Glossary: Bank of Japan

The Bank of Japan was established in 1882 after the overthrow of the feudal system. Since 1942 the Bank's remit has been the regulation of the currency, the facilitation of credit and finance, and running the credit system in line with national policy.

Constitutionally, the bank has little independent power, but in practice the Ministry of Finance delegates a substantial amount of policy to it. The Ministry of Finance still has the ultimate power of decision, but it is regarded as highly unlikely that the government would resort to this provision and has so far never done so.

Personnel

The government appoints both the Bank's governor, who serves for five years, and its directors, who serve for four. The governor can be reappointed at the end of the five- year term.

The Policy Committee consists of the chairman, two government representatives, without voting rights, who represent the Economic Planning Agency and the Ministry of Finance, and four appointed members with knowledge of the business of the large city banks, regional banks, commerce and industry, and agriculture respectively.

Discount rate

The overnight discount rate or ODR used to be the most important instrument of the Bank of Japan's monetary policy. This is the rate at which the bank will lend to private financial institutions.

The current interest rate structure in Japan means that changes in the discount rate do not usually affect the amount borrowed from the central bank. The discount rate is usually set lower than the call and bill market rates; consequently, banks would like to borrow as much as possible at the discount rate.

However, a change in the discount rate remains important because it reflects the policy stance of the Bank. For example, if the discount rate is increased, private banks may anticipate a tightening and raise their lending rates in turn. This is termed the announcement effect, something that the Bank of Japan usually attempts to maximise through the timing of changes in the discount rate.

Call rate

Special importance is now attached to the overnight call rate or OCR. The Bank of Japan is trying to keep this rate as close as possible to zero.

Open market operations

The Bank of Japan can affect the reserve positions of private banks, and thus the money market rates, through its open market operations.

These have come under scrutiny in recent months because the central bank is trying to ease monetary policy with interest rates already at zero.

The bank's open market operations can be divided into two categories: short-term adjustments and long-term money supply operations.

Short-term operations are used to neutralise daily or seasonal excess supply/demand of funds in the money market. The bank enters the market and supplies/absorbs funds in order to influence interest rates.

Long-term operations have the objective of supplying money for future economic growth, usually through the purchase of government bonds.