Japan[¥]

Institutional framework

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". 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.

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 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 market operations and chooses types of operational instruments, and provides and absorbs funds in the market.

The current policy framework, Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, consists of two major components: the first is "yield curve control" in which the Bank controls short-term and long-term interest rates through market operations; and the second is an "inflation-overshooting commitment" in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index exceeds the price stability target of 2 percent and stays above the target in a stable manner.

Key features of the monetary policy implementation framework

For policy implementation, the bank conducts the following measures in market operations.

The Bank adopts a three-tier system in which the outstanding balance of each financial institution's current account at the Bank is divided into three tiers, to which a positive interest rate (the basic balance), a zero interest rate (the macro add-on balance), or a negative interest rate is applied (the policy-rate balance), respectively. The interest rate applied to the policy-rate balance is regarded as the "short-term policy interest rate" and its level is to be decided at every MPM. The three-tier system encourages arbitrage trading at negative interest rates in money markets. Financial institutions have an incentive to ensure profit margins (reduce their policy-rate balances) by borrowing (lending) cash at interest rates that are lower (higher) than those applied according to their current account balances at the Bank and depositing funds in their current accounts at the Bank (supplying funds from their current accounts). The Bank reviews the "Benchmark Ratio Used to Calculate the Macro Add-on Balance" once every three months in principle to adjust the macro add-on balance and thereby the policy-rate balance to the appropriate levels.

The Bank offers outright purchases of T-Bills. The Bank decides the purchase size per auction considering the effects on financial markets.

The Bank purchases JGBs so that 10-year JGB yields would remain at around the "operating target for the long-term interest rate". While purchasing JGBs, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices. With regard to the amount of JGBs to be purchased, the Bank conducts purchases in a flexible manner so that their amount outstanding will increase at an annual pace determined at the MPMs. In situations involving a rapid increase in the yields, the Bank would purchase JGBs promptly and appropriately.

The Bank purchases ETFs and J-REITs so that the amounts outstanding of its holdings will increase at annual paces in accordance with the guidelines decided at the MPMs. With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amounts of purchases depending on market conditions.

The Bank purchases other assets, including CP and corporate bonds, in accordance with the guidelines for asset purchases decided at the MPMs. Also, the Bank conducts other operations, including the funds-supplying operations against pooled collateral, growth-supporting funding facility, stimulating bank lending facility, funds-supplying operation to support financial institutions in disaster areas, funds-supplying operation to support financial institutions in disaster areas of the 2016 Kumamoto earthquake, securities lending facility, US dollar funds-supplying operations, securities lending to provide JGSs as collateral for the US dollar funds-supplying, and the complementary lending facility.

Under QQE with Yield Curve Control, the Bank carefully examines the developments and functioning of financial markets as well as the impact of the Bank's operations on financial markets. Also, with a view to further deepening dialogue with market participants, the Bank conducts daily market monitoring and various market surveys and holds various meetings with market participants.