Introduction to Central Bank

A central bank, reserve bank, or monetary authority is a public institution that manages the nation's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the nation's monetary base, and usually also prints the national currency, which usually serves as the nation's legal tender. Examples include the European Central Bank (ECB), the Federal Reserve of the United States, and the People's Bank of China. The primary function of a central bank is to manage the nation's money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually also have supervisory powers, intended to prevent commercial banks and other financial institutions from reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference.

Central Bank of Japan (THE BANK OF JAPAN)

With the passing of the Bank of Japan Act in 1882, the Bank of Japan (BOJ) was officially established as the nations first central bank and is one of the worlds oldest central banks. The banks headquarters are located in Tokyo, however the face of the bank is considered to be the Osaka branch. In the midst of World War II, the Bank of Japan Law (the Law of 1942) replaced the aforementioned act and set new guidelines for the bank. Although several changes were subsequently made to the Bank of Japan Law (many by Allied occupiers), it was only heavily revised in 1997 due to the changes of the global economy. The new law emphasized transparency and increased independence of the bank from the government.

Previously, the lack of independence from the Government was one of the marked differences between the Bank of Japan and other central banks like the Federal Reserve and the European Central Bank. In Japan, the government does have an effect on policy and the Governor of the bank must work together with the Prime Minister in order to be effective, which will ensure that the nations monetary policy will fit with the governments economic policy. While the new legislation provided some separation between the two institutions, they are still linked. For instance, the Bank of Japans budget must still be approved by the government. Regardless of the new laws, in order for the bank to achieve its goals, collaboration between the Governor of the bank and the Prime Minister is required. Failure to do so could lead to an ineffective administration, such as the one held by previous Governor Masaru Hayami, who often bickered with the Prime Minister. The Bank of Japans decision making body is known as the Policy Board, which consists of the governor, two deputy governors and six other members. All nine members are appointed by the Cabinet, Japans executive branch, and approved by the Diet (the legislature) for a term of five years. The Policy Board meets frequently, but two meetings per month are solely dedicated to discussing monetary policy. Decisions on monetary policy and on how to achieve the banks goals are made through a majority vote of the Policy Board.

History

The Act of 1942 was revised completely in June 1997 under the two principles of "independence" and "transparency." The revised act (the Act) came into effect on April 1, 1998. The Bank of Japan was established under the Bank of Japan Act (promulgated in June 1882) and began operating on October 10, 1882, as the nation's central bank. The Bank was reorganized on May 1, 1942 in conformity with the Bank of Japan Act (hereafter the Act of 1942), promulgated in February 1942. The Act of 1942 strongly reflected the wartime situation: for example, Article 1 stated the objectives of the Bank as "the regulation of the currency, control and facilitation of credit and finance, and the maintenance and fostering of the credit system, pursuant to national policy, in order that the general economic activities of the nation might adequately be enhanced." The Act of 1942 was amended several times after World War II. Such amendments included the establishment of the Policy Board as the Bank's highest decision-making body in June 1949.

Reorganization
The BOJ was reorganized in 1942 Under the Bank of Japan Act of 1942. There was a brief post-war period during the Occupation of Japan when the bank's functions were suspended, and military currency was issued. In 1949, the bank was again restructured. In the 1970s, the Bank's operating environment evolved along with the transition from a fixed foreign currency exchange rate and a rather closed economy to a large open economy with a variable exchange rate. However, since the introduction of the new law, the Bank of Japan has persistently rebuffed government requests to stimulate the economy. In recognition of the fact that currency and monetary control is a component of overall economic policy, the Bank of Japan shall always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government's economic policy shall be mutually harmonious. During the entire post-war era, until at least 1991, the Bank of Japan's monetary policy has primarily been conducted via its 'window guidance credit controls (which are the model for the Chinese central bank's primary tool of monetary

policy implementation), whereby the central bank would impose bank credit growth quotas on the commercial banks. The tool was instrumental in the creation of the 'bubble economy' of the 1980s. It was implemented by the Bank of Japan's then 'Business Department'

Objectives
The Act sets the Bank's objectives "to issue banknotes and to carry out currency and monetary control" and "to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of stability of the financial system." The Act also stipulates the Bank's principle of currency and monetary control as follows: "currency and monetary control by the Bank of Japan shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy."

Mission of bank of japan

The BOJs first mission is to maintain price stability. In other words the goal is to create a situation where there is neither inflation nor deflation. In order to achieve this, the bank conducts monetary policy by buying or selling securities on the open market and altering the interest rate. Recently, Japan was suffering from deflation and was maintaining a Zero Interest Rate Policy (ZIRP) in order to spur the economy, which is still in effect today. Although ZIRP is a valid method to restore economic health, once implemented it severely hampers the BOJs future monetary policy efforts because it cannot lower the interest rate from 0%.The second mission of the BOJ is to ensure the stability of the financial system and to develop the economy. In order to achieve this, the bank engages in the following activities: issuing banknotes, providing settlement services, international activities, government securities operations, and compiling economic data. The other missions of the Bank of Japan are as follows Issuance and management of banknotes Implementation of monetary policy Providing settlement services and ensuring the stability of the financial system International activities Treasury and government securities-related operations Compilation of data, economic analyses and research activities

There are 15 departments at the Bank's Head Office the Bank has 32 branches and 14 local offices in Japan, and seven overseas representative offices.

The Departments in the bank of Japan are as follows

Secretariats of the bank of Japan Internal auditors office Monetary affairs department Financial system and bank examination system Payment and settlement system department Financial markets department Research and statics department International department Currency issue department Operations department Information system service department Public relation department Personal and corporate affairs department Administration department Institute of monetary and economic studies

Capital
The Bank is capitalized at 100 million yen in accordance with the Act. About 55 percent of the capital is subscribed by the government. The Act states that "of the amount of stated capital set forth in the preceding paragraph, the amount of contribution by the government shall be no less than fifty-five million yen."The Act does not grant holders of subscription certificates the right to participate in the Bank's management, and, in the case of liquidation, only gives them the right to request distribution of remaining assets up to the sum of the paid-up capital and, if any, the special reserve. Dividend payments on paid-up capital are limited to 5 percent or below in each fiscal period.

Functions of bank of japan

Issuance and management of Bank notes The Bank of Japan issues banknotes (officially referred to as Bank of Japan notes) as the nation's sole "issuing bank." It employs a wide range of measures to prevent counterfeiting, including watermarks, special inks, and microlettering. Because banknotes are used in all kinds of transactions, the Bank pays close attention to the control of the physical quality of banknotes so that the public is able to use the notes with confidence Worn and soiled banknotes make it more difficult to distinguish genuine notes from counterfeits, which may proliferate as a result. Therefore, the Bank of Japan checks the validity and cleanness of each of the banknotes which return to the Bank, destroying badly worn notes and putting only those that are in good condition back into circulation. The conduct of monetary policy The Bank controls the overall volume of money in the economy and interest rates on a daily basis through money market operations, i.e., through its sales/purchases of money market instruments such as Japanese government securities (JGSs) to/from private financial institutions. The Bank's policy to stabilize prices, thereby contributing to the sound development of the national economy, is called monetary policy. For example, if Japan's economy weakened so that sales of goods declined and there was downward pressure on prices, the Bank would buy money market instruments such as JGSs from private financial institutions, thus increasing the volume of money in the economy and lowering interest rates. More money in circulation and lower rates enable firms to borrow money more easily and act as a spur to economic activity: more people purchase goods and services, and thus prices are less likely to decline.

Conversely, if economic activity heated up, with goods selling too well and upward pressure on prices, the Bank would reduce the volume of money in the economy and would raise interest rates. Accordingly, economic activity would be dampened and prices would be unlikely to rise. The Bank conducts monetary policy to achieve price stability, thereby contributing to the stability of the economy as a whole. The Bank believes that price stability is a prerequisite for stability in our daily lives and for realizing sustainable and balanced economic growth. Providing settlement services and ensuring the stability of the financial system The term "financial system" refers to the collective mechanisms through which financial institutions intermediate funds between depositors and investors and provide payment and settlement services, such as funds transfers between accounts. The financial system constitutes a fundamental social infrastructure that supports our daily lives, as is the provision of electric power, water, and gas. The Bank of Japan conducts various activities to maintain this particular infrastructure.

Provision and Maintenance of the Settlement System Financial transactions between financial institutions are settled by transferring funds across the current accounts held by each institution at the Bank of Japan. Because it offers accounts to financial institutions, the Bank is often referred to as the "banks' bank." The amount settled across the accounts at the Bank of Japan totals over 300 trillion per day. In order to facilitate such funds transfers, the Bank operates an electronic settlement system, the Bank of Japan Financial Network System (BOJ-NET), and is constantly working to upgrade and improve the efficiency of the settlement system.

Monitoring and Examination of the Financial and Management Conditions of Financial Institutions

The sound management of individual financial institutions is a prerequisite to the stable functioning of the financial system. The Bank of Japan thus closely monitors trends in the loans and deposits of financial institutions, and the Bank's staff regularly visits financial institutions to carry out an "on-site examination" to review their financial and management conditions. Function as the Lender of Last Resort When a financial institution becomes insolvent and this is likely to pose a threat to the financial system, the Bank of Japan may provide emergency liquidity to the troubled institution in its role as the "lender of last resort" in an effort to prevent financial disorder. Treasury and Government securities related operations As the "government's bank," the Bank of Japan handles receipts and disbursements of treasury funds, including acceptance of tax monies and payment of public works expenditures and public pensions. It also conducts accounting and bookkeeping for government agencies. In addition, the Bank deals with the entire business of Japanese government securities, namely issuance, registration, interest payment, and redemption. Settlement of funds and Japanese government securities arising from the above operations are facilitated by the BOJ-NET.

International Activities of Bank of Japan

The Bank of Japan engages in the following international activities.

International Financial Transactions and Operations The Bank provides yen accounts to central banks and governmental institutions overseas. It also makes capital subscriptions and loan extensions to international organizations such as the Bank for International Settlements (BIS) and the International Monetary Fund (IMF). Intervention in the Foreign Exchange Markets The Bank closely monitors exchange rate developments. It intervenes in the foreign exchange market as an agent of the Minister of Finance, when necessary. International Exchange of Views The Bank of Japan frequently participates in discussions held at various international forums, such as the meetings at the BIS, the G7, and the IMF. Topics of discussions range widely, from monetary policy and the foreign exchange markets to bank supervision and settlement systems. Exchange of views with overseas central banks is important in strengthening cooperative relationships among the central banks. Compilation of data, Economic Analyses and Research Activities To ensure appropriate implementation of monetary policy, the Bank of Japan must have an accurate understanding of the overall economic and financial conditions in Japan. To this end, the Bank compiles various statistics, including the Corporate Goods Price Index, the Corporate Service Price Index, and money stock. It also conducts a regular business survey known as the Tankan-- Short-Term Economic Survey of Enterprises in Japan. Based on these and a wide variety of other statistical data, including those prepared by government agencies and other organizations, the Bank reviews Japan's financial and economic conditions. In addition, the Bank's head office and branches make direct contact with a large number of firms to directly receive their views on the economy. The Bank also conducts opinion polls of the public when necessary, to which Bank's careful attention is paid. The Bank explains its view mainly through the publication of results of these analyses. Additionally, the Bank is able to receive the public's views and opinions through the Public Relations Department.

Further to the above activities, the Bank is also engaged in theoretical research from a longer-term perspective, on issues such as monetary policy and the financial system. How the Bank of Japan Affects the Foreign Exchange Market The Japanese economy is very dependent on importing and exporting goods and services. Nearly all of their natural resources, such as oil are imported and a large portion of their businesses products/services are exported. As a result, the Bank of Japan used to peg the Yen to the U.S. Dollar at a fixed rate in order to remain competitive in their exporting operations. Eventually, they allowed the Yen to float, but are still known to occasionally intervene in the Foreign Exchange Market and artificially manipulate the price of the USD/JPY. In the past, traders have taken advantage of their intervention and reaped tremendous profits, so it is important to follow the press releases of the BOJ for any hint of intervention. Also, the BOJs interest rate decisions have a profound effect on the Yens exchange rate. For example, if the BOJ decides to raise the interest rate, then returns on Yen assets will appear more favorable to investors and the Yen will appreciate in value. This will create a situation where imports are cheaper for Japanese citizens and their exports become more expensive to the rest of the world. Currently with interest rates at 0%, Japanese investors are some of the largest investors in foreign securities (in a recent quarter they purchased billion worth), but if returns in Japan were to increase, then investors will be more inclined to sell their foreign assets and purchase domestic ones. On the other hand, if the BOJ chooses to lower the interest rate, then Yen assets will not be as appealing to investors and the Yen will depreciate in value. This scenario causes imports to be more expensive for Japanese citizens, but their exports become more appealing to other nations. Currently, this scenario is impossible because interest rates are at 0%.