Decision-Making at the Bank of Japan

The Bank of Japan (BOJ), one of the most important economic and legal institutions in the world, presents a fascinating puzzle to those interested in the economic and legal organization of international finance. (1) Several of the BOJ's peer institutions -- notably, the German Bundesbank and the U.S. Federal Reserve Board -- have long enjoyed a degree of independence from the "political" branches of the government. (2) Other central banks in both the developed and the developing world are gaining legal independence, and the new European central bank, if it is established, will enjoy similar autonomy. (3) Yet the BOJ operates under a wartime charter, enacted in 1942, which subjects the Bank and its Governor to the apparently plenary control of the Ministry of Finance (MOF). (4) Based on legal form, the BOJ has been one of the least independent central banks in the developed world, and trails even many developing countries. (5) In 1997, as this is being written, Japan is preparing to revise its central bank law to create a higher degree of formal legal independence. (6) Yet, as will be seen, there is reason to doubt that the new law will fundamentally alter the balance of power between the BOJ and MOF, although it does represent an important change, the effects of which are difficult to predict with certainty. (7) Why does the pattern observed in Japan differ in this regard from much of the rest of the developed world? On top of this puzzle is a related anomaly. Political theory predicts, and the empirical research confirms, that at least in the developed world, the legal independence of a country's central bank tends to correlate with lower inflation. (8) The intuition is that an independent central bank will be able to resist the demands of political actors that it print money to pay the government's debts or that it engage in stimulative monetary policy in order to enhance the governing party's re-election prospects. On this theory, japan ought to have high inflation. But it doesn't. Japan's inflation rate is one of the lowest in the developed world, and has been at the low end of world inflation rates for many years. (9) This paper attempts to provide some explanation for the role of the BOJ. I argue that the independent-dependent measure, which is commonly used to analyze the relationship between a central bank and the government, may not be a complete framework to use when considering the role of the BOJ. Viewed from the perspective of the independent-dependent measure, the BOJ sometimes displays what appears to be independence of action and sometimes follows the lead of the MOF. A somewhat different perspective may be indicated as a supplement to the univocal measure of independence/dependence. I will offer two theories of the role of the Bank of Japan. The first draws on the remarkable political stability that characterized Japanese politics between the end of the Second World War and the recent past, a stability based largely on a commitment by the ruling party to pursuing policies designed to foster rapid economic growth. The second draws on a model of bureaucratic decision-making at the BOJ that appears to be richer and more complete than the model implied by the simple "independent-dependent" measure of central bank independence. I argue that the BOJ's decisions on monetary policy questions are arrived at through a process of "preclearance" in which decisions are thoroughly vetted and discussed by the relevant actors -- who may include officials of the Ministry of Finance as well as the BOJ -- before they are publicly announced. Preclearance allows the Bank to maintain a substantial degree of control over the decision-making process while at the same time subjecting the Bank to influences from without that render it accountable to the political system. These two explanations are linked, in that the preclearance system appears to work best in a stable political environment characterized by long-term, repeat-dealing relationships among the parties and where the economy is characterized by rapid economic growth -- i. …