Roles of the central bank in Japanese economy from 1945 to now



Bank of Japan (BOJ) is one of the banks operating and developing for the long time in the world. In the process of formation and development, BOJ has had many changes in institution, organization model, operation mode, independence and policies etc. Based on roles, functions, missions and rights of the Bank as well as targets of economic development of the Japanese Government, BOJ has reached certain success in regulating the Japanese economy. Although the Bank has had some difficulties, BOJ has made decisions and policies to help the bank system escape from crisis and rescue the economy. This research shows analysis, evaluation of Japanese economy situation and roles of the central bank “Bank of Japan” in economic development in recent time.

Keywords: roles of the central bank, Bank of Japan, State Bank Reform, Japan, Japanese economy

Bank system is one of the parts with important roles in development of national economy. In the bank system, the Central Bank has leading roles. The Bank has been affirming its importance in organization, operation and promotion of economic growth. The operation of the Central Bank affects not only benefits of the Bank but also economic development situation of each country.

BOJ is one of the central banks formed and developed earliest in the world; the reality has proved the important roles of BOJ in economic development of Japan. Based on functions, missions and rights, BOJ has proved all roles in regulating macro economy through managing, supervising and promulgating policies related to money. Thereby, the Bank has helped the Japanese economy overcome difficulties and reach great achievements. Role research of the Central Bank in economic development aims at finding relationship, impacts, effects and contributions of BOJ to the Japanese economy. And this is an implied lesson for Vietnam in reforming the State Bank.

1. Overview of Bank of Japan

Bank of Japan was established in 1882 according to the model of a joint stock company, the bank had an initial state capital of 55 million Yen. The bank’s operation is mainly for the state. In reality, private shareholders don’t have rights to give opinion on policy of BOJ. In 1942, the first law document on BOJ was officially promulgated. In 1949, the monetary policy was decided by Monetary Policy Committee. This committee consists of 7 members: President of BOJ, representative of Ministry of Finance, representative of State Planning Committee, and 4 other members appointed by the National Assembly. BOJ has a close relationship with the Japanese government. It can be said that BOJ don’t have independent rights in the policy of monetary regulation as FED, BDF. Besides the main office in Tokyo, BOJ has 31 branches in regions and representative head offices in Tokyo. BOJ also has 31 branches in regions and representative head offices in New York, Paris, London, Frankfurt, Hong Kong.

In November 1996, when the Japanese economy had weak points, the determination of reforming the central bank was concretized through the establishment of Research Council of Japan Financial System, in which there was a subcommittee to research and draft BOJ law. Three months later, this Council submitted a detailed report to the government. Considering and deciding quickly in one month, the government decided to submit it to the National Assembly for consideration. In June 1997, BOJ Law was officially promulgated and effective in 1998. Many economists claim that the most important thing for the success of BOJ reform process is objective requirements of the economy and strong determination of the Japanese government (Ito, 2009).

Although BOJ doesn’t have totally independent rights in deciding on monetary policy as FED, it is still the central bank with independent level in operation for authorities with the 2^nd position in the world. Close combination with the Japanese government in aiming at common targets of the economy, the Bank of Japan has carried out the regulating policy effectively.

2. Roles of BOJ in economic development

Japan is a country with unfavorable natural geography conditions. Mountains and hills account for 70 % of area and Japan doesn’t almost have minerals. Although sea area is big, there is no oil mine. Natural disasters often occur. However, Japan still exists and develops strongly and is one of the countries with greatly developed economy in the world.

After the Second World War (1945), this is a period of economic restoration of Japan. This is a stage of reforms at the request of Japan Managing Allied Force. Due to the effect of the War, production was interrupted, the economy was fiercely devastated, unemployment and inflation increased dramatically. To restore economy, the government carried out food distribution, administrative control for price, and speculation prevention. At that time, the government intervened in the Bank, made decisions such as “freezing” bank deposit, stopping money exchange activities, bond issuance, focusing on restoring and developing priority sectors such coal, stone, steel, fertilizer, power etc., enhancing the position of industrial capital, stimulating investment and business spirit. In 1948, the American government appointed Joseph Dodge to Japan to manage the economy. It can be seen that in this stage, roles of Japanese banks mainly base on the policy of the Government. Thanks to combination between fiscal and monetary policy, the free economy is restored, productivity in Japan is enhanced, and inflation rate is controlled in the safe level.

The quickly developing stage, from 1955 to 1973 is a miraculous stage in economic development of Japan. This is the stage when Japanese economy catches up with big economy in the world. Real GDP as per the price compared annually (original year 1965) almost grew up to two figures. In this stage, roles of Bank of Japan are very important. That BOJ made decisions to fix Japanese Yen to US dollar with the exchange rate of 360/JPY/USD promoted export development, stimulated domestic production, enhanced consumption demand, and stabilized financial sources to invest, keep banks not fall into bankruptcy. Therefore, until 1973, GNP of Japan was equal to 1/3 JNP of American economy, ranked the second position in the world [1].

In the transition period from 1973 to 1981, many crises occurred. In this stage, GDP growth rate of Japan was not stable, half lower than the previous period. The main reasons for crises were scarcity of energy, especially petroleum and gas.

In the next period from 1980 to 1989, Japanese economy had most changes. In this period, annual average GDP growth rate of Japan was always higher than the one of West Europe and North America. This index fluctuated up and down in the range of 3.1 % — 7.1 %. The price of Japanese Yen was higher than the one of US dollar. The inflation rate had tendency to decrease from 7.8 % (in 1980) to 2.3 % (in 1989). Years of deflation were 1986, 1987, 1988. Unemployment rate was low with average rate of 2.5 %, asset price increased, consumption increased strongly.

Table 1

Some economic indexes of Japan from 1980 to 2015

Year	Unemployment rate (%)	Rate of inflation/ deflation (%)	GDP growth rate (%)	Year	Unemployment rate (%)	Rate of inflation/ deflation (%)	GDP growth rate (%)
1980	2,0	7,8	3,2	1998	4,1	0,7	-2,0
1981	2,2	4,9	4,2	1999	4,7	-0,3	-0,2
1982	2,4	2,7	3,4	2000	4,7	-0,7	2,3
1983	2,7	1,9	3,1	2001	5,0	-0,8	0,4
1984	2,7	2,3	4,5	2002	5,4	-0,9	0,3
1985	2,6	2,0	6,3	2003	5,2	-0,3	1,7
1986	2,8	0,6	2,8	2004	4,7	0,0	2,4
1987	2,9	0,1	4,1	2005	4,4	-0,3	1,3
1988	2,5	0,7	7,1	2006	4,1	0,2	1,7
1989	2,3	2,3	5,4	2007	3,8	0,1	2,2
1990	2,1	3,0	5,6	2008	4,0	1,4	-1,0
1991	2,1	3,3	3,3	2009	5,1	-1,3	-5,5
1992	2,2	1,7	0,8	2010	5,0	-0,7	4,7
1993	2,5	1,3	0,2	2011	4,6	-0,3	-0,5
1994	2,9	0,7	0,9	2012	4,3	0,0	1,8
1995	3,1	-0,1	1,9	2013	4,0	0,4	1,6
1996	3,4	0,1	2,6	2014	3,6	2,7	-0,1
1997	3,4	1,8	1,6	2015	3,4	0,8	0,5

The source: International Monetary Fund, World Economic Outlook Database, 4/2016

Economists call this period as the asset bubble period. The main reason leading to this phenomenon is price increase of Japanese Yen after Plaza Accord (1985), which made Japanese manufacturer have many difficulties. This had a great effect on growth rate of the economy. At that time, BOJ performed the loose monetary policy (interest rate decrease) to cope with the above state. Lending interest rate decreased from 8.3 % (in 1980) to 5.3 % (in 1989). This made liquidity increase highly.

Table 2

Interest rate of Bank of Japan from 1980 to 2015

Year	Real interest (%)	Deposit rate (%)	Interest rates (%)	Year	Real interest (%)	Deposit rate (%)	Interest rates (%)
1980	2,8	5,0	8,3	1998	2,4	0,3	2,3
1981	4,5	4,3	7,9	1999	3,5	0,1	2,2
1982	5,7	3,8	7,3	2000	3,4	0,1	2,1
1983	6,2	3,8	7,1	2001	3,2	0,1	2,0
1984	4,9	3,5	6,7	2002	3,5	0,0	1,9
1985	5,5	3,5	6,6	2003	3,6	0,0	1,8
1986	4,2	1,8	6,0	2004	3,2	0,1	1,8
1987	5,3	1,8	5,2	2005	3,0	0,3	1,7
1988	4,7	1,8	5,0	2006	2,8	0,7	1,7
1989	3,0	2,3	5,3	2007	2,8	0,8	1,9
1990	4,5	4,1	6,9	2008	3,2	0,6	1,9
1991	4,8	5,1	7,5	2009	2,2	0,4	1,7
1992	4,5	3,4	6,2	2010	3,8	0,5	1,6
1993	4,4	2,1	4,9	2011	3,4	0,5	1,5
1994	4,0	1,7	4,1	2012	2,4	0,5	1,4
1995	4,3	0,9	3,5	2013	1,9	0,5	1,3
1996	3,2	0,3	2,7	2014	-0,4	0,4	1,2
1997	1,8	0,3	2,4	2015	0,0	0,4	1,1

The source: http://data.worldbank.org

As a result, the economy grew strongly and asset speculation began to make asset price increase. On the other hand, investors began to change their investment portfolio when the exchange rate of JPY/USD changed, especially after the event of black Monday in the American securities market. Increase in Japanese Yen price stimulated Japanese enterprises to directly invest in foreign countries. This made the Japanese people richer, encouraged them to buy foreign assets and travel abroad.

Other banks and credit institutions of Japan which invested in enterprises in the manufacturing zones for a long time started to invest in financial assets, be active at lending for real estate development projects, ready to accept financial assets and real estate as collateral upon lending enterprises and individuals in this period. This is one of main causes making credit institutions of Japan suffer from the state of bad debt when economic bubble and asset bubble are broken.

Stage from 1990–2009: Until the first decade of the 21^st century, Japanese economy was still in long-lasting crisis immediately after the bubble economy period. Bank of Japan performed the tight monetary policy. Economic bubble was broken in 1991 and asset price bubble was broken in 1992. Moreover, in this stage, Japan must put up with impact of the regional financial crisis in 1997–1998. Main difficulties were bad debt and crisis on development model. After having rights to manage the Cabinet at the end of 2001, the Prime Minister Koizumi resolved bad debts step by step such as: debt forgiveness, merger, acquisition of unprofitable banks and financial institutions; simultaneously performed the structure reform policy boldly. BOJ adjusted monetary policy to resolve bad debts, modernized and rearranged the bank system under international standards, evaluated impacts of the monetary policy on stimulating investment and allocation of financial capital sources to ensure restoration and growth of the economy. Simultaneously, BOJ performed the monetary policy with the orientation of enhancing marketability, effectiveness of the financial system as well as enhanced securitization trend and interaction between monetary market and capital market of Japan.

Table 3

Some economic indicators of Japan from 2000–2015

Year	Exports of goods and services (% GDP)	Nhập khẩu hàng hóa và dịch vụ (% GDP)	Imports of goods and services (% GDP)	Foreign direct investment, net inflows (USD)
2000	10,9	9,4	n/a	10.688.168.326
2001	10,4	9,8	n/a	4.926.033.619
2002	11,3	9,9	n/a	11.557.373.874
2003	11,9	10,2	n/a	8.771.535.612
2004	13,2	11,3	n/a	7.527.948.175
2005	14,3	12,9	-3,9	5.459.618.343
2006	16,2	14,9	-0,7	-2.396.909.736
2007	17,7	16,1	-2,4	21.631.204.436
2008	17,7	17,5	-3,0	24.624.845.330
2009	12,7	12,3	-7,3	12.226.471.579
2010	15,2	14,0	-6,7	7.440.979.284
2011	15,1	16,0	-8,2	-850.717.035
2012	14,7	16,7	-7,8	546.962.692
2013	16,2	19,0	-7,2	10.648.441.636
2014	17,7	20,8	n/a	18.409.187.112
2015	17,9	18,9	n/a	-41.885.911

The source: http://data.worldbank.org

Thanks to this structure reform, Japanese economy grew again in the stage 2002–2007, put an end to 15-year recession and stagnation. As a record, economic prosperity lasted 69 continuous months from February 2002 to October 2007. This exceeded the figure of 57 months of the high growth period in the last years of the 60^th decade of 19^th century. Export and import situation had lots of positive changes, goods and services export (as per % GDP) increased. In 2014, export accounted for 17.7 (% GDP), import accounted for 20.8 (% GDP). Foreign direct investment increased dramatically, especially in 2008, FDI was 24.6 billion USD. However in this period, GDP growth was maintained in an average level of 1.5 %. Even in many years, growth rate was negative, especially in 2009 (-5.5 %); unemployment rate increased dramatically from 2.1 % (in 1990) to 5.1 % (in 2009); deflation rate lasts in years (Table 1).

However, Japanese economy recovery didn’t last for a long time, and then the economy fell into serious recession due to effect of the global financial crisis in 2008. In this stage, the Japanese economy became more and more sluggish and difficult. Inflation, unemployment, bankruptcy of enterprises increased. To cope with challenges of the global financial crisis, the Japan government provided economy stimulating packages in 4 times with total value up to 300 billion USD. BOJ performed different measures divided into 3 main sectors: policy interest rate decrease by basic interest rate decrease of Japanese Yen down to the record low level of 0.1 %; measures of ensuring financial market stability; and measures of creating financial conditions of companies. Moreover, to ensure stability of financial system, BOJ continued to buy shares of banks in the system and decided to lend the affiliated banks. BOJ contributed to enhance safety and effectiveness of the payment system and resolved the safety problem by supplying fixed assets safely and conveniently. It also participated in effort to enhance infrastructure of the market to improve function and effectiveness of the financial market, as well as stimulate stability of international finance. BOJ supported economic and financial activities in Japan through its business activities in fields: issuance, circulation of paper currency, treasury funds and Japanese government bond, continuous business for urgent situations. Thanks to such effort, Japanese economy after the second half of 2009 had optimistic signals.

The stage from 2010–2016: In this stage, like almost economies in the world, Japanese economy must repair quite big impact from the world financial crisis (in 2007, 2008). Japan must also make effort to restore and develop economy. In 2011–2012, BOJ made continuous effort to give economy support policies. Bank of Japan continuously made great contribution to make good the deflation situation and returned to the stable development road with price stability through access to three targets: strong monetary loosening through comprehensive monetary loosening, financial market stability assurance and support supply for enhancing basis of economic growth. After returning to hold power of controlling the Cabinet, the Prime Minister Shino Abe gave some major economic policies (shortly called Abenomics) including three main contents: flexible fiscal policy, loose monetary policy and structure reform promotion. Thanks to performance of the Abenomics policy, Japanese economy had quite optimistic signals although all difficulties were not wholly resolved. In January 2013, BOJ set forth the target of 2 % inflation and performed this target through quantitative easing. BOJ mainly repurchased short-term bond in its assets purchasing plan from the beginning of 2014 [2]. BOJ also showed that monetary and financial policy would solve almost problems in short term and structure reform would be a long-term plan of Mr. Abe. Monetary policy loosening would decrease value of Japanese Yen, open many chances for export, increase profit for enterprises, which would lead to higher salary, therefore personal consumption and shares price would increase. In the first week of April 2013, BOJ notified that it would extend the purchase of government bond and risk assets, which began a new stage of loosing monetary policy on quantity and quality.

Thanks to timely and suitable policy of the government and strong support from BOJ, Japanese economy in this stage had prosperity. Unemployment rate decreased strongly from 4.6 % (2011) to 3.4 % (2015), inflation rate increased from -0.3 (2011) to 0.8 % (2015), economic growth rate increased from -0.5 % (2011) to 0.5 % (2015), export also had tendency to increase at the end of 2015. Business belief of Japanese enterprises increased most strongly in 6 last years.

Conclusion

Through the above analysis, the overall picture on Japanese economy from 1945 to now has been highlighted, we can see roles of BOJ in Japanese economy. When the economy falls into crisis, BOJ will be a powerful rescuer to untie important knots, help the economy restore by its regulating tools such as deposit interest rate, lending interest rate, exchange rate adjustment, support and relief packages etc. However, BOJ doesn’t still prove all abilities because it still depends on government. Although BOJ has certain independence in target, tools, personnel and finance, there are still some certain restrictions such as relative dependence on Ministry on apparatus organization; maintaining frequent relationship with the government to “exchange” and “share” viewpoints on policy; too short term of office of the bank governor (5 years); budget finance (through credit). All the above things show that BOJ doesn’t still have perfect independence, it still puts up with much pressure from powerful apparatus, and therefore it doesn’t still prove all abilities in developing Japanese economic development.

References:

1. Luu Ngoc Trinh (1998). Japanese Econmony — The ups and downs in history, Statistics Publishing House, Hanoi, page 187.
2. Tran Quang Minh, Tran Minh Nguyet (2014). Japanese economy: Loking back on one year of Abenomics policy”, Northeast Asian Studies Journal, No. 2(156), 2/2014, page 22.