Bank of Japan

Founded in 1882, The Bank of Japan (BoJ) is the Japanese central bank. It is responsible for issuing and handling currency and treasury securities. Its tasks also include the implementation of monetary policy and maintaining the stability of the country's financial system.

What Is the Bank of Japan?

It is the central bank of the country.

In 1873, based on the National Banks Act, national banks were established in Japan. Until 1876, the ability of banks to finance the industry and commerce was limited due to an insufficient metal coating of banknotes issued by banks. In 1876, the banks received the right to issue notes for government bonds. As a result, the number of banks in the country increased dramatically. In the late 1870s, their number reached 151.

The sharp rise in banks and uncontrolled emissions led to an increase in inflation. In order to prevent the collapse of the economy, the Bank of Japan was established in 1882. The institution was founded for a period of 30 years, and its main goal was to reduce inflation.

Since 1885, the bank began to issue banknotes exchanged for silver. The law of 1889 established the rules of note issue. Henceforth, notes issued by the BoJ had to be covered with 100% silver, with the exception of an uncovered limit of 70 million yen. In 1897, the uncovered limit was increased to 85 million, and in 1899 - to 120 million yen. The bank could issue additional notes over the set limit only with the permission of the Minister of Finance. In this case, it was obliged to pay emission tax (at least 5%), the rate of which was set in each case by the head of the Ministry of Finance of Japan.

In 1897, Japan switched to the gold standard system, aided by the indemnity received by Japan from China under the Shimonoseki Treaty. Banknotes could be issued only by the Bank of Japan and, at the request of their holders, could be exchanged for gold in their cash registers. Yen, issued by the bank, became the legal means of payment throughout the country. With the issued notes, the BoJ paid a monthly tax of 1.25% per annum. From December 1931, the exchange of the BoJ notes for gold was stopped.

Subsequently, the period of the bank's functioning was extended for another 30 years. In 1942, a law was issued, according to which the institution became government controlled. The Minister of Finance of Japan received the right to independently change the by-laws of the bank. In 1949, the Political Council was created, which began to determine the interests of the state in the field of monetary regulation. In 1979, the Bank Law was modernized, and the institution was granted indefinite status. On April 1, 1998, a new Law on the BoJ came into force, according to which the bank became independent from the Ministry of Finance.

Functions

The BoJ has the following functions:

• Issue of bank notes.

• Implementation of monetary policy (adjusting the required reserves ratio, operations in financial markets, and regulation of the interest rate).

• Implementation of mutual settlements of commercial banks.

• Monitoring and checking the financial status and management of financial institutions.

• Conducting operations with government securities.

• Implementation of international activities.

• Performing economic analysis and conducting theoretical studies.

Interest Rate

To implement monetary policy in the country, the Bank of Japan sets the refinancing rate at which banks can raise and place funds. From 2001 to 2006, the interest rate was zero. From February 2007 to October 2008, the rate was set at 0.5%, from November 1, 2008 to December 18, 2008 - 0.3%, from December 19, 2008 to October 4, 2010 - 0.1%. On October 5, 2010, the BoJ lowered the interest rate to the range of 0 - 0.1%.

On January 29, 2016, the interest rate of the Bank of Japan was reduced to a negative value of -0.1%. In the autumn of 2016 at the next meeting of the Board of Directors, it was decided to leave the interest rate of -0.1% unchanged.

Shareholders

According to its status, the BoJ is not an administrative body, but a joint-stock company: 55% of its capital is owned by the government and the other 45% - by private and institutional shareholders. The shareholders are guaranteed dividends of 4%. If the bank receives high profits, the dividends can be increased to 5%. The main profit is charged to the state budget.

The Bottom Line

The BoJ is Japan's central bank that has existed since 1882 when many national banks were established in Japan as a result of the National Banks Act of 1873. The primary purpose of the bank was protection against inflation. Now the bank is responsible for the issue of the bank notes, implementation of monetary policy, and other tasks. The institution has been independent of the Ministry of Finance since April 1998.