easing (QQE) in April 2013, the Bank changed the main operating target for money market operations from the uncollateralized overnight call rate to the monetary base. Since then, the Bank has been conducting monetary policy based on the following guideline for money market operations.
"The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about XX trillion yen."
Furthermore, in January 2016 the Bank introduced QQE with a Negative Interest Rate, which added a new dimension to the existing policy framework of QQE. Under this policy, the Bank applies a negative interest rate to part of financial institutions' current account deposits at the Bank.
Under the aforementioned guideline for money market operations, the Bank controls the monetary base by supplying or absorbing funds in the money market on a daily basis. The primary means of money market operations are open market operations, through which the Bank increases or decreases lending to financial institutions, or purchases from or sells to financial institutions financial assets such as Japanese government securities (JGSs).
Open market operations can be broadly divided into two types: funds-supplying operations and funds-absorbing operations. Funds-supplying operations, such as extending loans, are used by the Bank to supply funds to the money market. Funds-absorbing operations, such as sales of bills issued by the Bank and sales of JGSs held by the Bank with repurchase agreements, are used to absorb funds from the money market.
Related Pages
The latest guideline for money market operations is available from Statements on Monetary Policy at Monetary Policy Releases. The results of market operations are available at Sources of Changes in Current Account Balances at the Bank of Japan and Market Operations and Money Market Operations Conducted by the Bank of Japan.
