The Bank of Japan: Central Bank Independence and the Politicization of Monetary Policy

2021 ◽  
Author(s):  
Gene Park
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Prime Minister ◽  
Central Bank Independence ◽  
Executive Power ◽  
Theoretical Justification ◽  
Electoral Incentives ◽  
Economic Stagnation ◽  
Bank Of Japan ◽  
The Government

In April 1998, the Bank of Japan (BOJ) gained legal independence. While the primary theoretical justification was to enhance the central bank’s inflation-fighting credibility, the newly independent BOJ immediately confronted a different and unexpected problem: a long and persistent deflation. As the government battled economic stagnation, debates over the extent to which the BOJ should prioritize overcoming deflation and the policies that should be employed to this end led to a profound politicization of monetary policy. This culminated in the Prime Minister Abe’s landslide electoral victory at the end of 2012 in which he campaigned on overcoming deflation, and then, once in power, effectively took over control of a previously intransigent BOJ Policy Board to reflate the economy. The democratic electoral process paved the way for a reassertion of control over the still legally independent central bank. From a wider perspective, these developments reflect broader changes in Japanese democracy: the greater influence of electoral incentives on policy and the centralization of executive power.

Taming Japan's Deflation

2018 ◽  
Author(s):  
Gene Park ◽  
Saori N. Katada ◽  
Giacomo Chiozza ◽  
Yoshiko Kojo
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Prime Minister ◽  
Explanatory Power ◽  
Policy Network ◽  
Policy Options ◽  
Policy Ideas ◽  
Bank Of Japan ◽  
Empirical Tests ◽  
Central Bankers

Bolder economic policy could have addressed the persistent bouts of deflation in post-bubble Japan, claims this book. Despite warnings from economists, intense political pressure, and unconventional policy options to address this problem, Japan's central bank, the Bank of Japan (BOJ), resisted taking the bold actions that this book claims would have significantly helped. With Prime Minister Abe Shinzō's return to power, Japan finally shifted course at the start of 2013 with the launch of Abenomics—an economic agenda to reflate the economy—and Abe's appointment of new leadership at the BOJ. The BOJ's resistance to experimenting with bolder policy stemmed from entrenched policy ideas that were hostile to activist monetary policy. The book explains how these policy ideas evolved over the course of the BOJ's long history and gained dominance because of the closed nature of the broader policy network. The explanatory power of policy ideas and networks suggests a basic inadequacy in the dominant framework for analysis of the politics of monetary policy derived from the literature on central bank independence. This approach privileges the interaction between political principals and their supposed agents, central bankers; but this book shows clearly that central bankers' views, shaped by ideas and institutions, can be decisive in determining monetary policy. Through a combination of institutional analysis, quantitative empirical tests, in-depth case studies, and structured comparison of Japan with other countries, the book shows that, ultimately, the decision to adopt aggressive monetary policy depends largely on the bankers' established policy ideas and policy network.

scholarly journals Some Reflections on the Political Economy of Monetary Policy

2020 ◽  
Vol 70 (3) ◽  
pp. 213-228
Author(s):  
Jakob de Haan
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Political Ideology ◽  
Wealth Inequality ◽  
Theoretical Work ◽  
Central Bank Independence ◽  
The Political ◽  
The Government ◽  
Redistributive Effects ◽  
The Impact

AbstractDuring the past decades, central bank independence has been increased in a large number of countries. However, even an independent central bank does not operate in a political vacuum. For instance, governments generally appoint political allies, presuming that consequently the central bank will follow policies that are in line with the governments’ preferences. The first part of this paper reviews recent research on whether the political ideology of the government has any impact on monetary policies pursued. It is argued that if forward-looking data are used to estimate Taylor-rule models for a panel of OECD countries that take country heterogeneity into account, there is no strong evidence for partisan effects on monetary policy. One of the reasons that central bank independence is no longer taken for granted is the acclaimed redistributive effects of monetary policy. The second part of the paper reviews recent research on the impact of conventional and unconventional monetary policy on income and wealth inequality. It is concluded that empirical research provides very mixed evidence on these issues and that it is not well connected to recent theoretical work.

The Non-Linear Process of Institutional Change: The Bank of Japan Reform and Its Aftermath

2006 ◽  
Vol 7 (2) ◽  
pp. 127-152 ◽  
Author(s):  
ARVID J. LUKAUSKAS ◽  
YUMIKO SHIMABUKURO
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Institutional Change ◽  
Research Capacity ◽  
Legal Framework ◽  
Linear Process ◽  
Political Class ◽  
Bank Of Japan ◽  
State Of The Economy ◽  
The Government

In 1997, the Japanese Diet revised the Bank of Japan law thereby granting the central bank greater independence in monetary policy making. The revision was an attempt by Japan's political class to weaken the authority of the powerful Ministry of Finance over the central bank and augment its own influence. The Bank of Japan, however, gained more autonomy than politicians ever intended, leading to frequent confrontations between the government and the central bank over monetary policy. This paper explores the new strategic relationship that emerged between the Bank of Japan and government and the nature of monetary policy implemented in the post-reform period. We demonstrate that several factors contributed to the Bank's unexpected ability to enhance its independence: the astute leadership of the first post-reform governor Hayami Masaru; the Bank's ability to turn politicization of monetary policy to its advantage; and its pursuit of a ‘power through knowledge’ strategy achieved by augmenting its own research capacity. On a theoretical level, our findings show that the passage of a new legal framework only marks the completion of one stage of institutional change and the start of the next; post-enactment politics have as much importance as pre-enactment politics in shaping outcomes. In the post-enactment phase, various factors, including the state of the economy and informal institutions or processes, matter greatly and may shift the direction of institutional change away from the intended path.

scholarly journals Independence Before Conservatism: Transparency, Politics and Central Bank Design

2005 ◽  
Vol 6 (1) ◽  
pp. 1-21 ◽  
Author(s):  
Andrew Hughes Hallett ◽  
Diana N. Weymark
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Central Bank ◽  
Institutional Design ◽  
Central Bank Independence ◽  
Optimal Outcomes ◽  
Second Stage ◽  
Stage Game ◽  
The Government ◽  
Monetary And Fiscal Policy

Abstract The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy is taken into account, there is a continuum of combinations of central bank independence and conservatism that produce optimal outcomes. This indeterminacy is resolved by appealing to practical considerations. In particular, it is argued that full central bank independence facilitates the greatest degree of policy transparency and political coherence.

The Political Economy of Monetary Policy

2017 ◽  
Author(s):  
Cristina Bodea
Keyword(s):  
Monetary Policy ◽  
World War I ◽  
Central Bank ◽  
Exchange Rates ◽  
Institutional Arrangement ◽  
Central Banks ◽  
Central Bank Independence ◽  
Rate System ◽  
Fixed Exchange Rates ◽  
The Government

The recent global economic crisis has renewed interest in the nature and history of monetary policy, the distributional effects of central bank policy, central bank governance, and the personalities at the helm of major central banks. In modern times, a country’s central bank formulates, or, to a minimum, implements, a country’s monetary policy, or the process of adjustment of a country’s money supply to achieve some combination of stable prices and sustainable economic growth. Monetary policy depends heavily on a country’s exchange rate system. Under fixed exchange rates, the country’s commitment to keep the level of the currency at a certain level dictates monetary policy to a great degree. As the gold standard was unraveling after World War I, many countries experienced high inflation or even hyperinflation. A similar situation faced monetary policy after the collapse of the Bretton Woods system of fixed exchange rates in the 1970s. By the 1980s, however, countries turned toward central bank independence as an institutional arrangement to control inflation. The current issues surrounding monetary policy have emerged from the historical increase in central bank independence and the 2007 economic and financial crisis. In particular, the opacity of central bank decisions, given their autonomy to pursue stable prices without political interference, has increased the demand for transparency and communication with the government, the public, and financial markets. Also, the 2007 crisis pushed central banks toward unconventional measures and macro-prudential regulation, and brought back into focus the monetary policy of the euro area.

scholarly journals Central Bank Independence and Fiscal Policy: Can the Central Bank Restrain Deficit Spending?

2015 ◽  
Vol 47 (1) ◽  
pp. 47-70 ◽  
Author(s):  
Cristina Bodea ◽  
Masaaki Higashijima
Keyword(s):  
Central Bank ◽  
Central Bank Independence ◽  
Executive Power ◽  
The Novel ◽  
Fiscal Deficits ◽  
Long Run ◽  
Deficit Spending ◽  
The Government ◽  
Electoral Calendar ◽  
Yearly Data

Independent central banks prefer balanced budgets due to the long-run connection between deficits and inflation, and can enforce their preference through interest rate increases and denial of credit to the government. This article argues that legal central bank independence (CBI) deters fiscal deficits predominantly in countries with rule of law and impartial contract enforcement, a free press and constraints on executive power. It further suggests that CBI may not affect fiscal deficits in a counter-cyclical fashion, but instead depending on the electoral calendar and government partisanship. The article also tests the novel hypotheses using new yearly data on legal CBI for seventy-eight countries from 1970 to 2007. The results show that CBI restrains deficits only in democracies, during non-election years and under left government tenures.

scholarly journals Central Bank Independence – The Case of the Central Bank of Montenegro

2018 ◽  
Vol 7 (3) ◽  
pp. 25-40
Author(s):  
Milivoje Radovic ◽  
Milena Radonjic ◽  
Jovan Djuraskovic
Keyword(s):  
Economic Theory ◽  
Central Bank ◽  
Inflation Rate ◽  
Central Banks ◽  
Transition Countries ◽  
Central Bank Independence ◽  
Executive Power ◽  
Eu Accession ◽  
Key Factor ◽  
The Eu

Abstract In recent decades, there has been a trend in increasing the level of independence of central banks. The key factor that has contributed to a growing interest in this concept is grounded in economic theory that confirms the link between a lower inflation rate and a greater level of central bank independence. For this reason, in many countries, the existing regulations relating to central bank have been modified to protect its position from the absolute influence of the executive power of the state. This trend was particularly prevalent in transition countries, which was conditioned primarily by the EU accession criteria. The aim of this paper is to analyse independence of the Central Bank of Montenegro through the prism of functional, institutional, financial, and personal independence, and to assess the level of its legal independence by using appropriate indices.

scholarly journals Monetary policy change of the Central bank of Poland

2015 ◽  
Vol 15 (3) ◽  
pp. 246-259
Author(s):  
Ireneusz Kraś
Keyword(s):  
Monetary Policy ◽  
Economic Policy ◽  
Central Bank ◽  
Policy Change ◽  
Financial System ◽  
Financial Statements ◽  
Democratic Character ◽  
National Bank ◽  
The Republic ◽  
The Government

Abstract The National Bank of Poland is an institution which, in conjunction with the government is responsible for the implementation of country’s economic policy reinforces its democratic character. Provisions of its operation are governed by the Constitution of The Republic of Poland and by the Act on the National Bank of Poland. To this end, the objective of the present research is to analyse the proposed amendments in the Act on the NBP. The latter concerns the amendment procedures, term of office and the rotations and numbers of Monetary Policy Council. The remaining part of the analyses is dedicated to the issue of dismissal of a MPC’s member in conjunction with the prohibition of occupying other positions, the adoption of the NBP’s financial statements and the separation of instruments of monetary policy’s instruments for stability of domestic financial system. Introduced changes in the proposed draft reduce the independence of the NBP while making it more subject to the Cabinet. Following the result of further consultations on the draft of Act on the NBP, provisions which reduce the independence of the NBP shall be partially removed.

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