The Bank of Japan (BoJ)

The central bank of Japan is the Bank of Japan (BoJ). This is the financial institution that is responsible for the key monetary policy. It has a complete autonomy over the setting of monetary policy since 1998, when this independence was granted from the Ministry of Finance (MoF). Nevertheless, the MoF is still responsible for the policies regarding the foreign exchange rates. Under its directions the BoJ has to execute the official Japanese foreign exchange activities.

There are nine members in the BoJ's Policy Board - a Governor, two Deputy Governors and six additional members. Two times every month meetings are held, after which information on the decisions taken is given in the form of briefings and press releases. The Policy Board issues a Monthly report and a Monthly Economic Report. Thus, you should pay special attention to these since they reflect any attempts of the government to stimulate economic growth through the decided new monetary policies.

Currency changes are impacted by the decisions taken by the MoF and the BoJ. This stems from the fact that the MoF is in charge of the foreign exchange activities. So, the announcements made by MoF's officials should be closely watched.

The Japanese economy is characterized as being export driven. This means that the government tends to be in favor of a weak JPY so that the exports are at lower prices. An increase in the value of the JPY will result in a negative reaction on the part of the BoJ and the MoF. Their comments may move the market and should not be overlooked since the economic history of Japan is full with examples of Japanese government interventions so that the value of the JPY is adjusted to the best interest of the country's economy.

In order to control the monetary policy of Japan it applies open market operations so that the uncollateralized overnight call rate is under control. However, the discount rate cannot be further decreased so that growth, consumption and liquidity are stimulated because it is at a zero level. Liquidity manipulations are needed so that zero interest rates are achieved. This is done through the direct purchasing and selling of bills, repos or Japanese government bonds.

Several actions are being undertaken so that BoJ can cope with the non-performing loans. Some of the strategies include:

• Nationalization of a portion of the private banks
• Repackaging the bad debt of the banks and selling it at a discount rate
• Targeting an inflation level

None of these activities has been put into action yet, but they represent alternatives that are being considered.

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