Monetary policy consists of the

actions of a central bank, currency

board or other regulatory committee
that determine the size and rate of
growth of the money supply, which
in turn affects interest rates.
Monetary policy is maintained
through actions such as modifying
the interest rate, buying or selling
government bonds, and changing the
amount of money banks are required
to keep in the vault.
 Outline of
 Price Stability and the "Price
Japanese
Stability Target"monetary
of 2 Percent policy
 Monetary Policy and Money
Market Operations
 Monetary Policy Meetings
(MPMs)
 Independence and
Accountability to the Public
Price Stability and the "Price Stability Target"
of 2 Percent

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."
Price stability is important because it provides the foundation for the nation's economic activity.
In a market economy, individuals and firms make decisions on whether to consume or invest,
based on the prices of goods and services. When prices fluctuate, individuals and firms find it
hard to make appropriate consumption and investment decisions, and this can hinder the
efficient allocation of resources in the economy. Unstable prices can also distort income
distribution.
On this basis, 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.
•
 Monetary Policy and Money Market Operations

• The Bank's Policy Board decides on the basic stance for monetary
policy at MPMs. The Policy Board discusses the economic and financial
situation and then decides an appropriate guideline for money market
operations at MPMs. After every MPM, the Bank releases its
assessment of economic activity and prices as well as the Bank's
monetary policy stance for the immediate future, in addition to the
guideline for money market operations.
• According to the guideline for money market operations decided at
MPMs, the Bank controls the amount of funds in the money market,
mainly through money market operations.
• The Bank supplies funds to financial institutions by, for example,
extending loans to them, which are backed by collateral submitted to the
Bank by these institutions. Such an operation is called a funds-
supplying operation. The opposite type of operation, in which the Bank
absorbs funds by for example issuing and selling bills, is called a funds-
absorbing operation.
•
Monetary Policy Meetings (MPMs)

MPMs are held eight times a year, each time for two days. At the
MPMs, the Policy Board members discuss and decide the
guideline for monetary market operations. The monetary policy
decisions are made by a majority vote of the nine members of
the Policy Board, which consists of the Governor, the two
Deputy Governors, and the six other members.
In addition to in-depth research and analysis on economic and
financial conditions, the Bank studies and examines various
matters concerning monetary policy, such as monetary policy
strategies and instruments as well as the financial system. The
Bank makes use of its research findings as the basis for
deciding monetary policy.
 Independence and Accountability to the
Public
The experience of a number of countries shows that conduct of monetary
policy tends to come under pressure to adopt inflationary policies. For this
reason, it has become the norm throughout the world for monetary policy to
be conducted by a central bank that is neutral and independent from the
government, and equipped with the requisite expertise.
The Act states, "The Bank of Japan's autonomy regarding currency and
monetary control shall be respected." Of course, it is important that the
Bank's monetary policy and the basic stance of the government's economic
policy be mutually harmonious, and thus it is stipulated that the Bank shall
"always maintain close contact with the government and exchange views
sufficiently."
Monetary policy has a significant influence on the daily lives of the public,
and thus the Bank should seek to clarify to the public the content of its
decisions, as well as its decision-making processes, regarding monetary
policy. In view of this, the Bank immediately releases its decisions on
monetary policy, such as the guideline for money market operations and its
views on economic and financial developments, after each MPM
Exchange rate policy in Japan
 Exchange rate policy

• The exchange rate of an economy affects aggregate demand through

its effect on export and import prices, and policy makers may exploit
this connection.
• Therefore, whenever the exchange rate changes there will be a double
effect, on both import and export prices. Changes in import and
export prices will lead to changes in import and export volumes,
causing changes in import spending and export revenue
• For example, if £1 exchanges for $1.50 on the foreign exchange
market, a UK product selling for £10 in the UK will sell for $15 in
New York. If the exchange rate now appreciates, so that £1 buys
$1.60, the UK product in New York will now sell for $16.
Assuming that demand in New York is price inelastic, this is good
news for UK exporters because revenue in USDs will rise.
However, if demand is elastic in New York, the effect of the
appreciation of sterling would be damaging to UK exporters.
• If the UK also imports goods from the USA, the rise in the
exchange rate would mean that a $10 US product is now cheaper in
London, falling from £6.67p to £6.25p. Importers do relatively well
from the appreciation of the pound, in that the cost of imported
raw materials or finished goods falls
 Yen
• The yen is the official currency of Japan and is
denoted by JPY. It is the third most-traded currency
in the foreign exchange market after the Euro and
the US dollar. The Japanese currency is widely used
as a reserve currency after the US dollar, the Euro
and the pound sterling
 History of the Japanese Yen
Exchange Rate

• The Japanese yen has been appreciating since December 1971.

During the 1971-1985 phase, the yen appreciated without any
fluctuation in trend. After the Plaza Accord in 1985, the
Japanese currency spiked. Against this backdrop, Japanese
industries invested abroad to capture offshore markets. This, in
turn, depressed domestic industrial growth and employment.
Domestic investments dipped and all these led to deflation in
the Japanese economy. At this juncture, the Japanese
government intervened in the forex market to capture the yen
appreciation in order to boost the export sector. In early 2009,
the yen benefited from the economic crisis. This was mainly due
to the high repatriation of Japan’s extensive foreign
investments.
• Japan depends on the Ministry of Finance for its exchange rate
policies. However, it is the Bank of Japan Policy Board that
publishes the exchange rate statements. The interest rates set by
the Bank of Japan has greatly influenced the exchange rate of the
yen. A rise in the interest rate results in higher returns from yen
assets. This further pushes up the currency. This has a negative
impact on the export side, although the import bills decline.