Bank of Japan’s Monetary Policyin the 1980s: A View Perceived
from Archived and Other Materials
Masanao Itoh, Ryoji Koike, and Masato Shizume
This monographic paper summarizes views held by the Bank of Japan(hereafter BOJ or the Bank) in the 1980s regarding economic conditions
and monetary policy formulation, perceived from the BOJ archives andother materials from the period. From a historical viewpoint, the authors
see the 1980s as a watershed time for the Bank’s policy formulation, because the Bank acquired lessons for monetary policy formulation under alarge fluctuation in economic and financial conditions and innovated new
approaches for monetary policy formulation and money market management as stated below. First, during the 1980s the BOJ had to largely
consider the external imbalance in formulating policy, and attention began to shift towards price stability in the medium or long term by theend of the decade. Second, the large fluctuations in asset prices, money
supply, and commercial bank lending were closely monitored during thisperiod, but the Bank’s assessment about their impacts on macroeconomic
consequences in the medium to long term was insuﬃcient. A reflection ofthese lessons appears to evolve into a perspective on the Bank’s monetary
policy formulation that financial imbalances should be examined as a risk
for achieving price stability in the medium to long term. Third, in lightof ongoing financial deregulation during this period, the Bank started tochange monetary policy measures from those based on a regulated interest rate framework to those based on market operation with good use ofmoney markets and flexible interest rates.
Keywords: Monetary policy management; Price stability in the medium
and long term; Financial imbalance; External imbalance; Financial deregulation
JEL Classification: E52, N15
Masanao Itoh: Professor, Otsuma Women’s University and IMES, BOJ(E-mail:masaitoh@otsuma.ac.jp)
Ryoji Koike: Deputy Head of Monetary History Studies Group, IMES, BOJ(E-mail:ryouji.koike@boj.or.jp)
Masato Shizume: Professor, Waseda University and IMES, BOJ(E-mail:masato.shizume@waseda.jp).....................................................................................................................
An earlier Japanese version was presented at the workshop titled “Research in History Field withusage of the Bank of Japan Archive” held by IMES, BOJ, on April 28, 2014. The authors are
grateful to Professor Kazuo Ueda as the chair, Professor Tetsuji Okazaki as the discussant, andthe other participants of the workshop for helpful comments and discussions. The authors also
would like to thank the BOJ staﬀ for their helpful comments. The views expressed in this paper
are those of the authors and do not necessarily reflect the oﬃcial views of the BOJ.

MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015
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I. Summary
This monographic paper summarizes contemporary views held by the Bank of Japan(hereafter BOJ or the Bank) mainly in the 1980s regarding economic conditions andmonetary policy formulation, perceived from archived materials (formally, the materials stored in the Archive,1 Institute for Monetary and Economic Studies, Bank ofJapan) and other contemporary materials.2
The BOJ Archive stores a large number of materials produced inside the Bank during the 1980s. The authors digested many documents from that period in the Bank’s
archive as well as in the public. Among the archived materials, governor’s speeches at
general managers’ meeting, speeches at meetings with top executives of commercial
banks,3 letters from the head of the Policy Planning Department (formerly the Coordination and Planning Department), and letters from the head of the Market Operations
Department,4 were drafted at the departments in relation to monetary policy formulation. These documents appear to contain information about the Bank’s assessmentof economic conditions and policy stance. In addition to these archived documents,
the views expressed in Chosa Geppo (BOJ’s Monthly Bulletin, partly translated into
English as BOJ special papers) are also available, along with other public materials
containing views of BOJ-related personnel. We utilized all the information above insummarizing contemporary views of the Bank in that period.
In digesting documents and surveying a vast amount of information, we consider
three viewpoints in mind: (1) the Bank’s conceptual framework in formulating policy, (2) the Bank’s assessment against factors such as economic conditions which may
possibly aﬀect the Bank’s policy formulation and (3) the Bank’s recognition about con................................
1. The Bank of Japan established the Archives at IMES in 1999. The Archives acquire and preserve historical
documents (principally in Japanese) to make them accessible for social needs. As of the end of March 2014,
the catalog listed approximately 81,000 document titles.
2. As for references discussing monetary policy in the 1980s, see Okina, Shirakawa and Shiratsuka (2001)
written by BOJ oﬃcials, Ministry of Finance (2003a) edited by Japan’s Ministry of Finance, and Komineed. (2011) written as a part of a research project organized by Japan’s Cabinet Oﬃce.
3. So far as the authors read the archived materials, the BOJ general managers’ meeting was held four times per
year (January, April, July and October) during the 1980s, and the head of the Policy Planning Department
sent the text of the speeches to heads of the departments at the head oﬃce, general managers of the BOJ
branches, and general managers overseas. Also, the meeting with top executives of the regional banks washeld nine times per year, and the text of the speeches was sent to the general manager of branches and theheads of the local oﬃces. The Bank released an excerpt of the governor’s speech at each general managers’
meeting, and the text of speech appears to include closer perspective about contemporary recognitions of theeconomic conditions, policy stance in the near term and policy issues in the mid-term.
4. Letters from the head of the Policy Planning Department (formerly the Coordination and Planning Department) were personally signed by the head and sent to general managers of branches with personal name ofthe department’s head. Letters from the head of the Market Operations Department (formerly the Banking
Department and subsequently the Credit and Market Management Department) were also sent as personal
letters to general managers of branches and heads of local oﬃces as necessary. These letters were sent in theform of a personal letter of the department’s head, implying possible inclusion of personal views, rather thanan institutional document. The information in the letters was still shared institutionally within the Bank. It
appears that the letter from the head of the Policy Planning Department documented the background andperspective of policy actions thoroughly relative to contemporaneous releases. Among letters from the headof the Market Operations Department, those sent every quarter contained the policy orientation for window
guidance and background information such as lending attitudes of commercial banks and demand for loans
from borrowers.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

sistency between the actual policy action and the alternative action with domestic pricestability as the top priority. This paper mainly focuses on the 1980s, but we also try torecognize the position of monetary policy in the 1980s in relation to the policy before
the 1970s and the policy from the 1990s onward.
From a historical viewpoint, the authors position the monetary policy in the 1980s
as a watershed period, because the Bank learnt lessons about monetary policy formulation amid large fluctuations in economic and financial conditions and innovated
new approaches for monetary policy formulation and money market management asstated below. From various experiences, the lessons about financial imbalance or the
relationship between the financial bubble and monetary policy relatively have gatheredattention. Aside from these lessons, the 1980s can still be positioned as an importantwatershed period, in terms of a shift in policy priority from external imbalance to pricestability for the medium and long term, and a further use of market functions underongoing financial liberalization.
(1) Under the circumstances in the 1980s, the rectification of the external imbalance had been imperative for Japan, and the Bank had to consider such circumstances in formulating and implementing monetary policy. In the late 1980s,
however, the orientation of monetary policy began to shift toward price stability
in the medium and long term.
Specifically, the Bank always considered the importance of price stability asa policy goal in formulation and implementation of monetary policy, partly on
the basis of experience with the first oil crisis. At the same time, the Bank also
considered other important factors such as domestic economic conditions, foreignexchange rates and external balance. As mentioned below, during most of the
1980s the rectification of external imbalance between United States and Japan
had been Japan’s top priority for Japan’s policy goal. It appears that the Bank’s
did not intentionally prioritize a consideration for price stability as the top priority
in monetary policy formulation during some time in the 1980s. Then, by the endof the 1980s, external imbalance tended to be small. The changing circumstances
allowed the Bank to shift policy priority from external imbalance to domestic
economic conditions, and it started to crystallize the principle in monetary policy
formulation toward price stability in the medium to long term.
• During the period between 1982 and 1983, the yen exchange rate frequently
weakened against the U.S. dollar mainly due to a high level of the U.S. interest
rates. Monetary policy tended to be relatively tightened during this period, forfear that a lower interest rate might induce a weaker yen, an increase in exports
and growth in the external imbalance.
• From the latter half of 1986 to the beginning of 1988, monetary policy tended tobe relatively eased, from the perspective that domestic demand shall be enlarged
to increase imports in line with international policy coordination for coping witha slow adjustment in external imbalance in spite of a sharp appreciation of yen
after the Plaza Accord.
• By the end of the 1980s, external imbalance began to be smaller and then fo-

99

cuses of economic friction between the U.S. and Japan shifted toward structuralissues such as trade barriers of particular industries, land policies and closed
aspects of distribution networks. The Bank gradually changed its recognition
that the changes in circumstances allow the Bank to place a greater focus ondomestic economic conditions rather than external imbalances in conducting
monetary policy. Furthermore, the Bank began to state the idea more clearly
that the goal for monetary policy is to contribute to the sound development ofJapan’s economy with the help of price stability in the middle to long term.
(2) Although the large fluctuations in asset prices, money supply and commercialbank lending were closely monitored, the Bank’s assessment about their impacts
on macroeconomic development in the medium to long term was insuﬃcient. A
reflection of these lessons appears to evolve into a perspective on the Bank’s monetary policy formulation that financial imbalances should be examined as a risk
for achieving price stability in the medium to long term.
Regarding the relationship between monetary policy and fluctuations of asset
prices or money stock, the Bank in the latter half of the 1980s had considerationand concern for a potential risk of excessive easing of monetary policy. However,
the risk was considered mainly in relation to price stability in the near term as
stated below, and the Bank was not able to adequately assess the impact of financial imbalances on macroeconomic development in the medium to long term. The
resulting readjustment of balance sheets had continued for more than ten years
during the 1990s and early 2000s, and as a result, this had probably amplified
fluctuations in economic conditions. Regarding the monetary policy formulation
today from two perspectives, the origin of the second perspective examining risks
in a longer term such as financial imbalance can be attributed to the lessons learnt
in monetary policy implementation from the latter half of the 1980s onward.5• In 1988, when the enlargement of the bubble economy was considered to remain intact in retrospect, the Bank did not tighten monetary policy completely.
Regarding this background, the Bank considered that there was a pause in speculative behavior possibly igniting inflation and that an enhanced supply capacity
by larger investments would contribute to price stability. The Bank appears tohave assessed partly that the desirability of monetary tightening slightly diminished.
• After the end of 1990, when the eﬀect of tightened policy gradually spilled
over, the Bank appears to have kept its assessments that economy maintained
steady growth, that potential detrimental impact from a readjustment of balance
sheets accompanied with a collapse of the bubble economy would not be very
severe, and that normalization of bubble economy rather contributed to sounddevelopment of Japan’s economy. The Bank maintained the tightening during................................
5. The Bank today conducts monetary policy based on its assessment of economic activity and prices from two
perspectives. The first perspective is examining whether the outlook follows a path of sustainable growthunder price stability, and the second perspective is examining risks in a longer term, such as financial imbalances in particular. Please see BOJ (2013).

100 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

the first half of 1991.
• After the latter half of the 1970s, the Bank considered money supply of muchgreater importance as the key indicator for monetary policy. At the same time,
the Bank has never positioned money supply as the formal intermediate target
for monetary policy. The Bank rather regarded money supply as one indicator
to pay careful attention to together with other various indicators. Furthermore,in the 1980s, it was pointed out that the relationship between money and prices
had become less stable partly as a result of financial deregulation. The Bank
had maintained its perspective that money supply should be considered as one
indicator to pay careful attention to together with other indicators in monetary
policy formulation. Despite a high growth rate in money supply observed in thelatter half of the 1980s, easy monetary conditions were maintained mainly due
to very stable prices in that period.
(3) In light of ongoing financial deregulation during this period, the Bank started
to change monetary policy measures from those based on a regulated interest rate
framework to those based on market operation with good use of money markets
and flexible interest rates.
Financial deregulations in the 1980s, particularly an increase in the proportion of free interest rate instruments, aﬀected the conduct of monetary policy both
directly and indirectly as stated below. During the period in the 1980s and before that, monetary policy implementation was based on the regulated interest rate
framework, and the changes in oﬃcial discount rate as well as “window guidance” controlling lending directly were primary policy tools. However, among
the development of financial deregulation during the 1980s, the Bank increasingly
recognized that further use of interest rate adjustment through money market operations should be necessary in order to secure the eﬀectiveness and flexibility ofmonetary policy implementation. By the end of the 1980s, the Bank started toreform instruments and other methods of monetary policy implementation.
• During the period in the 1980s and before that, monetary policy was basically
implemented with changes in the oﬃcial discount rate accompanied by other interest rates under the regulated interest rate framework, and with window guidance in line with monetary policy stance under the oﬃcial discount rate. The
guidance was ex-ante restrictive guidance for adjustment of commercial banklending, conducted by the Market Operations Department.
• Financial deregulations accelerated after the U.S.–Japan Yen–Dollar Committee’s report was released in 1984, and both a decrease in the proportion of banklending in firms’ funding and an increase in the proportion of free interest rate
instruments in financial institutions’ funding occurred. The Bank became increasingly aware of the necessity that the further use of interest rate adjustment
through money market operations should be necessary in order to secure theeﬀectiveness and flexibility of monetary policy implementation.
• After November 1988, the practices in the money market were reviewed on
the Bank’s initiative, and circumstances conductive for monetary adjustments

101mainly by guiding market interest rates with open market operations were developed. In a tightening phase between 1989 and 1991, the Bank successively
raised the oﬃcial discount rate, partly because money market rates increased
reflecting changes in domestic economic conditions. The Bank also tended tomake more emphasis on the role of communication with market participants inmonetary policy implementation, such as policy change in larger considerationof its impact on market interest rates.
• Regarding window guidance, which started in 1947, the Bank respected commercial banks’ discretion of loan plans from the early 1980s in conducting theguidance. Then, the Bank exploited the guidance again to enhance the eﬀect ofmonetary policy during the tightening period from 1989 to 1991, and the Bankoﬃcially abolished the guidance from July 1991 onward.

II. Response to the Second Oil Crisis (from Late 1978 to Summer
1980, Phase I)• Against the second oil crisis, which occurred in late 1978, the Bank gave it toppriority to prevent import-price inflation from spreading over inflation in domestic prices, reflecting the lessons learnt from the first oil crisis with high domestic
inflation. Specifically, the Bank swiftly tightened monetary conditions, by preemptive and large raises of the oﬃcial discount rate five times from April 1979 to
March 1980, as well as by the tightened window guidance.
• The impact of oil price increases on reducing domestic income during the second
oil crisis was similar to that during the first oil crisis, but both the inflation indomestic prices and a deceleration in economic activity were relatively mild, asa result of a restrained inflationary mind with calm reactions by firms and households as well as the flexible conduct of monetary policy.
A. Advent of the Second Oil Crisis and the Bank’s Reaction (from Late 1978 toMid-1980)
1. Economic conditions before the second oil crisis (1978)
In Japan’s economy during 1978, the domestic prices weakened due to a productivity increase as a result of firms’ restructuring and enhanced eﬃciency, as well as the
yen appreciation. The year-on-year rate of change in wholesale price decreased fromaround 7 percent at end-1976 to minus 1 percent in fall 1978, and the year-on-year rate
in consumer prices decreased from the 10 percent level at end-1976 to the 3 percent
level in fall 1978 (Charts 2 (1) and (2)). Against a backdrop of restored price stability,
under the eﬀects of fiscal expansion for coping with an appreciation of the yen and alarger current account surplus along with a cease of the prolonged adjustments in employment and business investment, personal consumption recovered from spring 1978,
so did fixed investment after mid-1978. As a result, Japan’s economy maintained a
growth rate at about the 6 percent level year on year for 1978, which was recognized

102 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

as organic growth mainly led by domestic demand (Chart 1 (1)). Money supply (M2)
gradually increased its growth rate to 12 percent year on year at end-1978 from the 10
percent level at top 1978, and a future increase in inflationary pressure was a concern(Chart 5 (2)).6 , 7
On the external front, Japan’s current account surplus8 grew in 1978, accompanied
by yen appreciation, mainly reflecting an expansion of the U.S. economy and increasein import demand for Japanese products, such as competitive fuel-eﬃcient cars (Chart 3(2)). The “locomotive theory,” according to which the world economy should be led by
the U.S., Japan and West Germany as the locomotives, started to be prevalent overseas
around early 1977. Against this backdrop, a rise in Japan’s current account surplus wasworsening the trade friction between Japan and the U.S., which experienced a rise incurrent account deficit.9
2. The role of money supply in the latter half of the 1970s
After the second half of the 1970s, the Bank came to consider money supply of muchgreater importance in monetary policy implementation, reflecting the lesson that thefirst oil crisis, together with increasingly excess liquidity, had resulted in subsequent
higher inflation (see Appendix 5 for Role of the Money Supply).10 Specifically, theBank released a paper, “Role of the Money Supply in the Japanese Economy,” in 197511
and then started to publish in the first month of every quarter a projection (or forecast)of the increase in the money supply for the July–September quarter of 1978 and afterwards.12
At that time, the major central banks in the West regarded money supply as theintermediate target for monetary policy. Meanwhile, the Bank of Japan did not position
money supply as the oﬃcial target for monetary policy, and rather regarded money
supply as one indicator to pay careful attention to together with other various indicators.
As a backdrop of this perspective by the Bank, two factors are pointed out in theCentennial History of the Bank of Japan. First, the relationship between money supply and prices, as well as economic activity, varied depending on time and economic
conditions, and the Bank considered it diﬃcult to publish a suﬃciently stable oﬃcial target. Second, the oﬃcial target in the form of a fixed number with normative................................
6. BOJ (1979), pp. 1–10 and BOJ (1986a), pp. 463–467. In this paper, words in double quotations (“ ”) inbody text, with footnotes at the end of either segment, sentence or paragraph, indicate either a citation froman English reference if available, or the authors’ translation of a Japanese reference (such as the archived
documents). The cited parts without double quotations and with footnote indicates indirect citations.
7. Mr. Yukitsugu Nakagawa was the head of the Coordination and Planning Department from April 1971 to
May 1973, and then the head of the Market Operations Department from May 1973 to April 1975, and theexecutive director for policy planning from December 1976 to March 1980. In his book Nakagawa (1981,
p. 106), he wrote about the policy formulation around 1977 and 1978, which was to the eﬀect that if thegrowth rate of money supply would be 50 percent higher than the nominal economic growth rate, where thegrowth rate of money supply was around the 16 percent level, monetary policy should be tightened without
question.
8. Japan’s current account registered a 0.7 billion dollar deficit in 1975, but then registered a 3.7 billion dollar
surplus in 1976, 10.9 billion dollar surplus in 1977 and 16.5 billion dollar surplus in 1978 on an increasing
trend.
9. BOJ (1986a), p. 459.
10. Nakagawa (1981), p. 63 and p. 67.
11. See BOJ (1975b).
12. BOJ (1978), p. 39.

103

significance could later be interpreted regardless of the Bank’s intention in transient
economic conditions, and could be detrimental for flexibility and options in adjustable
implementation of monetary policy.13
3. Advent of the second oil crisis (late 1978)
Production and export of oil from Iran, then the second largest oil producer of the
OPEC (Organization of Petroleum Exporting Countries), sharply dropped due to an
unstable political situation. OPEC countries decided to raise the price of crude oil at
the OPEC conference in December 1978. After the occurrence of the Iranian Islamic
revolution in February 1979, crude oil exports from Iran remained at a low level. The
price of crude oil was further raised frequently during the period between 1979 and
1981, resulting in the increase by a factor of 2.8 during this period (Chart 2 (3)-I and
II).14
4. Economic conditions after the second oil crisis (from 1979 to mid-1980)
As crude oil prices were surging and the “oil-vulnerability” of the Japanese economy
with a high dependence on oil imports was highlighted in the exchange market, thedepreciation of the yen progressed from the end of 1978 to spring in 1980 (Chart 3 (1)I). Wholesale prices rose rapidly from early 1979 to the first half of 1980 in responseto the rise in crude oil prices and the weakening of the yen, reaching the 18 percent
level on a year-on-year basis in April–May 1980. Consumer prices also rose at a fasterpace since mid-1979 and the year-on-year change reached around 9 percent in August–
September 1980, reflecting the increase in import prices, but the inflationary eﬀect on
domestic final demand goods was limited compared to the situation during the firstoil crisis, and did not result in the increase in domestic prices in general (Charts 2(1) and (2)-I).15 At the same time, the year-on-year growth rate of the money supply(M2+CD16 ) dropped from around 12 percent in early 1979 to the 7 percent level in fall1980 (Chart 5(2)-I).
Regarding economic activity, the earlier eﬀorts of the corporate sector for streamlining and improving eﬃciency continued. Domestic demand such as personal consumption and capital spending particularly remained strong during the year 1979 undera limited spillover of higher prices of products in domestic final demand. Exports also
recovered from fall 1979 owing to the improvement of price competitiveness and export profitability resulting from the depreciation of the yen as well as the expansion ofdemand for Japanese products with non-price competitiveness, including fuel-eﬃcientcompact cars and high-end electric appliances (Chart 1 (1)-I).17 In these circumstances,the economy remained on an uptrend of expansion toward mid-1980.
5. BOJ’s policy stance and actions
After the second oil crisis, the Bank put the highest priority on preventing the rise inimport prices from spreading over the domestic prices to cause homegrown inflation,................................
13. BOJ (1986a), pp. 479–480.
14. Hereafter, a Roman numeral following a chart number indicates a phase in accordance with each section in
the body text. Specifically, the Roman numerals from phase I to VII at charts correspond to sections II to
VIII, respectively.
15. BOJ (1980), p. 1 and BOJ (1981c), pp. 2–6.
16. CD (Certificate of Deposits) was commenced in May 1979.
17. BOJ (1980), pp. 9–14 and BOJ (1981c), pp. 2–6.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

reflecting that the Bank allowed an occurrence of higher inflation after the first oil crisisand thus had to implement tightening measures thereafter, which caused a prolonged
recession. Under such policy, the Bank tried to implement monetary policy flexibly bycontinuing early and significant rate increases starting April 1979, facing a clear uptrend of the wholesale prices as a probable early indicator for inflation in general prices.
The Bank raised the oﬃcial discount rate by 5.5 percent in total for five times toward
March 1980 (Chart 4-I)18 and called for commercial banks to restrain lending throughwindow guidance (Chart 5 (1)-I). In particular, faced with the accelerated surges inwholesale prices and higher changes in consumer prices in February 1980, the Bank
considered that a permeation of excessive inflationary expectation among the public
and a resulting “vicious circle of wages and prices” should be prevented.19 The Bank
firmly decided that “both the firms’ attitudes for price increases and the employees’
spring negotiations for higher wages should strongly be halted,” and raised the oﬃcial
discount rate during budget deliberations for the next fiscal year at the Lower Houseagainst the parliamentary custom.20 The Bank again raised the rate significantly by
1.75 percent one month later.
6. Diﬀerences in the situation between the first and second oil crises
In terms of the extent of the downward pressure of the oil price inflation on domestic
income via revenue transfer to oil producing countries, the second oil crisis had almost
the same direct impact as the first oil crisis. The Bank at that time recognized that“following the substantial increase in the crude oil price that began in late 1978, theincrease in the value of crude oil imports was equivalent to a little more than 3 per centof the nominal GNP, similar to that in the first oil crisis (about 4 per cent).”21
However, in Japan, the impact of the second oil crisis on prices including volatileeconomic conditions was relatively small compared to that of the first oil crisis.22 The
Bank at that time recognized the two major causes as follows:(1) Diﬀerence in the initial economic conditions at the time when the shock occurred
When the first oil crisis occurred (in October 1973), the economy was at a peak andthere was not much slack in terms of supply (in addition to a higher ratio of capacity
utilization). The year-on-year consumer price growth rate reached the high level of 16
percent. In contrast, when the second oil crisis occurred (in December 1978), consumer................................
18. The five raises in the oﬃcial discount rate were eﬀective on April 17, 1979 (from 3.5% to 4.25%), on July24, 1979 (to 5.25%), on November 2, 1979 (to 6.25%), on February 19, 1980 (to 7.25%), and on March 19,
1980 (to 9.0%). See BOJ Archives (1979a), BOJ Archives (1979c), BOJ Archives (1980b), BOJ Archives(1980c), and BOJ Archives (1979b).
19. BOJ Archives (1980a), p. 3.
20. BOJ Archives (1980b), pp. 2–3. See Appendix 1 for the contemporaneous framework of interest rate determination and related matters. In addition, the draft budget introduced to the diet by the government presumed
the level of interest rates at the time the draft was prepared. The government then was extremely reluctant
to change (especially raise) the oﬃcial discount rate during budget deliberations in the diet because changes
in the oﬃcial discount rate would imply alternation of the budget presumption and could impede smoothpassage of the budget on schedule. See Nakagawa (1981), p. 144 and BOJ (1986a), p. 509. In addition, thereserve requirement ratios were raised in February and March 1980.
21. See BOJ (1981c), pp. 10–12, for the Bank’s contemporary view for the oil crisis. The Japanese government
also considered that the magnitude of the second oil crisis was roughly similar to that of the first. See EPA(1981), p. 80.
22. See BOJ (1986a) p. 496 for the second oil crisis and pp. 420–430 for the first oil crisis.

105

prices were stable at a single digit level, the economy was on a recovery path, and low
capacity utilization implied additional room for supply. Inflation was more unlikely tooccur because a condition of supply and demand was less tightened than that in the firstoil crisis.23(2) Diﬀerences in the response against the crisis
When the first oil crisis occurred, firms and households responded in anticipationof higher inflation in the future. They created speculative demand based on speculative accumulation of stocks unrelated to economic activity, which brought about tightdemand and supply conditions. Also, substantial pay rises put pressure on corporate
profits, which resulted in a subsequent reduction in employment and a decline in capital
investments. By contrast, at the time of the second oil crisis, flexible implementation of
the monetary policy partly served to restrain the inflationary expectation from spreading and the responses by firms, labor unions and households was in a non-emotionalmanner on the basis of their experience of the first oil crisis. As a result, the creation of
speculative demand was suppressed and the pace of wage increases remained modest.
Furthermore, large swings in prices, wages, and demand were contained, and the firms’
profit bases were stabilized. Accordingly, investments for eﬃciency improvement aswell as those for labor- and energy- saving underpinned the economic expansion andthereby improved productivity.24 , 25

III. Reduction of the Official Discount Rate with Consideration of
Exchange Rates (from Summer 1980 to the First Half of 1981,
Phase II)

• In response to the slowing economy as well as regained price stability, the Bank
gradually eased monetary conditions by lowering the oﬃcial discount rate threetimes from August 1980 to March 1981, as well as by relaxing window guidance
gradually and then allowing commercial banks to submit their loan plans at theirdiscretion from spring 1981 onward.
• Factors such as the amendment of the Foreign Exchange Law in 1980 encouraged international capital transactions between domestic and overseas markets,and then the diﬀerences between domestic and overseas interest rates began tohave a large eﬀect on exchange rates. Meanwhile, the highest priority for the
U.S. was to contain high inflation, and monetary tightening was implemented.
Against this background, the BOJ gradually lowered interest rates while assess................................
23. BOJ (1981c), p. 6.
24. BOJ (1981c), pp. 6, 10–12.
25. Masaru Yoshitomi, who was the chief researcher at the Economic Research Institute of the Economic Planning Agency at that time, emphasized the role of initial economic conditions relative to the lessons learnt
in 1974. See Yoshitomi (1981), pp. 244–263. Meanwhile, Kuroda (2005, p. 61) assessed both the role ofinitial condition and the lessons rather equally by pointing out that inflation expectations during the second
oil crisis were moderate partly due to the memory of sharp tightening during the first oil crisis among the
public.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

ing developments in exchange rates so that the rate reduction would cause neither
depreciation of the yen in relation to the high interest rates in the U.S. nor imported inflation.
A. Economic Conditions and Policy Stance of Major Countries
1. The U.S. high interest rate policy and appreciation of the dollar
In the United States, inflation aggravated following the second oil crisis and the yearon-year changes in consumer prices reached a double-digit figure from 1979 to 1981
(Chart 7 (2)-I). In response, the Federal Reserve (the Board of the Governors of theFederal Reserve System [FRB]) placed the highest priority on inflation control andraised the oﬃcial discount rate five times in total from July 1979 to February 1980,
causing it to reach the historic high of 13 percent. The FRB also implemented a newframework of money market operations which placed emphasis on the total reserves
and allowed for increases in short-term interest rates in October 1979. As a result,the monthly average of the Federal Funds (FF) rate was 17.6 percent in April 1980.
Faced with a rapid economic downturn caused by high interest rates, the FRB turned tomonetary easing from May to July 1980 temporarily. From fall 1980, however, the rateof wage increase was higher than expected, inflation expectation was seen as persistentbased on the surveys, and the growth of money supply was higher. The FRB raised
again the oﬃcial discount rate to 14 percent four times in total from September 1980 to
May 1981, and the monthly average of the FF rate reached 19.1 percent in June 1981
(Chart 8 (1)-I and II).26
Starting in January 1981, the Reagan Administration concluded that the expansionary fiscal and monetary policies implemented by the previous Carter Administration (such as higher social security expenditure) had caused high inflation, economic
stagnation, and a deteriorating current account balance. On this recognition, the Reagan Administration promoted the economic policies of so-called Reaganomics, which
aimed for: (1) an increase in defense spending to become a stronger nation; (2) areduction of corporate and personal taxes to strengthen the supply side of the economy; (3) sound implementation of monetary policy to control inflation by gradually
decreasing the growth rate of money supply; and (4) utilization of the market mechanism through deregulation. The administration also publicly stated its commitment
to reduce the budget deficit through cuts in expenditure. In fact, however, the budget
deficit expanded owing to a tax reduction, an increasing outlay in defense, and a delay
in reducing non-defense expenditure due to Congress opposition, and the long-term interest rate remained at a high level throughout the first half of the 1980s (Chart 8 (1)-II,
III, and IV).27
The economy decelerated during the year 1979 as consumption and housing investment slowed down due to price surges and higher interest rates. After a sharp
downturn in spring 1980, the economy recovered slowly from summer 1980 to early
1981 aﬀected by temporary monetary relaxation. However, it started to deteriorate
again from spring 1981 partly due to sluggish exports with dollar appreciation, slower................................
26. BOJ (1981a), p. 15, BOJ (1981e), pp. 12–13, BOJ (1982c), p. 17, and Meltzer (2009), pp. 1062–1064.
27. BOJ (1981e), pp. 12, 15–18 and BOJ (1983c), pp. 7–8,11.

107

consumption growth, and a drop in housing investment resulting from high interest
rates (Chart 7 (1)-I, II, and III).28
The high interest rates in the U.S. exerted pressure on foreign exchange markets
for dollar appreciation through the interest rate diﬀerentials between the U.S. and European countries or Japan. In particular, the dollar kept strengthening from 1979 to spring1980 in response to increases in short-term interest rates resulting from the FRB’s tightening, and also from mid-1980 to fall 1982 due to the remained high level of long-term
interest rates with expansion of budget deficits (Chart 3 (1)-I, II, and III).29
2. Stagflation in Europe
In Europe, constraints on corporate activities became greater, such as increased social
security burdens and tighter government regulations, from the mid-1960s onward andgreater rigidity of wage setting behavior was seen as a result of wider adoption of thesliding scale of wages throughout the 1970s. Corporate fixed investments stagnated due
to increases in these burdens on firms. After the second oil crisis, European countries
experienced wage increases in parallel to imported inflation, persistent current accountdeficits due to lower export competitiveness, and depreciation pressures on European
currencies due to the higher U.S. interest rates. Under these circumstances, European
countries had to implement tighter monetary policies, and stagflation with both highinflation and economic stagnation permeated with worsening employment conditions
as shown by a growing unemployment rate (Charts 9 (1), (2), and (3)-II and III).30
B. Economic Conditions in Japan
Japan’s economy started to slow down in summer 1980, aﬀected by a deterioration ofterms of trade due to previous oil price inflation (decline in real income) and monetary tightening. So-called “gradual slowdown” started mainly in personal consumption
and housing investment in particular, and then permeated over the economy gradually. Meanwhile, corporate profits were strong, fixed investment by large companies
was solid in areas such as energy saving, streamlining, technological innovation, anddevelopment of new products, and then a large-scale adjustment in employment was
avoided. Exports continued to increase with some fluctuations reflecting economic cycles in the U.S. and Europe, mainly due to the growth of products (such as computersand seamless pipes for oil fields) with higher non-price competitiveness. Therefore,
the Bank considered that sharp downturn in economic activity would be unlikely under
the current circumstances (Chart 1 (1)-II).31
With regard to prices, inflation in wholesale prices started to slow down aroundMay 1980. The supply and demand conditions for domestic products were eased partly
due to the eﬀect of the tightened monetary policy. The yen also appreciated under apause in rising prices of overseas raw materials such as fuels and the temporal lift in the
U.S. high interest rate policy. The uptrend of consumer prices also started to slow downfrom mid-1980. Consequently, in mid-1981, the year-on-year changes in wholesale andconsumer prices declined to near 0 percent and the 4 percent level, respectively (Charts................................
28. BOJ (1981a), p. 12 and BOJ (1981e), pp. 15–16.
29. BOJ (1981a), p. 6, BOJ (1981e), p. 10, and BOJ (1982c), p. 6.
30. BOJ (1981a), p. 7 and BOJ (1981e), pp. 8, 12, 19–20.
31. BOJ (1981c), pp. 1–2, 8–10 and BOJ (1982a), pp. 7–8.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

2 (1) and (2)-II).
C. Lowering the Oﬃcial Discount Rate Three Times (from Summer 1980 toSpring 1981)
1. The assessment of economic conditions and policy stance at the time
The Bank at that period considered that “for monetary policy implementation the Bank
consistently should recognize price stability as the basis for sustainable growth,”32 andclearly placed priority on price stability in monetary policy implementation. As forJapan’s contemporary economic conditions, the Bank recognized that Japan’s economy “performed relatively well” compared with the situation in the first oil crisis orwith the situations in other countries, with an assessment that “the steep rises in importprices were contained and were not transformed into domestic inflation, the international balance-of-payments equilibrium was restored speedily and serious deterioration in economic activity was avoided.”33 The Bank considered that rational attitudes
of firms and households contributed to the situation in addition to the policy responseof early and significant interest rate raises. The Bank also believed that “the corporate
profit foundation this time has become stronger than during the first oil crisis” because
the firms did “attain greater eﬃciency of operations by means of energy-saving, reducing per unit of output, controlling inventories, and developing new products,” with“the strenuous eﬀorts for rationalization by both management and labor” and labor
accepting “moderate wage hikes in consonance with labor productivity.”34
Meanwhile, the Bank recognized that “it was diﬃcult to expect that Japan alone
could achieve higher economic growth under a stagnant world economy, where a large
amount of income was transferred to oil producing countries through rapidly increasing
oil prices and the slower economic growth of the industrial countries as a whole.” Also,
the Bank viewed that Japan had to accept lower economic growth, and that the Bank
“should not consider an easy solution in which stagnation alone was enough reason formonetary stimulus.”35
2. Policy responses
In response to the slowing down of the economy while prices regained stability, theBank lowered the oﬃcial discount rate three times from August 1980 to March 1981
(Chart 4-II).36 Regarding window guidance, the Bank started to relax the restrictive
stance from the October–December quarter of 1980. The Bank then allowed commercial banks to submit their loan plans at their discretion, from the January–March
quarter of 1981 for regional banks and sogo banks (hereafter regional banks), and fromthe April–June quarter of 1981 for city banks, long-term credit banks, and trust banks................................
32. BOJ Archives (1981a), p. 1.
33. BOJ (1981c), p. 2.
34. BOJ (1982a), pp. 4–5.
35. BOJ Archives (1981d), p. 8. Also, see BOJ (1981b) and BOJ (1982a), pp. 4–5.
36. The oﬃcial discount rate was lowered three times. The first was from 9 percent to 8.25 percent on August
20, 1980. The second was to 7.25 percent on November 6, 1980. The third was to 6.25 percent on March
18, 1981. See BOJ Archive (1980d), BOJ Archive (1980e), and BOJ Archive (1981c). In November 1980
and March 1981, the reserve requirement ratio was also lowered.

109

(hereafter major banks).37 (See Appendix 4 for the development of window guidance.)
3. Interest rate reduction and exchange rates
In the second half of the 1970s and thereafter, exchange control was gradually relaxed,
and it was basically liberated through the amendment of the Foreign Exchange and Foreign Trade Control Law in December 1980.38 International capital transactions became
active, and the diﬀerence between domestic and overseas interest rates came to be more
influential on exchange rates.39 Under such circumstances, the Bank undertook a seriesof rate reductions, on the recognition that prices were stable in the near term and thatstable capital inflow should be attractive enough to finance the current account deficit
remaining under higher oil prices. In lowering the rate, the Bank cautiously assessed
the developments in foreign exchange markets, so that the rate reduction would notcause depreciation of the yen or higher import prices, due to larger diﬀerences between
the domestic and overseas interest rates and international capital flow.40
In addition, on lowering the discount rate in March 1981, the Bank introduced a
special lending facility to flexibly provide funds at a rate determined separately fromthe oﬃcial discount rate. The facility was prepared for cases where fluctuations inshort-term capital flow in response to the interest rate diﬀerential between domestic
and overseas influenced on foreign exchange markets. The special lending facility was
supposed to be implemented without changes in the oﬃcial discount rate, interest rates
of deposits, savings, or bank loans. In this regard, the Bank supposed that “the rate
could be changed without consideration of deposit rates and other rates, in a resilientand flexible manner” so that the facility would aﬀect the international short-term capitalflow without aﬀecting the domestic economy.41

IV. Cautious Monetary Easing with Consideration of Trade Conflicts(from the Second Half of 1981 to Fall 1983, Phase III)• In the U.S. and European countries, the higher inflation remained mainly due
to a continuation of significant wage increases, and the tight monetary policy
for taming inflation brought the slower economic growth and the higher unemployment rates. Under such circumstances, Japan’s expanding current accountsurplus, accompanied with the smaller imports through energy saving and withthe enhanced competitiveness through improvement of the productivity, brought................................
37. BOJ Archives (1981b), pp. 1, 4. The Bank maintained a policy stance of allowing acceptance of the loanplans by respective commercial banks at their discretion until spring 1987.
38. MOF (2004), pp. 70–83.
39. BOJ Archives (1981d), p. 9, BOJ Archives (1981e), pp. 8–9, and BOJ (1982a), p. 20.
40. BOJ Archives (1980d), pp. 3–6.
41. BOJ Archives (1981c), pp. 6–7. The Bank considered using the special lending facility in face of sharp yen
depreciation later, but did not use it in the end, abolishing it at the end of February 2001. As for media
reports referring to the Bank’s consideration of carrying out the facility in summer 1982, summer 1984 andFebruary 1985, see Nihon Keizai Shimbun (1985), p. 1 and Kinyu Zaisei Jijo (1985), p. 13. No material
specifically mentioning use of the facility can be found in the BOJ Archives. As for documents implying
a possible activation of the facility, see BOJ Archives (1982b), p. 7, BOJ Archives (1983b), p. 5, and BOJ
Archives (1985b), p. 5.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

about increasingly intense trade conflicts.
• Japan’s economy overcame the impact of the second oil crisis. Solid corporate
profits through firms’ managerial eﬀorts for improving energy eﬃciency and labor productivity as well as the tamed wage growth by both labor and management helped to avoid an escalation of inflation and a sharp economic downturn.
However, the economic growth remained relatively low compared to the previous
periods, partly due to weak overseas demand under the U.S. monetary tightening
for containing high inflation.
• A further interest rate cut may have been appropriate for domestic economic conditions such as low inflation and moderate economic growth. However, in thecontext of worsening trade conflicts, the lower interest rates could have brought
about a depreciation of the yen under the pressure of the U.S. high interest rates
for a weaker yen. In this regard, the Bank gradually and carefully reduced theinterest rates and eased monetary conditions, while confirming that the exchange
rates were stable and that the risk of an overly weaker yen was small enough.
A. Economic Conditions and Policy Stance of Major Countries
1. Situation in the U.S.
The U.S. economy became stagnant further from spring 1981 partly because of theslackened export growth under the strong dollar and the sluggish European economy,
as well as the stagnation of domestic demand such as consumption, housing investment,
and corporate fixed investment under the higher interest rates. The unemployment raterose to a double digit level from September 1982 to June 1983 for the first time since1940 (Charts 7 (1) and (3)-III). In response, the FRB turned to reduce the interest
rates from November 1981, and lowered the oﬃcial discount rate twice to 12 percent
in December 1981. However, the significant wage growth continued and the inflation
remained at a high level. The FRB maintained a stance to place the highest priority on
containing inflation until the first half of 1982 and lowered short-term interest rates ata measured pace while confirming the weaker inflationary pressure (Chart 8 (1)-III).42
The stagnated economy and worsening unemployment bolstered the protectionist
movements, and reciprocity bills were submitted in succession to Congress from late1981 to 1982, requesting trading partners such as Japan to open their markets or imposing import restrictions in the U.S. otherwise.43
In summer 1982, milder inflation became gradually obvious. Also considering the
instability in international finance caused by a surfacing problem of accumulated debts
by developing countries, the FRB continued to loosen policy from July 1982 and reduced the oﬃcial discount rate five times to reach 8.5 percent in December 1982 (Chart
8 (1)-III). After early 1983, the economy showed a strong recovery led by increased
consumption and housing investment under tamed inflation, lower short-term interest
rates, and tax reduction (Chart 7 (1)-III).44................................
42. BOJ (1981e), pp. 5–17 and BOJ (1982c), pp. 15–17.
43. BOJ (1982c), p. 13.
44. BOJ (1982c), pp. 11–13, 16–17 and BOJ (1983c), pp. 1, 9.

111

Meanwhile, budget deficits expanded from fiscal year (FY) 198245 to 1983, partly
because of a conflict between the Reagan Administration (in favor of reducing taxes
and expanding defense outlays) and the U.S. Congress (against reducing social security
outlays). Against the background of an increasing fiscal deficit, the long-term interest
rate remained high at a level exceeding 10 percent throughout 1983 (Chart 8 (1)-III)and partly contributed to an appreciation of the dollar. The current account balanceturned into deficit from the July–September quarter of 1982 as the competitivenessdeclined with the dollar appreciation, and the current account deficit tended to increasein 1983, partly reflecting economic recovery (Chart 8 (2)-III).46
2. Situation in Europe
In early 1982, the higher inflation became gradually moderate in major European countries (Chart 9 (2)-III). Under persistently high interest rates in the U.S., however, monetary conditions in Europe were rather tightened to address the pressure for home currency depreciation (Charts 10 (1) and (3)-III). Economic activity remained stagnant
and thereby the unemployment rate increased (Charts 9 (1) and (3)-III).47 Under suchcircumstances, protectionism intensified also in Europe.48
3. Comparison between Japan and major countries
The responses after the second oil crisis in Japan were diﬀerent from those in the U.S.
and Europe. In Japan, firms’ managerial eﬀorts such as saving cost, labor and other
inputs supported steady corporate profits, in addition to the modest wage growth withharmonious labor relations. The energy eﬃciency and the labor productivity werealso improved through corporate fixed investment. In contrast, in the United Statesand Europe, the increasing wages were not restrained under worsening terms-of-trade
and thereby the high inflation remained. Against this background, deterioration incorporate profits suppressed fixed investment, inhibited an improvement of the laborproductivity and caused firms to refrain from hiring, thereby resulting in the increasingor elevated level of unemployment rate.49
The BOJ recognized the adjustments in the corporate sector to address these challenges as the diﬀerence in the economic performance between Japan and the West.
Meanwhile, the Bank acknowledged that Japan’s improvement of the energy eﬃciency
and the labor productivity resulted in the saving of imported raw materials and fuels andin the higher competitiveness of Japanese products, respectively. This consequently
created a trade structure allowing a fast and easy growth of exports, while curtailingthe growth of imports serving as one of the structural factors of external imbalance.
Although the Bank also recognized that a rectification of external imbalance caused bythese structural factors would be time consuming, the Bank expressed the view that it
would be necessary to “insure the stability of the yen rate at a higher level, thereby encouraging changes in the structure of exports and imports” together with eﬀorts toward
import expansion through greater market access.50................................
45. The U.S. fiscal year is from October of the previous year to September of the current year.
46. BOJ (1983c), pp. 7–8, 10–11.
47. BOJ (1983c), pp. 7–8, 13.
48. BOJ (1982c), p. 14.
49. BOJ (1983a), pp. 1–2, 11–12.
50. BOJ (1984b), p. 5. Also, see BOJ (1982b), pp. 1, 17, BOJ (1983a), pp. 1–2, 13–14, BOJ Archives (1984a),

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

B. Economic Conditions in Japan and Policy Responses (from the Second Half of1981 to October 1983)
1. Situation in the second half of 1981 and the interest rate cut in December 1981
Japan’s economy continued to recover slowly toward the second half of 1981, but thegrowth was lower compared to the previous periods. Fixed investment by large enterprises was solid, but consumption and housing investment were weak as disposable
income grew at a sluggish pace due to lesser overtime earnings (Chart 1 (1)-III). As
for prices, wholesale prices remained almost unchanged from the previous year andconsumer prices only increased by around 4 percent on a year-on-year basis due tofalling crude oil prices and the looser market conditions in domestic supply and demand (Charts 2 (1) and (2)-III). In foreign exchange markets, the yen ceased to depreciate owing to a decline of the U.S. interest rates in fall 1981. The dollar traded ataround 220 yen in December 1981, declined from around 230 yen in September andOctober of 1981 (Chart 3 (1)-III).
The current account generally began to remain in surplus from 1981, because exports grew persistently due to solid demand for Japanese products with enhanced competitiveness and imports declined mainly due to energy savings (Chart 3 (2)-III). With
this background, the trade conflicts with the U.S. and Europe intensified. The U.S. Secretary of Commerce Malcolm Baldrige visited Japan to call for more product imports
in October 1981, and also in October the European Commission made a request forimport expansion to the mission sent to Europe, led by Chairman Yoshihiro Inayamaof the Japan Federation of Economic Organizations. In November 1981, Western European countries expressed concern to Saburo Okita, the government delegate for thesecountries that Japan was trying to maintain the cheaper yen with policy measures forsupporting export competitiveness. The Bank recognized that it was diﬃcult to lower
the interest rates as it might cause depreciation of the yen through the larger diﬀerence
between domestic and overseas interest rates under the trade conflicts. On the other
hand, some Japanese government oﬃcials argued internally that an early rate reduction
would be a policy option for stimulating domestic demand and reducing trade surplus
in a circumstance with limited policy options acceptable internationally for the modest
surplus.51
The Bank recognized that a reduction in interest rates would be desirable on thedomestic front in light of stagnant economic growth with stable prices and lower inflation. At the same time, the Bank believed that a higher and stable yen was important asa precondition for interest rate reduction, and in particular that a careful considerationof the timing to avoid causing yen depreciation would be very important to prevent afurther deterioration in the relationships with the U.S. and European countries. When
the FRB lowered the oﬃcial discount rate from 14 percent to 13 percent on November
2 and then to 12 percent on December 4, the yen was higher and stable, and the Bank
reduced the oﬃcial discount rate by 0.75 percent to 5.5 percent on December 11 (Chart
4-III).52 Window guidance was further relaxed, and the Bank decided to allow commer..........................................................................................................................................
pp. 6–7, BOJ (1984a), pp. 1, 16–17, and BOJ (1985b), pp. 1–2.
51. BOJ Archives (1981g), p. 2.
52. BOJ (1981d).

113

cial banks to formulate their loan plans totally at discretion from the January–March
quarter of 1982, instead of merely allowing them to formulate their plans at discretionas much as possible.53
2. Economic conditions in 1982 and the monetary operation to increase shortterm interest rates
Japan’s economy slowed down toward the end of 1982 and the business sentimentworsened, because the slower growth in exports amid stagnation in the U.S. and Europe induced a greater adjustment in production after early 1982 and this circumstanceresulted in stagnation in domestic demand such as fixed investment (Charts 1 (1), (2),and (3)-III).54 Prices further slowed down as a result of looser conditions in supply anddemand (Charts 2 (1) and (2)-III). On the other hand, the yen exchange rate was ataround 220 yen in early 1982, and it continued to weaken to hit a bottom of 278 yen in
November 1982 owing to a situation of a stronger dollar against other currencies under
the higher interest rates in the United States (Chart 3 (1)-III).
The Bank considered that accommodative monetary policy was more appropriate
for domestic conditions such as economic activity and prices. Meanwhile, the Bank
faced a dilemma that a yen with higher value would be favorable under the deterioration of economic conflicts with the U.S. and European countries, but in reality the difference between domestic and overseas interest rates tended to pressure the yen toward
depreciation.55 In this regard, the Bank implemented tighter money market operations
for “raising short-term money market interest rates” without a change in the oﬃcial
discount rate from mid-March to the early fall of 1982, with the intention of avoiding
influences as much as possible on the commercial banks’ lending rates and the otherdomestic interest rates, and of inhibiting the weakness of the yen with the widening
gap between domestic and overseas interest rates (Chart 4-III).56
3. Situation from early 1983 to fall 1983 and the rate reduction in October 1983
During 1983, Japan’s economy started to recover gradually owing to increases in exports to the U.S. in particular. However, the pace of recovery in domestic demandremained moderate, owing to the end of a series of large-scale plant investments forenergy saving and other purposes, moderate consumption under slow increases in employment and wages, and the lower growth of government fiscal disbursement reflecting the on-going fiscal reform measures (Chart 1 (1)-III). Meanwhile, stable prices
were maintained (Charts 2 (1) and (2)-III).
In the foreign exchange markets, the yen tended to depreciate toward fall 1983,
starting at the level of 230 yen per dollar in early 1983 to 247 yen per dollar in early
September of 1983, partly due to a strong view in the market for a persistent gap between domestic and overseas interest rates. However, from fall 1983, the slower inflation in prices and lower growth in money supply calmed down anticipation for a high
U.S. interest rate. In addition, an expansion of Japan’s current account surplus gathered attention. The yen became stable at around the 230 yen-level from October 1983................................
53. BOJ Archives (1981h), pp. 1, 4–6.
54. BOJ (1983b), p. 1.
55. BOJ Archives (1982a), pp. 3–6.
56. BOJ (1983b), pp. 4–5.

114 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials(Chart 3 (1)-III).57
The Bank in 1983 consistently assessed as it did in 1982 that an interest rate reduction would be desirable from a domestic perspective with the domestic circumstance
where inflation remained stably low and the domestic demand stayed sluggish.58
From an international perspective, economic recovery relying on exports might
have faced intense criticism from abroad and added fuel to economic frictions. The
Bank considered that an interest rate reduction with a view to “ensuring an economic
recovery balanced for both domestic and external demand” could be accountable overseas. However, the Bank also considered that the rate reduction could possibly bring aweaker yen and rather aggravate the economic friction with other countries. The Bank
maintained a stance that “the stability of the yen rate at a higher level” was the necessary condition for an interest rate reduction and the careful examination of timing forthe reduction was mandatory.59
On October 21, 1983, based on the judgment that “the lowering of the discount ratewould not aﬀect the yen’s strength,” the Bank decided to reduce the oﬃcial discountrate for the first time in 22 months since December 1981 (from 5.5 percent to 5.0
percent) and eﬀective from October 22 (Chart 4-III).60 Meanwhile, in preparation for
U.S. President Ronald Reagan’s oﬃcial visit to Japan in November 1983, the Japanese
government adopted the “comprehensive economic measures for economic promotion”
at the economic ministers’ meeting on October 22, including measures for domestic
demand expansion such as greater market access and import promotion. The Bank
carefully considered that “it would be acceptable if the monetary policy was asked
to be in coordination with the overall economic policy by the Japanese government”
on the grounds of “the basic premise of stability in both prices and exchange rates forsupporting solid economic recovery as much as possible.” The Bank appeared to accept
the recognition of the lowering of the oﬃcial discount rate as part of the government’s
policy actions for enlarging domestic demand and rectifying external imbalance.61
C. Issues Behind the Policy Stance During This Time
1. Escalation of trade conflicts with the U.S. and European countries
The U.S. and European countries in that time suﬀered more or less with the economic
stagnation and higher unemployment rates, and the higher level of frustrations for external circumstances also brought greater protectionist movements. Under such circumstances, these countries intensified economic conflicts with Japan that showed relatively better economic conditions and had a greater current account surplus.62
In the U.S., the FRB eased monetary conditions from summer 1982, but the pace ofprogress in reducing fiscal deficit was very slow and the long-term interest rate (10-year
U.S. Treasury) remained at a high level of double digit (Chart 8 (1)-III). Such persistent................................
57. BOJ (1984b), pp. 1–3 and BOJ Archives (1983a), p. 3.
58. BOJ Archives (1983a), p. 2.
59. BOJ Archives (1983b), p. 2.
60. BOJ Archives (1983a), p. 3.
61. BOJ Archives (1983a), p. 5.
62. See Kondo (2011, pp. 46–70) for the survey with details about the history and developments of economic
friction between the U.S. and Japan mainly in terms of international trade through the post World War II
period.

115

high interest rates in the U.S. served as downward pressure on other currencies, andfrom the perspective of preventing depreciation of the yen amid expansion of Japan’scurrent account surplus, the contemporary situation was not favorable for reducing
interest rates.
In this regard, the Bank recognized that “diﬃculties have developed in maintaining
the regime of free trade,” which was the foundation for the world economy in the postwar era and which was particularly “the most beneficial for Japan to achieve growth.”
Therefore, the Bank considered that monetary policy should be implemented with “dueattention to economic and political circumstances in the U.S. and European countries”
so that the “free trade principle” would be esteemed and Japan “would not be isolated
in the global community.”63 In other words, after overcoming the impact of the second
oil crisis on prices, the Bank considered Japan’s national interests in a broader sense,
and also acknowledged that monetary policy should be conducted with consideration
given not only to the domestic conditions such as economic activity and prices, but also
to the external relations and particularly developments of economic friction.64
2. Long-term interest rates remained at a high level with large-scale government
bond issuanceIn the first half of the 1980s, the long-term interest rates remained at a high level inJapan partly due to the impact of the high interest rates in the U.S. as well as theincreases in the outstanding balance of the Japanese government bonds.
After 1975, the issuance of special deficit-financing bonds to cover budget deficit
became a customary practice and the outstanding balance of the national government
bonds increased progressively (Chart 3 (3)). At first, a large proportion of the bonds inthe amount issued were underwritten by a syndicate, where issuance conditions were
determined through negotiations between the government and financial institutions,and the amount of government bonds held by financial institutions continued to increase. Throughout the period from the second half of the 1970s to the 1980s, thegovernment continued to pursue the reconstruction of public finance in order to cease
an issuance of special deficit-financing bonds. In fiscal years 1981 and 1982, however, the government experienced a large shortfall in tax revenue and the consequent
failure of “the government’s long-term fiscal target of eliminating the current accountdeficit by the fiscal 1984” as the goal defined by the government became obvious.65
The percentage of outstanding government bonds against GDP continued to increase
until fiscal year 1986. Meanwhile, the secondary bond market expanded, as the selling
restrictions were relaxed in response to requests from financial institutions.
The Bank considered that the increasing reliance of public finance on government
bonds kept the long-term interest rates at a high level. Therefore, the Bank supported
the government’s fiscal reconstruction policy shown in the final report of the Second
Ad Hoc Commission on Administrative Reform in March 1983 and thereby opposed................................
63. BOJ Archives (1982a), p. 3.
64. Regarding the monetary policy during this period, Kuroda (2005, p. 165) stated that “it was uncertain whether
the Bank fought against inflation as a battle in the previous period or feared for a weaker yen with a stronger
dollar, but in either perspective the policy chosen during this period was inadequate.” The materials referred
to in this paper imply the latter aspect was stronger.
65. BOJ (1983b), p. 5.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

an easy fiscal policy. At the same time, seeking a monetary policy more centered on theinterest rate mechanism and a more smooth formation of interest rates through market
conditions, the Bank worked for the further development of deregulation of interest
rates in the primary and secondary markets.66 The Bank consistently maintained astance of encouraging financial deregulations to increase use of the market mechanism
further.
D. Debate over Monetary Policy with a Greater Consideration of the Exchange
Rates
The Bank started market operations to “bring the short-term interest rates to a higher
level” in spring 1982. Around this time, other countries criticized Japan’s combinationof tighter fiscal policy and easier monetary policy as causing depreciation of the yen.
At the OECD Working Party Three (WP3) where monetary and fiscal authorities
in major countries discussed their policies, the oﬃcials from the U.S. and European
authorities and international organizations made a criticism. They insisted that “thelower interest rates would cause depreciation of the yen and should be avoided as muchas possible” and that “Japan’s policy mixture of monetary easing and fiscal tightening
for fiscal reconstruction would exacerbate trade conflicts.” They asserted that “Japan
should implement a diﬀerent policy mixture with monetary tightening and the slower
pace of fiscal reconstruction, instead of the current policy mixture.”67
Meanwhile, after market operations to “bring the short-term interest rates to ahigher level” were implemented, diﬀerent criticisms arose in the academic community. Some scholars argued that “the market operations for higher interest rates were atightening policy in the economic stagnation, and that the assignment of monetary policy for a weaker yen as a countermeasure rather than stabler domestic prices or solid
economic growth was inappropriate”68 and that “the monetary policy would never beable to control the stabler foreign exchange rates at will.”69
With regard to the criticism from the academics, the Bank considered that theirrecognition for assigning monetary policy toward stabler exchange rates as unjustifiable would include oversimplification, under conditions such as the spillover eﬀects bya weaker yen on domestic prices, on Japanese firms and on overseas frustration, as wellas the more volatile exchange rate under wider gaps between domestic and overseas interest rates.70 On the other hand, with regard to the criticisms from abroad, the Bank
recognized that they were not entirely irrelevant. Meanwhile, the Bank considered thatsome counter policy measures against a weaker yen should be desirable, based on theassessment of the eﬀect of a weaker yen on (1) bringing higher prices and larger overseas payment, (2) possibly reducing corporate profits in the material industry, and (3)................................
66. BOJ Archives (1981e), pp. 8–9, BOJ Archives (1981f), pp. 7–9, BOJ Archives (1982c), pp. 7–9, and BOJ(1983b), p. 5.
67. BOJ (1986a), pp. 562–563.
68. Komiya and Suda (1983), p. 431. Similar criticism can be found in Kosai (1983) and Shinkai (1983).
69. Remarks by Professor Komiya at the symposium of the IMES. See BOJ IMES (1983), p. 93.
70. At the Governor’s speech on July 22, 1985 (BOJ Archives [1985d], p. 4), it was stated regarding earlier
monetary policy implementation that “the Bank continuously pursued the best monetary policy with a balancing of various aspects such as prices, economic activity and foreign exchange rates, by assessing overall
circumstances domestic and overseas.”117little possibility for a larger export volume in the stagnating world economy.71

V. Greater Trade Conflicts, Monetary Policy, and the Japan–U.S.
Yen–Dollar Committee (from Fall 1983 to Summer 1985, Phase IV)• The U.S. economy strongly expanded, led by domestic demand, mainly supportedby the subdued inflation with the eﬀect of previous monetary tightening and by
the eﬀect of tax reduction. At the same time, the progress in reduction of fiscal
deficits was not enough. The U.S. interest rates remained at a high level and thedollar continued strengthening.
• Japan’s economy recovered gradually and then the expansion became increasingly solid, supported by the remaining price stability due to the improved productivity and the mild rise in wages, and by the spillover eﬀect of export growth
to the U.S., in particular on the domestic demand such as fixed investment andconsumption.
• The Bank kept the oﬃcial discount rate unchanged throughout the period from1984 to 1985. In the first half of 1984, when domestic demand was recoveringslowly and prices were stable, the Bank’s policy stance was slightly inclined forloosening. From mid-1984 to early 1985 when the recovery of domestic demand
became obvious and the yen depreciated further, the Bank’s policy stance wasslightly inclined for tightening reflecting concerns about intensification of trade
frictions or imported inflation under a further depreciation of the yen.
• The widening external imbalance among industrial countries worsened and thetrade friction further intensified. However, the requests against Japan in this period were mainly for greater market access in individual sectors. In responseto the requests, the Japan–U.S. Yen–Dollar Committee was established, and it
published a report in 1984. Then the financial deregulations were persistently
promoted in the second half of the 1980s, thereby aﬀecting monetary policy operations from medium- and long-term perspectives.
A. Economic Conditions and Policy Stance of Major Countries
1. Expansion of the U.S. economy and the strong dollar
From 1983 to the first half of 1984, the U.S. economy strongly expanded led by domestic demand, mainly supported by the subdued inflation with the eﬀect of previous
monetary tightening and by the growth in consumption and housing investment in addition to the eﬀect of tax reduction (Chart 7 (1)-III and IV). Against this background,the FRB conducted tighter market operations for concerns about inflation from spring
1983 onward and then raised the oﬃcial discount rate in April 1984. However, fromsummer 1984 to early 1985, the economic growth slowed partly because of the slowdown in consumption with a preceding surge. Therefore, the FRB in early fall 1984
eased its stance on monetary policy operations, then reduced the oﬃcial discount rate................................
71. BOJ Archives (1982b), pp. 2–3, 5.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

twice in the consecutive months of November and December 1984, and again lowered the oﬃcial discount rate again in May 1985 (Chart 8 (1)-III and IV). Meanwhile,the unemployment rate improved during the first half of 1984, but remained at a highlevel of around 7 percent after mid-1984. Prices in 1984 remained relatively stable despite buoyant economic activity under the moderate wage growth, stable oil prices andgrowing imports in low-price goods under a stronger dollar (Charts 7 (2) and (3)-IV).72
With regard to fiscal policy, the confrontation between the ruling Republican Party
against the reduction of defense spending and the Democratic Party against the decrease in social-welfare outlays remained and no eﬀective measures were developed
for reducing fiscal deficits. Against this background, with tightened monetary conditions by the FRB, both the short- and long-term interest rates remained high and supported a stronger dollar.73 With the sluggish export growth and greater import growthunder the strong dollar and active domestic economy, the U.S. current account deficit
was on an uptrend and reached an exceptionally high level of over 100 billion dollars
in 1984 (Chart 8 (2)-IV).74 The concern about the U.S. becoming a net external debtor
was growing rapidly around this period, as Paul Volcker, Chairman of the FRB, testified to Congress that “the world’s largest and richest economy might soon become theworld’s largest debtor” in February 1985.75
The external imbalances among the industrial countries, particularly the imbalance between the U.S. and Japan, aggravated. The political frustration against Japan
increasingly grew at U.S. Congress, under criticism concerning Japan’s persistent current account surplus and Japan’s massive trade surplus against the U.S. in particular.
Under these circumstances, the first Reagan Administration (1981–1984) pursued external policies with no direct intervention in principle in the foreign exchange markets
and with the requests of greater market access in surplus countries mainly on specificindustries (Charts 12 and 13). In line with this policy direction and after President
Reagan’s visit to Japan in November 1983, the Japan–U.S. Yen–Dollar Committee (tobe described later) was established, and discussions were held there including on liberalization of the Japanese money and capital markets as the main issue. Under theworsening economic conflict, however, the second Reagan Administration starting inJanuary 1985 changed the policy of non-intervention in foreign exchange markets andturned to pursue an exchange rate adjustment to rectify external imbalance.76
2. Modest economic recovery and remaining high unemployment in Europe
In Europe, economic activity started to recover from 1983, mainly in West Germany
and the United Kingdom, led by domestic demand under price stability with moderate wage growth. In 1984, external demand began to recover, mainly led by exports
to the U.S., and the overall economic activity in Europe including France started to................................
72. BOJ (1983c), pp. 2–5, 9–12 and BOJ (1984d), pp. 2–3, 9–11.
73. BOJ (1983c), pp. 11–12 and BOJ (1984d), pp. 11–12.
74. BOJ (1983c), pp. 10–11 and BOJ (1984d), p. 11.
75. Volcker and Gyohten (1992), p. 356. At the end 1985, the U.S. became a net foreign debtor for the first timesince relevant statistics became available. Also from BOJ (1986i), p. 13.
76. Both the overall U.S. trade deficit in 1984 (US$ 123.3 billion) and the U.S. trade deficit against Japan(US$ 36.8 billion) released on January 30, 1985, were the highest ever. Then, on February 3, James Baker,
who later took initiatives for the Plaza Accord, became secretary of the Treasury from the chief of staﬀ to
President. BOJ (1985c), pp. 7–8 and MOF (2004), pp. 350–351.

119

recover moderately (Chart 9 (1)-III and IV). Meanwhile, among a tendency of weaker
European currencies under a high level of the U.S. interest rates, European countries
had little choice but to maintain tighter monetary policies for concerns of inflationarypressure by weaker home currencies (Charts 10 (1) and (2)-IV). The pace of economic
recovery in Europe remained moderate. Furthermore, structural challenges, such as
the lower absorption for workers under a prolonged stagnation in corporate fixed investment and the delay of corporate restructuring across industries also brought little
improvement for employment conditions. The unemployment rates remained at a highlevel (Chart 9 (3)-IV).77
B. Economic Conditions in Japan from Fall 1983 to Summer 1985
1. Economic conditions from fall 1983 to mid-1984
Japan’s exports grew rapidly mainly to the U.S. from 1983 to the first half of 1984.
Consequently, corporate fixed investment increased in the export-related manufacturing industry with the elevated capacity utilization ratio and larger profit, and the trendof economic recovery became more solid. However, the economic recovery was mainly
driven by exports rather than by domestic demand, with a modest pace of recovery under modest expansion in household outlays due to slower growth in employment andwages, and the modest fiscal expenditure under the fiscal reforms dragged down (Chart
1 (1)-IV). Meanwhile, prices remained generally stable as a result of factors such as thestronger business conditions of firms, the improvement of productivity, and a moderate
wage increase (Charts 2 (1) and (2)-IV).78
The foreign exchange rates were generally stable in favor of the yen and remained
around the 220-yen level, higher than 230-yen level at the time of the interest rate cut
in October 1983. On the other hand, current account surplus remained on the uptrend(Charts 3 (1) and (2)-IV).
2. Economic conditions from mid-1984 to summer 1985
From mid-1984 to summer 1985, Japan’s export growth moderated due to the slowdown of the U.S. economy. However, the eﬀect of increased production in manufacturing industries and a recovery of their profits permeated into other sectors. Corporate fixed investment showed a strong expansion, and gradual improvements in both
employment and personal income helped to recover both consumption and housing
investment. Japan’s economy expanded smoothly on the whole with stable prices ingeneral (Chart 1 (1)-IV, Charts 2 (1) and (2)-IV).79
As for the exchange rates, the yen kept weakening and traded at the 260-yen levelin February 1985 (with a bottom of 263.05 yen per dollar on February 25), weaker thanthe 230-yen level per dollar in June 1984. Then, the trend of yen depreciation graduallychanged under the declining U.S. interest rates, and the yen was traded at around 240
yen per dollar from summer to fall 1985. Current account surplus continued to expand(Charts 3 (1) and (2)-IV).80................................
77. BOJ (1983c), pp. 12–14 and BOJ (1984d), pp. 13–15.
78. BOJ Archives (1984b), p. 4 and BOJ (1985a), pp. 1–2.
79. BOJ (1985a), pp. 1–2.
80. BOJ (1985a), pp. 2–3 and BOJ (1986f), pp. 3–4.

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C. Monetary Policy from Fall 1983 to Summer 1985
After the oﬃcial discount rate reduction in October 1983, the Bank kept the oﬃcial discount rate unchanged from 1984 to 1985 (Chart 4-IV). From fall 1983 to mid-1984, thepace of recovery in domestic demand was solid but slow under very stable prices. The
Bank considered that a desirable “direction should be an economic recovery with thebalance of domestic demand and foreign demand”81 instead of an economic recovery
driven by exports. In this regard, the Bank considered in monetary policy implementation that “a growth of domestic demand should be supported as much as possible so
far as no significant concerns would be found on the price stability”82 and the Bank’s
policy stance tended to be relatively accommodative with the unchanged oﬃcial discount rate. Meanwhile, from mid-1984 to early 1985, Japan’s economy experienced aslowdown in exports, a clear recovery in domestic demand, a solid penetration of theeﬀect of monetary easing, and a weaker yen in the foreign exchange markets. Under
these circumstances, regarding preventing possible inflation, the Bank considered theperspective that “a sharp appreciation of the yen could possibly have a more remarkable detrimental eﬀect as a sharp rise in domestic prices” as well as another perspectiveof rectifying current account imbalances.83 From these perspectives, the Bank’s policy stance tended to be relatively tight. Then, in spring 1985 the trend of the weaker
yen was overturned in the foreign exchange markets. Under these circumstances, theBank considered that “further eﬀorts would be desirable for stabilizing the trend of thestronger yen”84 from the perspective of monetary policy implementation, in addition toa consideration of rectifying the current account imbalance.
D. Establishment of the Japan–U.S. Yen–Dollar Committee and Its Achievements
1. Establishment of the Japan–U.S. Yen–Dollar Committee and its report
Trade frictions escalated as the problem of external imbalances exacerbated among
the major industrial countries, but the requests for Japan around that time focused onmarket access in individual sectors. In this regard, slightly before President Reagan’splanned visit in November 1983, the U.S. requested Japan to liberalize its financial
markets and promote internationalization of the yen, with the recognition that exclusive characteristics of Japan’s financial markets caused both the weaker yen andstronger dollar and thereby derived a trade imbalance between the U.S. and Japan.
Jointly chaired by Japan’s Finance Minister Noboru Takeshita and the U.S. Secretaryof Treasury Donald Regan, the Japan–U.S. Yen–Dollar Committee was established.
Substantial discussions were held at meetings of the working group, jointly chaired byVice Minister of Finance for International Aﬀairs Tomomitsu Oba and the U.S. Under
Secretary of Treasury Beryl Sprinkel.85
The working group submitted a report to Finance Minister Takeshita and Secretaryof Treasury Regan in May 1984. The report encouraged Japan to further (1) liberalize
the money and capital markets; (2) allow greater access to foreign financial institu................................
81. BOJ Archives (1983b), p. 2.
82. BOJ Archives (1984a), p. 5.
83. BOJ Archives (1984d), p. 5.
84. BOJ Archives (1985d), p. 4.
85. MOF (2004), pp. 330–331 and BOJ Archives (1984c).

121

tions; and (3) develop the Euro-yen markets. Regarding the liberalization of the money
and capital markets among these issues, the report indicated that a policy should bedirected toward a step-by-step deregulation of deposit interest rates, starting from thelarge time deposits toward the small deposits, including postal savings as an ultimate
goal. In addition, the report oﬀered other policy directions such as an enhancementof the treasury bill market, a relaxation of issuance restrictions on the domestic CD(certificates of deposit), creation of a yen-denominated Banker’s Acceptance market,
and elimination of the yen conversion regulations (from June 1, 1984).
2. The Bank’s recognition
Basically, the Bank embraced developments for financial deregulation as an unavoidable destiny at times. At the same time, the Bank considered that “proper attention
should be paid so as neither to damage the stability and soundness of financial institutions in a transitory period of financial circumstances nor to cause large confusionin the financial system.” Also the Bank acknowledged that “a further utilization of
the interest rate function in line with the liberalization of financial markets” should benecessary.86 In this regard, the Bank recognized that Japan “at this stage would never
be able to avoid the issues of liberalization and internationalization”87 indicated in thereport by the Japan–U.S. Yen–Dollar Committee. In particular, the Bank positively
considered that deregulations of deposit interest rates “should be steadily implemented
hereafter, as a core of Japan’s financial liberalizations.”88 On the other hand, the Bank
considered that the very rapid pace of liberalization in euroyen markets relative to thepace in domestic financial markets could possibly shrink transactions in domestic markets. The Bank also considered that the rapid liberalization of euroyen markets would
cause diﬃculties in the Bank’s domestic market operations. In this regard, the Bank
concerned that a very rapid liberalization would intensify international capital flow and“might induce a destabilization of the international currency system as a whole.”89 In
this regard, the Bank recognized that “a disproportional expansion of euroyen markets
would not be appropriate” and that “a proactive stance for liberalization in domestic
financial markets would be necessary steadfastly for avoiding adverse impacts.”90
3. Progress of liberalization after the U.S.–Japan Yen–Dollar Committee’s report
The report by the Japan–U.S. Yen–Dollar Committee did not have an immediate impact
in nature on the monetary policy at that time. However, in the medium- and long-term,
the policy directions for extensive financial liberalization significantly aﬀected Japan’s
financial intermediation and then the monetary policy framework. For example, in thesecond half of the 1980s, liberalization progressed steadily in such fields as the deregulation of interest rates on deposits by financial institutions, broader fields in businesses
and lower separation in activities by financial institutions, deregulations in domestic
and overseas financial transactions, and the liberalization of domestic financial markets.91 Under these circumstances, the ratios of both firms’ raising and investing funds................................
86. BOJ Archives (1982a), pp. 8–9.
87. BOJ Archives (1984d), p. 6.
88. BOJ Archives (1984b), p. 7.
89. BOJ Archives (1984c), p. 9.
90. BOJ Archives (1984d), p. 6.
91. BOJ (1985a), pp. 3–4.

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via financial markets instead of commercial banks increased (Charts 11 (2) and (3)).
Under the gradual deregulation of deposit interest rates, the proportion of the free interest rate instruments to the total deposits increased (Chart 11 (1)). Regarding thecommercial banks, they were compelled to take diﬀerent directions in their business,
in face of both the progress of interest rate deregulation on the fund-raising side andthe decline in conventional bank loans on the investment side. The commercial banks
increased the loans with variable lending rates in parallel to market interest rates, suchas lending with spread methods92 or with the new prime rate methods.93
Even under the ongoing financial liberalization, monetary policy implementation
was still based on the policy measures under the regulated interest rates framework.
Under these circumstances, the Bank considered that monetary policy measures should
be reformed for “better use of money market and free interest rates” to ensure theeﬀectiveness and flexibility of monetary policy. The Bank also recognized that “further
elaboration by ourselves should be necessary” for operational frameworks “such as therole of financial markets and monetary operations with conveying policy intentions
smoothly.”94
The Bank acknowledged the progress of financial liberalization itself as inevitable,
and assessed it positively from a viewpoint of more proper distribution of funds acrosseconomy and greater eﬃciency in the financial system. At the same time, the Bank considered that an attempt to radically reform the nation’s financial system would “cause
diﬃculties such as unexpected shifts of funds and instability in the management of financial institutions.” For preventing diﬃculties connected with the transitional phase,the Bank also recognized that “the varied measures for liberalization and internationalization should be implemented in a gradual manner, while sustaining a balance between
them,” and that an orderly and gradual liberalization would be desirable.95 The Bank
further acknowledged that under a circumstance in future with a greater progress ofliberalization, the interest rates for small deposits including postal savings should be“managed with greater consideration of financial market conditions” to enhance thefunctioning of markets for smoothing interest rates and thereby ensuring greater eﬀectiveness and flexibility of the monetary policy.96................................
92. With the so-called spread method, commercial banks determine their lending rates by adding a certain margin
to funding the cost of the short-term market interest rates. See Kure and Shima (1987), pp. 105–106.
93. Previously, in the so-called prime rate method, commercial banks determined the lending rate for prime
borrowers in correspondence with the oﬃcial discount rate. However, on January 23, 1989, Mitsubishi bankstarted to introduce a framework in which the lending rate was determined on the basis of funding cost fromshort-term money markets. Other commercial banks followed to adopt the similar determination method.
Their lending rate was called “the new prime rate.” See MOF (2003a), p. 19.
94. BOJ Archives (1984d), pp. 6–7.
95. BOJ (1985a), pp. 4–5.
96. BOJ Archives (1984d), p. 7.

123VI. Development of International Policy Coordination and Monetary
Policy (from the Plaza Accord to the Louvre Accord, Phase V)• In September 1985, the Plaza Accord was achieved primarily for exchange rate
realignment through concerted intervention in the foreign exchange markets andthereby rectifying the external imbalance, and the U.S. dollar depreciated sharply.
However, the external imbalance continued to expand partly due to the J-curve effect. Therefore, from fall 1986 onward, major countries strengthened their pursuitfor international policy coordination with fiscal and monetary policies in addition
to exchange rate realignment. In February 1987 the Louvre Accord was achieved,
aiming for the stabilization of exchange rates, the expansion of domestic demandand subsequent reduction of current account surplus in surplus countries, and the
reduction of both domestic imbalance and current account deficit in deficit countries.
• Against a backdrop of the yen’s sharp appreciation from fall 1985 onward, prices
became calmer and calmer, aﬀected by lower import prices with a stabilizationeﬀect on domestic prices. Regarding economic activity, domestic demand continued to grow, but the decline in exports and subsequent deterioration of corporate
profits in export-oriented industries steadily worsened conditions of corporate
fixed investment and employment.
• In the first half of 1986, the Bank reduced the oﬃcial discount rate three times
and thereby eased monetary conditions, considering that expansion of domestic
demand should be necessary in terms of both solid economic growth and rectification of external imbalance. In fall 1986 and afterwards, although both aturnaround in economic activity and a sign of financial imbalance were emerging,the Bank gave higher priority to a better circumstance for achieving the international agreement on stabilization of exchange rates. The oﬃcial discount rate waslowered twice in November 1986 and February 1987 for further monetary easing.
A. The Plaza Accord and Market Operations to Leave the Short Term Interest
Rates at a Higher Level (from Fall 1985 to the End of 1985)
1. Situation of major countries prior to the Plaza Accord
The U.S. continued to experience a significant “drain of demand to overseas” undera stronger dollar, and the U.S. current account deficit increased further (Chart 8 (2)IV). The economic activity slowed down with stable prices, and the unemployment
rate remained high at the 7 percent level (Charts 7 (1), (2) and (3)-IV). Against thisbackdrop, the FRB maintained the relatively accommodative policy stance with anunchanged discount rate (Chart 8 (1)-IV). Meanwhile, actions for rectifying the U.S.
trade imbalance with Japan became increasingly stronger mainly in Congress.97 In
summer 1985, the U.S. government intended an exchange rate adjustment for rectifying
the external imbalance (as aforementioned in section V. A.1.).
................................
97. BOJ (1985c), pp. 2, 11–16 and Ishii (2011), pp. 142–145.

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In European countries such as West Germany, the economy on the whole was expanding moderately under stable prices, but the unemployment rate remained high(Charts 9 (1), (2) and (3)-IV). With a concern about higher inflation led by weakerhome currencies, central banks in Europe implemented monetary policies with accommodation to a limited extent (Chart 10 (1)-IV).98 Under these circumstances, the realignment of foreign exchange rates for stronger home currencies and a weaker dollar
was desirable to broaden room for additional monetary easing.
In Japan, the economy was expanding moderately under the slower growth of exports to the U.S. and the steady growth of domestic demand mainly in consumption andcorporate fixed investment together with the still high level of corporate profits (Chart 1(1)-IV). Concurrently, prices were stable, where the year-on-year changes were around
2 percent in consumer prices and slightly negative in domestic wholesale prices.
The Bank assessed that “further simulative policies would not be necessary forcurrent conditions of domestic demand,” and also considered that “a stabilization of
the yen exchange rate at a higher value” would be “the most important for correcting
the external imbalance as a very serious problem.”99 An exchange rate adjustment forthe stronger yen against the weaker dollar was also desirable for Japan.
2. The Plaza Accord
On September 22, 1985, a G-5 meeting was held at the Plaza Hotel in New York,with the participants of the finance ministers and the central bank governors from thefive countries of Japan, the United States, the United Kingdom, West Germany, andFrance. The meeting achieved the so-called Plaza Accord, implicitly including conductof concerted intervention (with selling the dollar) as a main measure for an orderly
appreciation of the main non-dollar currencies.
According to the content of the joint announcement published, Ministers and Central Bank Governors of the five countries agreed that “it was essential that protectionist
pressures be resisted.” Furthermore, they “agreed that exchange rates should play arole in adjusting external imbalances” and also believed that “some further orderly appreciation of the main non-dollar currencies against the dollar is desirable.” In thisregard, the Accord indicated the possibility of concerted intervention in the foreign exchange markets for rectifying an overly strong dollar, by stating that “they stand readyto cooperate more closely to encourage this when to do so would be helpful.” Also,
according to the part of the Accord describing desirable policy packages for each of
the governments, Japan was supposed to conduct “flexible management of monetary
policy with due attention to the exchange rate”100 in addition to further opening up ofits domestic market, utilization of private sector vitality through the implementation ofvigorous deregulation measures, and a reduction of government deficit.101
The Bank allegedly did not know the contents of informal talks for the accord................................
98. BOJ (1985c), pp. 16–22.
99. BOJ Archives (1985e), pp. 2–4. Also, see BOJ (1985b), pp. 1–2, 16, 19.
100. Regarding the term of “flexible management” of monetary policy, the Vice Minister for International Aﬀairs
of Ministry of Finance, Mr. Tomomitsu Oba, later noted that the term was adopted in consideration of the
independence of monetary authority although the term of “reduction of policy rates” was close to the real
intention. Oba (1995), pp. 176–177.
101. “Press release by G-5 finance ministers and central bank governors on September 22, 1985”, from MOF(2003b), pp. 117–119. Also, see Funabashi (1988, pp. 261–266) for the reprinted release.

125

until just before the meeting. However, the Bank supported the Plaza Accord because
the fundamental policy direction of the Accord itself for a reduction of the external
imbalances mainly through a rectification of the overly stronger dollar and weaker yen
was fairly consistent with the Bank’s policy direction up to now.102
3. Appreciation of the yen after the Plaza Accord and the BOJ’s policy stance(money market operations to leave the short-term interest rates at a high level)
Under the Plaza Accord, G-5 countries conducted the concerted intervention in theforeign exchange markets from September 23, 1985. The dollar exchange rate dropped
sharply against the major currencies including the yen, falling from 242 yen per dollar(September 20) just before the Plaza Accord to 211 yen per dollar against the yen
on October 4. However, the dollar sometimes rebounded toward late October, partly
because of speculations that the Plaza Accord “might be losing its eﬀect” and that“market intervention was not suﬃcient for a rectification of an overly strong dollar”(Chart 3 (1)-V and Chart 10 (2)-V).103 Meanwhile, the long-term interest rates dropped
sharply in domestic financial markets partly due to growing anticipation for the lower
interest rates (as in Chart 4-V where the over-the-counter quotation of the 10-year
government bond yield dropped from 6.58 percent at the end of August to 5.77 percent
at the end of September 1985). The diﬀerence between domestic and overseas interest
rates was broadening.104
Under these circumstances, the Bank acknowledged regarding foreign exchange
rates that a future development of the U.S. fiscal deficit as a foundation for a strong
dollar would be “unpredictable” and that the stabilization of the yen at a higher value
would be still uncertain. At the same time, the Bank’s assessment of Japan’s economy
was that “although the pace of economic growth would somewhat be slower, the solid
economic expansion led by domestic demand would remain with little change in thenear term.” Under these circumstances, the Bank believed that “for a rectification of theexternal imbalance as Japan’s biggest problem, the stabilization of the yen at a higher
value was the most important policy task in the near future.”105
For the purpose of dispelling anticipation for lower interest rates and thereby laying
ground for a persistent appreciation of the yen, from late October to mid-December
1985, the Bank implemented money market operations “to leave short-term interest
rates at a higher level” by allowing the autonomous tightening of supply and demandconditions in the short-term money market to permeate overall market interest rates(Chart 4-V).106 As a result, the bill rate (monthly average rate on three-month instruments) increased from 6.37 percent in September to 6.73 percent in October and then
to 7.86 percent in November. The long-term interest rate also rose from 5.77 percent
at the end of September to 6.60 percent at the end of October. The yen appreciated to
202 yen per dollar by November 7 and then remained at the level of 200–205 yen.107
The Bank assessed that the circumstance for a stronger yen would be stable enough,................................
102. MOF (2004), p. 358 and BOJ Archives (1985f), pp. 2–3.
103. BOJ Archives (1985h), pp. 14–15.
104. BOJ (1986b), p. 21 and BOJ (1986f), p. 35.
105. BOJ Archives (1985f), pp. 3–4.
106. BOJ (1986f), pp. 3–4.
107. BOJ Archives (1985h), p. 15.

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and the Bank’s stance at money market operation was gradually restored from a stancewith “short-term interest rates at a higher level” to a neutral stance in the second halfof December 1985.108
The “market operations to leave the interest rate at a high level” brought overseas
concerns such that “a move toward monetary restraint for the foreign exchange realignments would be inadequate in terms of Japan’s concurrent economic conditions with asteady but moderate pace of growth.”109
B. Monetary Policy amid a Sharp Rise in the Yen (from the End of 1985 to Spring1986)
1. Further progress of appreciation of the yen against the dollar and the economic
situation in major overseas countries
In the U.S., the Balanced Budget and Emergency Deficit Control Act, also known as
Gramm–Rudman–Hollings Act, was signed into law in December 1985, with the goalof a balanced budget by fiscal 1991. Against a backdrop of developments for fiscal
deficit reduction like this enactment, the U.S. long-term interest rates dropped sharply
from late 1985 to spring 1986 (the monthly average of the 10-year government bondyield declining from 9.8 percent in November 1985 to 7.3 percent in April 1986, as
in Chart 8 (1)-V). The decline in the long-term interest rates supported solid personal
consumption and also encouraged a further depreciation of the dollar. However, thepace of the U.S. import decline against a weaker dollar became slower under a J-curveeﬀect and a structural change in U.S. international trade, where the stronger dollar
in the past phase increased imports of capital goods and parts from other countries
including Japan. With this background, the leakage of demand abroad remained and theeconomic growth became slower under an uptrend of current account deficits (Chart 7(1) and Chart 8 (2)-V).110 Under these circumstances, Saudi Arabia decided to increaseoil production in December 1985 and then crude oil prices started to drop sharply after
early 1986 (Chart 2 (3)-V). The developments for reducing production in the oil-relatedindustry along with lower oil prices slowed the U.S. economic growth in spring 1986
to some extent, and the unemployment rate remained high, at around 7 percent (Charts
7 (1) and (3)-V). Meanwhile, the decline in oil prices and the loosening conditions ofsupply and demand stabilized prices, with a level of less than 2 percent of the year-onyear change in consumer prices (Chart 7(2)-V) and with a level lower than the previous
year’s level in producer prices.
In early 1986, the FRB adjusted the short-term market interest rate to a slightly
lower level and thereby maintained a slightly accommodative policy stance (Chart 8(1)-V), on the grounds of domestic conditions with modest economic growth and ahigh unemployment rate. At the same time, the FRB considered that overly eased monetary conditions with a subsequent instability of the foreign exchange markets should
be avoided from the perspective of preventing a sharp drop of the dollar and a resurgence of inflation concerns.111 The FRB “appeared to be vexed with the dilemma” for................................
108. BOJ (1986f), pp. 3–4.
109. Ogata (1996), p. 23. Also, see Volcker and Gyohten (1992), pp. 246–247.
110. For the Bank’s analysis of the U.S. trade deficits in those times, see BOJ (1986g), pp. 1–2.
111. BOJ (1985c), pp. 15–16.

127monetary policy formulation.112
In West Germany, the economic activity was solid mainly in corporate fixed investment and personal consumption under stable prices. At the same time, the economic growth rate was moderate at a level slightly lower than 3 percent partly due toslower export growth under a higher German mark value (Chart 9 (1)-V). In addition,
the unemployment rate remained at a high level partly due to such structural factors
as favorable institutional frameworks for employees (Chart 9 (3)-V). Meanwhile, theyear-on-year changes around spring 1986 declined, becoming negative for both consumer prices and producer prices, partly due to the eﬀects of a stronger German markand a drop in oil prices (Chart 9 (2)-V).113
The foreign exchange markets were relatively stable from December 1985 to midJanuary 1986, at a level of around 200 yen to the dollar. Then, a G-5 meeting in
London agreed on January 19 that “the progress which has been made so far should
not be reversed,” and there was growing speculation that the eﬀect of a sharp drop in
oil prices for an improvement of trade balances would be greater for Japan and West
Germany than for the U.S. and would further increase the trade surplus of Japan and ofWest Germany. With this background, the dollar started to depreciate to a level below
200 yen to the dollar after late January 1986. Furthermore, the U.S. long-term interest
rate declined continuously and the U.S. current account deficit increased further. Also,
speculation arose that lower oil prices would widen an additional slack of monetaryeasing for the U.S., which should be persistently precautious against renewed inflation.
Then, the dollar weakened to a level of 180 yen to the dollar in March and to 160 yen
to the dollar at the end of April 1986 (Chart 3 (1)-V).114
2. Changing circumstances and the Bank’s response to the sharp yen appreciation
In Japan, domestic demand remained firm mainly in corporate fixed investment andpersonal consumption. Meanwhile, a deceleration of export growth became clearer under the yen’s appreciation and the slowdown of U.S. economic growth. After the endof 1985, industrial production gradually turned to a declining trend and the firms’ business confidence continued to deteriorate mainly in the manufacturing industries withthe passage of time (Charts 1 (1) and (3)-V).115 The Bank assessed the yen’s appreciation positively in the medium- and long-term that a stronger yen would be beneficial toeconomic activity by increasing household income in real terms under lower productprices and by increasing corporate profits under lower prices of import materials. At
the same time, the Bank considered the yen’s appreciation negatively in the near term,with the assessment that “the slower economic growth would be inevitable against abackground of sluggish export growth” under the yen appreciation.116
Meanwhile, prices were further stabilized under the yen’s appreciation and lower
oil prices aﬀecting lower import prices and stable domestic prices (Charts 2 (1), (2), and(3)-V). The Bank assessed that “a failure of price stability would be unthinkable in thenear term.” At the same time, the year-on-year growth rate of money supply (M2+CD)................................
112. BOJ Archives (1986a), p. 2. Also, see Volcker and Gyohten (1992), p. 247.
113. BIS (1987), pp. 17–19, 23–26.
114. BOJ (1986i), p. 4.
115. BOJ Archives (1986c), p. 2.
116. BOJ Archives (1986e), pp. 4–5.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

increased from the 7 percent level in early 1985 to 9 percent in early 1986 (Chart 5(2)-V), and the Bank considered that the higher growth in money supply “would partly
be attributed to deregulations of interest rates on large-scale time deposits as a special
factor.” Also, with the awareness of the rise of land prices in central Tokyo (Chart 6(2)-V), the Bank considered that the land price increase “was mainly caused by greater
demand for oﬃce buildings rather than monetary easing.”117
In December 1985, when the yen was around 200 yen per dollar, the Bank considered that “a fortification of the progress of the higher yen rate at this level” would
be adequate and that a further appreciation of the yen would not be desirable for negative eﬀects on the industries.118 The yen actually continued to appreciate even after
the turn of the year, however, and the eﬀect of the yen appreciation appeared to slow
down future economic growth. For this reason, the Bank lowered the oﬃcial discountrate in January (from 5.0 percent to 4.5 percent), March (to 4.0 percent) and April (to3.5 percent) 1986, considering that “the eﬀect of lower interest rates for improvementin business prospects” would support economic activity, “strengthen the growth of domestic demand,” and thereby “contribute to further adjustment of external imbalances”(Chart 4-V).119 In this regard, it appears that a reduction of interest rates in this period
did not basically cause a dilemma between the domestic and international policy goals,
that is, the stabilization of economic activity on the domestic front and the rectificationof external imbalance on the international front. Meanwhile, when the yen’s appreciation reached a level of around 180 yen per dollar on March 18, the Japanese authorities
solely started the dollar-buying intervention for the first time after the Plaza Accord,120
and when the Bank rate was lowered in both March and April 1986, the policy intention to “prevent excessive fluctuations of exchange rates” was explicitly included in thepress releases.121
3. Coordination of timing in interest rate reductions and the background
The policy developments of the oﬃcial discount rate reductions in March and April
1986 as well as those in February 1987 (to be described later) diﬀered from those ofmonetary policy changes in the other timing, with respect to the prior communications
closely among Japan, the U.S. and West Germany and the timing of the discount rate
reductions almost at the same time by Japan and the U.S. (in addition to West Germany
in March 1986).
It appears that the major countries would not necessarily try to change their monetary policies at the same time under the circumstance before the Bank’s rate reductionin January 1986. Specifically, the FRB’s Chairman Volcker recalled that, “[a]roundthe fringes of a G-5 meeting in London in January 1986, there was some talk about acoordinated move to reduce interest rates to spur the world economy” and that “[t]hetime was not ripe” for the FRB in terms of concerns about an inflationary surge from................................
117. BOJ Archives (1986g), pp. 3–4.
118. BOJ Archives (1986b), p. 2.
119. BOJ Archives (1986b), p. 2. Also, see BOJ Archives (1986c), p. 3, BOJ Archives (1986d), pp. 2–3, and BOJ
Archives (1986f), p. 3.
120. MOF (2004), p. 370.
121. BOJ (1986c) and BOJ (1986e).

129the current sharp depreciation of the dollar.122
Regarding the developments for the oﬃcial discount rate cut in January 1986, theBank recognized that in spite of the unchanged monetary policy in the U.S. “the oﬃcial
exchange rate was reduced expeditiously” in response to “the further appreciation of
the yen as a new development” in the foreign exchange markets. The Bank emphasizedthat the decision was “solely based on independent judgment” and that “neither priorrequests from the U.S. authorities nor preliminary consultations with them existed” inthe policy formulation.123
In contrast, regarding the development for the oﬃcial discount rate reductions inMarch 1986, the Bank implied the existence of preliminary consultations among thecentral banks of Japan, the U.S. and West Germany in order to reduce the interest rates
almost at the same time. Particularly, the BOJ recognized that “according to daily
communication and exchange of information with the FRB and the Bundesbank themonetary authorities of both countries would be likely to reduce the oﬃcial discountrates in the near future,” and that “the strong concern of the FRB for a further sharp depreciation of the dollar from the lower interest rates” was gradually informed. Furthermore, the BOJ considered that “a further sharp depreciation of the dollar with a sharp
appreciation of the yen would possibly have a seriously negative impact on Japan’s
economy.” The BOJ also considered that “the possibility of a sharp depreciation of thedollar would not be ruled out and the realization of the possibility by chance should
be avoided for the stabilization of the international monetary conditions.” Against thisbackground, the BOJ formed a policy intention that “it would be appropriate to reduce
the oﬃcial discount rate for the Bank” if both of the U.S. and West Germany would
lower the interest rates. Furthermore, the BOJ suspected that the intention of the BOJ“would be shared with the counterparts through the communication and exchange of
information.”124
Regarding the oﬃcial discount rate reductions in April 1986, Finance Minister
Noboru Takeshita and Secretary of Treasury James Baker held a meeting on April 8,
and then the Bank’s Governor Satoshi Sumita and Chairman of the FRB Paul Volcker
held a meeting on April 10 prior to the rate reductions.125 It is implied that at the meeting between Governor Sumita and Chairman Volcker as well as the oﬃcials of bothcountries, they exchanged their preliminary opinions about interest rate reductions.
Specifically, Governor Sumita, who attended international conferences associatedwith the Bank for International Settlements (BIS) and the International Monetary Fund(IMF), had discussions with his colleagues there in these meetings and with Chairman
Volcker bilaterally. Governor Sumita appears to have had an impression that “the U.S.
would intend to reduce the oﬃcial discount rate and that they had an aspiration forJapan’s additional interest rate reduction at about the same time.” The Bank further
came to consider that “the FRB’s timing for the reduction of the oﬃcial discount rate
could be in the near future through information exchanges with the FRB” after Governor Sumita’s return to Japan. Under these circumstances, the Bank considered that................................
122. Volcker and Gyohten (1992), p. 247 and MOF (2004), p. 369.
123. BOJ Archives (1986b), pp. 4–5.
124. BOJ Archives (1986d), pp. 2–3.
125. MOF (2004), p. 372.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials“additional assessments would be preferred admittedly.” At the same time, the Bank
recognized that “under the current fluctuation of the foreign exchange rates toward thestronger yen Japan’s interest rate would be appropriate in terms of stabilization of theforeign exchange rates” and that “the calmer prices and the slower economic growth
were becoming more obvious on the domestic front.” Under these circumstances, theBank considered that “the Bank’s policy decision would be to lower the interest rates
if the FRB would reduce the oﬃcial discount rate.”126
These developments were also aﬀected by the two perspectives in the U.S. authorities that lower interest rates would be appropriate for domestic economic activity on
one hand, but a unilateral reduction of the oﬃcial discount rate would be harmful fora possible depreciation of the dollar in terms of the stabler prices and the stabler international capital flow. For example, among the oﬃcials of the U.S. authorities aroundFebruary 1986, Chairman Volcker at the FRB was concerned about the weakening of
the dollar in terms of the price stability and the avoidance of rapid international capital flow. Trade Representative Clayton Yeutter and Commerce Secretary Malcolm
Baldrige, however, wanted a stronger yen for reducing the current account deficit further. Secretary of Treasury Baker also tolerated orderly depreciation of the dollar for
ameliorating the U.S. protectionism. Under such circumstances, during the unscheduled meeting of the Board of Governors on February 24 with the participation of two
newly-appointed governors, a proposal for a unilateral reduction of the oﬃcial discountrate carried 4 votes to 3 despite Chairman Volcker’s opposition. Then, Chairman Volcker, with a fear of a weaker dollar by a unilateral rate reduction, proposed to defer
the implementation of the rate reduction until the achievement of coordination in reducing interest rates simultaneously with Japan and West Germany, and the proposal
was approved unanimously. With this background, Chairman Volcker “initiated further
discussions with” his “colleagues at the Bundesbank and the Bank of Japan, reaching
agreement” that the three countries would lower the interest rates almost at the sametime.127 In July 1986, Chairman Volcker made a congressional statement meaning that“an important consideration in the timing and extent of any rate cut was the risk posedby an excessive reaction in the foreign exchange markets” and that “the discount rate
reductions in March and April were timed to coincide with similar changes by one ormore other key countries, minimizing any impact on the exchange markets.”128
C. Monetary Policies under Macroeconomic “Policy Coordination” (from Summer 1986 to Spring 1987)
1. Circumstances in major economies including Japan (from spring 1986 tospring 1987)
In the U.S., the dollar continued to depreciate, but “erosion of domestic demandabroad” remained under the structural tendency of lesser imports particularly in capital
goods and parts. The current account deficit expanded to a level exceeding 140
billion dollars in 1986 (Chart 8 (2)-V). In addition, the economic activity “in general................................
126. BOJ Archives (1986f), pp. 2–3.
127. Volcker and Gyohten (1992), p. 274. Also, see MOF (2004), p. 370.
128. BOJ (1986i), p. 14. Also, see FRB (1986), pp. 613, 641–642.

131

lacked strength somewhat” and the unemployment rate remained high at a level ofaround 7 percent, partly due to the developments for a large production cutback andreduction of corporate fixed investment in the oil-related industry after lower oil prices
in early 1986. Meanwhile, prices tended to be more stable mainly due to lower oil
prices (Charts 7 (1), (2), and (3)-V). Under these circumstances, the FRB reduced theoﬃcial discount rate unilaterally in July and again in August (Chart 8 (1)-V).129 InWest Germany, exports became slower under the appreciation of the German Mark,but the growth of personal consumption accelerated under better income conditions
with stable prices and tax reductions. Also, corporate fixed investment increased
through higher capacity utilization and better corporate profit, and the overall economy
continued to grow (Chart 9 (1)-V). Concurrently, prices declined sharply under theappreciation of the German Mark and a drop in oil prices (Chart 9 (2)-V), but under
the ongoing economic growth, the Bundesbank adopted a cautious policy stance forfurther monetary easing and kept the oﬃcial discount rate unchanged until the end of1986 (Chart 10 (1)-V).130
In Japan, after fall 1985, exports started to decline under a sharp and significant
appreciation of the yen, and the economic growth rapidly slowed owing to larger
adjustments in both corporate fixed investment and employment due to worsening
profitability in the export-related industries. Meanwhile, the growth in domestic demand remained steady mainly in household spending and capital investment by nonmanufacturers. The overall economy avoided a deep economic downturn, and the composition in gross demand changed with the larger share in domestic demand and thesmaller share of overseas demand (Chart 1 (1)-V).131 On the external front, Japan’s
trade surplus in terms of quantity turned to decrease, but under the eﬀects of a raise inexport prices in response to strong demand for Japanese products and lower oil prices,Japan’s trade surplus in dollar terms grew further from fall 1985 to summer 1986, andthen remained at a high level with no signs of decline until spring 1987 (Chart 3 (2)V).132
In the foreign exchange markets, the dollar continued to weaken against other currencies sharply after early 1986, due to the maintained coordination among the authorities of each country toward the rectification of excessive appreciation of the dollar,
possible room for an additional interest rate reduction in the U.S. under the sharp decline in oil prices, and few signs of improvement of the U.S. trade imbalance (Chart 3(1) and Chart 10 (2)-V).133
2. Developments in the macroeconomic policy coordination for the Louvre Accord
The U.S. Treasury allegedly sought international policy coordination in the field of bothfiscal policy and monetary policy in addition to foreign exchange policy, even before
the Plaza Accord. It appears that the development for the international coordinationof overall macroeconomic policies would be more concrete after the Tokyo Summit................................
129. BOJ (1986i), pp. 8–11. Also, see BOJ Archives (1986i), p. 5.
130. BOJ (1986i), pp. 16–17, 20–21, 23.
131. BOJ (1987b), pp. 1–2.
132. BOJ (1987b), pp. 2–3.
133. BOJ (1986i), pp. 4–5.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

in May 1986 and became full-scale from fall 1986 onward.134 Under these circumstances, the Bank recognized that the interest rates should be kept unchanged on thedomestic front so far as the stability of foreign exchange markets would be maintained
as described below. At the same time, the Bank received requests for further monetary easing from overseas authorities. Against this background, the Bank assessed thatnecessary conditions for the stable domestic economy would possibly be lost withoutobtaining an international agreement for stabler foreign exchange rates, and lowered
the oﬃcial discount rate in November 1986 and February 1987.135
On the Tokyo Economic Summit Conference, Secretary of Treasury Baker proposed a new initiative of “a system of conducting mutual surveillance on economic
policy managements” by applying economic indicators for possible actions.136 On May
6, a framework for such “multilateral surveillance”137 was proposed in the Tokyo Economic Declaration.
Prior to the Tokyo Summit, “the Advisory Group on Economic Structural Adjustment for International Harmony” organized by the request of Prime Minister Nakasone
in October 1985 (headed by the former Governor of the Bank Haruo Mayekawa as the
Chairman) submitted a report (known as the Mayekawa report) to the Prime Minister in April 1986. The Report, with a purpose to “attain the goal of steadily reducing
the nation’s current account imbalance to one consistent with international harmony”
by “setting [it] as a medium-term national policy goal,” included recommendations
such as “basic transformations in the nation’s trade and industrial structure” along with“striving for economic growth led by domestic demand.” (See Appendix 2 for the“Mayekawa Report.”)
It appears that the informal talks toward the full-scale international coordination ofmacro-economic policy including fiscal and monetary policies began around fall 1986.
Minister of Finance Kiichi Miyazawa, who assumed the oﬃce in July 1986, had thefirst meeting with Secretary of Treasury Baker on September 6. It was reported that at
the meeting Finance Minister Miyazawa called for the stabilization of exchange rates
and the reduction of the U.S. fiscal deficit, and that Secretary of Treasury Baker requested Japan to increase domestic demand, lower the oﬃcial discount rate, reform thetax system and reduce taxes. The specific details of the policy coordination were notachieved at this stage, but the authorities of both Japan and the U.S. began a joint study
on strengthening their policy coordination. From late September and early October
1986, such international conferences as the IMF Annual Meetings were held in Wash................................
134. MOF (2004), pp. 354, 372–373.
135. In this regard, Okina, Shirakawa and Shiratsuka (2001, p. 420) pointed out that considerable emphasis wasgiven to ensuring foreign exchange rate stability, especially preventing the yen’s appreciation, in conducting
monetary policy.
136. BOJ Archives (1986h), p. 6.
137. The multilateral surveillance proposed by Secretary of Treasury James Baker mainly consisted of two parts:
first, a formulation of G-7 meetings by finance ministers and their deputies and the conduct of mutual surveillance for the coordination of respective policies among peers at regular meetings at least once a year; second,a framework using several macroeconomic indicators for objective and strict surveillance of respective countries and enforcing automatic corrective measures for countries largely deviating in terms of their indicators.
MOF (2004), pp. 372–373. Also, see BOJ Archives (1986h), p. 6. Among the Baker proposal, member
countries agreed on a formulation of G-7 meetings, but countries did not agree on the use or role of indicators.

133

ington D.C. The second Miyazawa-Baker meeting was also held in this period, and the
Baker–Miyazawa joint communiqué was released on October 31.138 The communiqué
included Japan’s policy actions such as a submission of a supplementary budget to theDiet in order to implement the 3.6 trillion yen package announced in September, a tax
reform plan including reductions in the tax rate for both personal and corporate income, and the Bank’s decision to reduce its discount rate from 3.5 percent to 3 percent
eﬀective November 1. The policy actions by the U.S. included steady reductions in
the U.S. budget deficit, a tax reform providing additional incentives to invest and towork for promoting economic growth, and resistance against protectionist pressures.
Furthermore, in the communiqué they “shared the view that exchange rate instability
can jeopardize stable economic growth” and they “expressed their mutual understanding that . . . the exchange rate realignment is now broadly consistent with the present
underlying fundamentals.”139
The Bank lowered the oﬃcial discount rate in November 1986 and February 1987,
placing priority on international coordination on stabilization of the exchange rates.
Until early fall 1986, the Bank considered that the economy was slowing down but thepace of deceleration would not be increasing,” and also recognized “a rising stock market and wider areas with increasing land prices.” The Bank assessed that “this timing
would not be appropriate for lowering interest rates.”140 Under these circumstances,during Governor Sumita’s U.S. visit, he was asked about “a possible reduction of interest rates” by Chairman Volcker, who coincided with Secretary of Treasury Baker on a
stance of asking additional measures for Japan’s greater domestic demand, at the international meetings in late September and early October.141 The Bank also acknowledged
the necessity to expand domestic demand and Governor Sumita recognized that “given
the size of the external surplus and Japan’s proportion relative to the global economy,
we should prepare well for larger expectations by other countries.”142 Furthermore,
on October 31, the Bank decided to lower its discount rate with the recognition thatmainly in the export-related industries “larger developments for restraining capital investment and employment made firms’ stance for business more cautious on the whole,and thereby economic activity was slowing.”143 The Bank considered that an important
point for a decision on a rate reduction was a likely “reaﬃrmation of the U.S. intention
to cooperate on the exchange rate issues in face of Japan’s reduction of the oﬃcial discount rate.” The Bank also released a statement by the governor that the Bank “highly
evaluates” the announcement that the countries “reaﬃrmed their willingness to cooperate on exchange market issues” in the Baker–Miyazawa joint communiqué.144
After the announcement of the Baker–Miyazawa joint communiqué the exchange
rate remained stable at around 160 yen per dollar until the end of 1986. However, on
December 31, 1986, it was released that the U.S. trade deficit amounted to 19.2 billion................................
138. Volcker and Gyohten (1992), pp. 263–266 and MOF (2004), pp. 354, 374–376.
139. “Joint announcement” on October 31, 1986, taken from BOJ Archives (1986l), exhibit #1.
140. BOJ Archives (1986l), pp. 1–2.
141. Ohta (1991), p. 109.
142. BOJ Archives (1986k), p. 4.
143. BOJ (1986h).
144. BOJ Archives (1986l), pp. 2–3 and exhibit #2.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

dollars (preliminary figure) in one month of November 1986. Then on January 8 Secretary of Treasury Baker showed recognition at the U.S. Senate Budget Committee’s
meeting that the dollar depreciation at the time was appropriate and orderly. Furthermore, the New York Times on January 14 reported that an unidentified oﬃcial of the
U.S. administration wanted the dollar to decline further. Against this background thedollar depreciated further and on January 19 temporarily depreciated to a level of 149
yen per dollar (Chart 3 (1)-V).145
Under these circumstances, Finance Minister Miyazawa urgently visited the U.S.
to meet with Secretary of Treasury Baker, and after the meeting on January 21 they issued another Baker–Miyazawa joint communiqué.146 Regarding the stabilization of exchange rates in the communiqué, “Secretary Baker and Minister Miyazawa agreed thatdevelopments in exchange markets warrant monitoring. The ministers expressed theirview that during most of the period since October 31, 1986, the yen/dollar exchange
rate has been broadly consistent with underlying fundamentals, although there wererecent instances of temporary instability in exchange rate markets. Accordingly, theministers reaﬃrmed their willingness to cooperate on exchange market issue.” Regarding policy coordination among industrial countries in the communiqué, “both ministers
agreed that in order to promote global growth, reduce imbalances and promote open
market, closer coordination of economic policies among all major industrial countries
is critical. Towards this end, they agreed to intensify consultations with other major industrial countries.” This indicated a start of preparatory works for the Louvre Accord
in February.147 And on January 28, the Federal Reserve Bank of New York intervened
to buy the dollar for the first time after the Plaza Accord.148
The Bank considered that after the interest rate reduction in November 1986 “thedeceleration of economic growth started to cease in the manufacturing industry” andexpected that “economic recovery would be clearer after mid-1987 regardless of its
pace.”149 At the same time, the Bank obligingly considered on the financial front that
“under the longer duration of monetary accommodation than ever before, the excessive monetary easing should not contribute to an increasing risk for excessive inflationin the future.” Therefore, in terms of domestic circumstances, the Bank recognizedthat “a further monetary easing would not be appropriate” in monetary policy implementation.150 However, the Bank also considered that “a more stable yen exchange
rate” should be “a major precondition” for a possible realization of economic recovery. Therefore, regarding the yen’s appreciation after early 1987, the Bank assessedthat “a continuously unstable exchange rate with a higher yen could possibly suppress
business conditions of manufacturing industry” and “concerns for a possible economic
recovery would be larger.”151
The Bank exchanged views with the Ministry of Finance before Finance Minister................................
145. MOF (2004), p. 377.
146. MOF (2004), p. 377.
147. All citation in this paragraph were taken from “Press release (in Japanese)” on January 21, 1987 in BOJ
Archives (1987c), exhibit #1. Also, see Funabashi (1988, p. 276) for the reprinted release.
148. MOF (2004), p. 377.
149. BOJ Archives (1987c), p. 2.
150. BOJ Archives (1987a), pp. 5–6.
151. BOJ Archives (1987c), p. 3.

135

Miyazawa’s visit to the U.S. in January. The Bank recognized that the U.S. would
possibly call for a further expansion of domestic demand by a further reduction ofinterest rates in return for coordination toward the stability of foreign exchange rates.
In this regard, at the discussion with the government, the Bank considered that althougha further monetary accommodation would not be necessary on domestic fronts “themost important task at this stage should be the exchange rate stability, and a satisfactory
accord of the exchange rate stability would be a compelling reason for a further interest
rate reduction.
About the agreement between Minister Miyazawa and Secretary of Treasury Baker,
the Bank “evaluated it to a certain extent” and would “assess the timing for the interest
rate reduction, expecting a greater prospect for reaching a multinational agreement on
stabilization of the exchange rates.”152
After the Miyazawa–Baker meeting in January 1987, the substance of agreement
about the stabilization of exchange rates and macroeconomic policy coordination was
discussed and adjusted, and the “Louvre Accord” was achieved at the G-7 meeting of
Finance Ministers and Central Bank Governors, held at the Louvre Palace in Paris on
February 22, 1987.153
In the joint statement on the Louvre Accord issued, Financial Ministers and Central
Bank Governors agreed that “the reduction of the large unsustainable trade imbalances
is a matter of high priority.” They also agreed “to intensify their economic policy coordination eﬀorts in order to promote more balanced global growth and to reduce existing imbalances.” Then, “surplus countries committed themselves to follow policies
designed to strengthen domestic demand and to reduce their external surpluses while
maintaining price stability. Deficit countries committed themselves to follow policies
designed to encourage steady, low-inflation growth while reducing their domestic imbalances and external deficits.” Regarding the exchange rates, the Ministers and Governors agreed that they brought “their currencies within ranges broadly consistent with
underlying economic fundamentals, given the policy commitments summarized in thisstatement,” and they “agreed to cooperate closely to foster stability of exchange rates
around current levels.” Regarding their respective policy management, Japan committed to conduct “monetary and fiscal policies which will help to expand domestic
demand and thereby contribute to reducing the external surplus.” The policies included
the comprehensive tax reform, the early implementation of the fiscal 1987 budget, thepreparation of a comprehensive economic program to stimulate domestic demand, andthe Bank’s announcement to reduce its discount rate by one half percent on February
23. The United States agreed to pursue policies with a view to reducing the fiscal 1988
deficit to 2.3% of GNP from its estimated level of 3.9% in fiscal 1987.154
The Bank decided to reduce its oﬃcial discount rate on February 20 (from 3.0 percent to 2.5 percent, eﬀective on February 23) before the Louvre Accord (Chart 4-V).
Regarding the decision, the Bank considered that “a further continuation of unstable................................
152. BOJ Archives (1987c), pp. 3–4.
153. MOF (2004), pp. 377–381. At this time Italy were against an informal G-5 meeting without Italy and Canada
a day before the formal G-7 meeting, and Italian delegates walked out of the G-7 meeting in protest. Also,
see Funabashi (1988, pp. 277–281) for the reprinted release.
154. MOF (2003b), pp. 184–186.

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exchange rates with upward pressure on the yen would worsen a further deflationary impact on Japan’s economy and thereby hinder a correction of external imbalancethrough promotion of long-term structural adjustment with an uninterrupted growthof domestic demand as an achievement of the most important task for Japan.”155 The
Bank also emphasized “the reduction of interest rates with greater consideration on
stabilization of the exchange rates than before.”156 Also, based on the recognition of“coordination among the major countries as indispensable in ensuring stability of exchange rates,”157 the Bank reflected that its interest rate reduction was “highly evaluatedby the other countries as the specific measure conducted simultaneously with the meeting as well as the leading move among participants” during the G-7 meeting toward anachievement of the Louvre Accord.158, 159
In early 1987, against a backdrop of sharp deceleration of economic activity undera harsh winter and an appreciation of the German mark (to be described later in section
VII. A. 1.), the Bundesbank of West Germany unilaterally lowered the oﬃcial discountrate on January 22 (Chart 10 (1)-V).160
3. Developments on the financial fronts and the Bank’s recognition
The Bank in the 1980s paid attention to developments on the monetary and financial
fronts as an indication of inflationary pressures in a longer term, such as developments
of money supply, asset prices including land prices and stock prices, and a stance ofbank lending by commercial banks. Under a persistent double-digit growth of bankloans (Chart 5 (1)-V), an uptrend of stock prices became stronger in spring 1986 andland price rises in the center of Tokyo commercial district sprawled to the other neighboring areas (Charts 6 (1) and (2)-V).161 The Bank gradually became cautious against
these signs of financial imbalances.
On the reduction of interest rates in April 1986, the Bank called for the representatives of financial institutions to “maintain a prudent lending attitude,” considering
the level of its oﬃcial discount rate as “a postwar record low except for a temporallevel in immediate postwar days.”162 (Similar requests were made when discount rate
reductions were made in November 1986 and February 1987.) In a Nikkei Newspaper
article on May 20, 1986, “an unidentified high oﬃcial of the Bank” expressed “concern about an increase of money supply” as “a lot of dry tinder under the chair.” In................................
155. BOJ (1987a).
156. BOJ Archives (1987c), p. 6.
157. BOJ (1987a).
158. BOJ Archives (1987d), p. 2.
159. Regarding this phase, Kuroda (2005, p. 95) suspected that “external economic policy would be formulated
independently of the other policies.” Okina, Shirakawa and Shiratsuka (2001, p. 419) also considered thatmonetary policy was strongly influenced by the framework of international policy coordination and under
this framework countries with a current account surplus such as Japan and Germany were asked to boost
domestic demand.
160. Three days after the rate reduction (on January 25, 1987), the ruling party in West Germany won the generalelection. Nihon Keizai Shimbun (1987a).
161. In 1985, National Land Agency published a report. National Land Agency (1985, pp. 103–104) included a
projection that new demand for oﬃce space in the area of Tokyo’s 23 wards could reach about 5 thousand
hectares (equivalent to 250 skyscrapers). This estimated number was interpreted carelessly, and then “criticized as fueling bubbles in land prices” during the second half of the 1980s. See Ishii (2011), pp. 283–284.
162. BOJ Archives (1986f), exhibit #2. However, the Bank of Japan’s stance of respecting autonomous formulation of the loan plans by respective banks remained eﬀective until spring 1987.

137

the article “the Bank was also concerned that once an inflationary mind was ignited,
speculative money held for asset-related purposes as well as money for transactions
could rush into commercial products.” The growth of money supply became slightly
higher around summer 1986 (Chart 5 (2)-V), and concurrently during the summer theland price increases in commercial areas in central Tokyo sprawled to residential areasin the city and to the commercial areas of other cities. Regarding the background tothese developments, the Bank increasingly regarded “monetary accommodation as one
factor,”163 and simultaneously recognized speculative fund investment or the “so-called
zaitech”164 as progressively active mainly among firms.165 Furthermore, the Bank acknowledged around fall 1986 that competition among some large city banks to obtain
deposits “appeared to strengthen the volume-oriented tendency of these banks” and thatthe merger between Sumitomo Bank and Heiwa Sogo Bank (in October 1986) brought
more stiﬀ competition to lending. The BOJ recognized commercial banks’ lending attitude as becoming gradually aggressive.166 Furthermore, after the elimination of the yen
conversion regulations in 1984, arbitrages between yen-denominated loans of domestic branches and impact loans (the so-called inpa in Japanese) 167 became active. From
fall 1986 onward, the level of the interest rates declined, and impact loans without areporting requirement under window guidance grew notably.168
The Bank recognized that “there should be no essential diﬀerences between yendenominated loans provided by domestic branches and impact loans” to the extent of an“eﬀect on money supply” and that high growth of impact loans “could be problematicin terms of controlling liquidity in the future.” In this regard, from the April–June quarter of 1987 onward, the Bank called for major banks (specifically city banks, long-term
credit banks and trust banks) as a part of the Bank’s claim for a prudent lending attitude
to ensure a consistent growth rate of impact loans relative to that of yen-denominatedloans.169 , 170 (See Appendix 4 for the development of window guidance.)
However, wholesale prices showed a year-on-year decline and the year-on-yearchange in consumer prices remained almost unchanged at zero percent mainly due tothe appreciation of the yen and the decline in oil prices. The Bank also recognizedthat “the circumstances surrounding price stability would not change significantly”171
for prices in the near term. Against this background, the Bank assessed that the current developments on monetary and financial fronts would “be no threat against price................................
163. See Nihon Keizai Shimbun (1986). Also, see BOJ Archives (1986k), p. 7.
164. “Zaitech” referred to the activity that, in the face of lower funding costs in the prolonged monetary easing,funds obtained by firms were more directed for speculative transactions in assets such as shares, bond andland for seeking capital gains, than for real investments. See BOJ (1987b), p. 6 and BOJ (1988a), p. 16.
165. BOJ Archives (1986j), p. 6.
166. BOJ Archives (1986j), pp. 6–9.
167. The so-called impact loans here refer to foreign currency denominated loans without restrictions on use andeuroyen denominated loans provided by overseas branches. Ginkokeiri mondai kenkyukai (2008), pp. 355–
357. Deregulations for impact loans started in 1980 by enforcement of the new foreign exchange controllaw.
168. BOJ Archives (1987f), pp. 1–3.
169. BOJ Archives (1987f), pp. 1–2.
170. In this regard, Okina, Shirakawa and Shiratsuka (2001) (pp. 422–425) noted that the Bank was seeking toshift to tightening from around spring 1987.
171. BOJ Archives (1987b), p. 5.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

stability”172 and the developments would not become a hindrance to the reduction ofinterest rates.

VII. Economic Growth Led by Domestic Demand and Monetary
Policy (from Spring 1987 to Spring 1989, Phase VI)• After the second half of 1987, reflecting price stability as a result of the past
appreciation of the yen and the eﬀect of monetary easing and fiscal expansion
under the Louvre Accord, Japan’s economy entered a phase of strong expansion,
led by increases in personal consumption and corporate fixed investment. The
expansion continued with a faster pace than the Bank’s preliminary anticipation.
• During the summer and fall of 1987, the Bank increasingly became cautious about
excessive monetary easing, while confronting the greater upward pressure on
prices with the tighter domestic conditions of supply and demand, as well as theindication of larger financial imbalances such as faster growth in money supply,
more aggressive lending attitude by commercial banks, and steep rises in stock
prices and land prices. Against this background, the Bank called for a “prudent
lending attitude” toward commercial banks in window guidance while respecting
the autonomous formulation of commercial banks’ loan plans as a basic principle.
• In the aftermath of Black Monday in October 1987, the Bank strenuously tried
to stabilize financial markets mainly by providing plentiful liquidity. After themarkets calmed down, the Bank assessed by contrast that a sharp drop of stock
prices reduced speculative bank loans and that the financial imbalances somewhat
shrank. It appears that the Bank in those days considered ongoing structuralchanges for the economy driven by domestic demand to be elevating the potential
economic growth rate, and that the Bank’s recognition of an expansion of the
bubble in those days was not suﬃcient. Regarding a concurrent prospect in thenear term, the Bank considered that the further appreciation of the yen after theBlack Monday would support both a calmer inflationary mind and more active
fixed investment, and that both price stability and higher economic growth would
thereby continue. Accordingly, the Bank continued monetary accommodation by
maintaining low interest rates.
• Throughout the period from spring 1987 to early 1989, the Bank recognized thatthe prolonged monetary accommodation served as a contributing factor to increases in asset prices. At the same time, it appears that the Bank did not strongly
recognize the necessity of monetary tightening so far as prices were stable.
• Meanwhile, in light of the progress of financial liberalization, the Bank played aleading role in the market reforms in November 1988 for smoother market operations, including a shift to an oﬀer-bid system at interbank money markets.

................................
172. BOJ Archives (1986l), p. 3.

139

A. Macroeconomic Policy Coordination and the Black Monday (from Spring1987 to Spring 1988)
1. Overseas circumstances under macroeconomic policy coordination after the
Louvre Accord (from spring to fall 1987)
In the U.S., from spring to fall 1987, the economy expanded at a faster pace and theunemployment rate declined gradually, led by a significant export increase under the
past depreciation of the dollar, and recovering corporate fixed investments under anincrease in production and improvement in corporate profits (Charts 7 (1) and (3)VI). However, the nominal trade deficits of the U.S. were higher than the previous
year’s level owing to the past depreciation of the dollar (Chart 8 (2)-VI). Under thesecircumstances, protectionist movements continued in the U.S., such as the Omnibus
Trade Reform Act of 1987 with protectionist clauses, which was submitted to Congressin early 1987 and discriminative measures became eﬀective in May 1987 regarding thesemiconductor issue between the U.S. and Japan.173
On the price fronts, the year-on-year change in producer prices increased fromnegative to positive (specifically from −2.6 percent in January 1987 to +4.5 percent inAugust 1987 on a year-on-year basis), owing to a rebound in oil prices in early 1987
after an agreement for coordinated reduction of production at the OPEC meeting in
December 1986, an eﬀect of the past depreciation of the dollar, and a tighter balanceof supply and demand under economic expansion (Chart 2 (3)-VI). The change in
consumer prices also increased from +1.5 percent in January 1987 to +4.3 percent
in August on a year-on-year basis (Chart 7 (2)-VI). Against this background, in lateMarch 1987, the FRB turned to tighten market operations to prevent a higher domestic
inflation in advance and to ensure exchange rate stability. In September 1987, the FRB
raised its oﬃcial discount rate for the first time in three years and five months (Chart 8(1)-VI), under the initiative of new Chairman Alan Greenspan, who assumed oﬃce inAugust 1987.174
In West Germany, economic activity slowed down in the first half of 1987 due tothe past appreciation of the German mark and the eﬀect of the harsh winter in early
1987, but in summer and fall 1987 a pause in the German mark appreciation recovered exports and thereby turned to improve economic expansion. Consumer prices(the cost-of-living index) remained below the previous year level from April 1986 to
March 1987, but turned to be positive on a year-on-year basis from April 1987 onward(Charts 9 (1) and (2)-VI). Under these circumstances, from February to around June
1987, the Bundesbank maintained an accommodative policy stance in market operation
for lower interest rates. Then, the year-on-year changes in prices turned to be positive,the economy was recovering although modestly, and the appreciation of the German
mark ceased in the foreign exchange markets. In this changing circumstance, the Bundesbank changed its stance from July 1987 onward to rather tightening by raising therepo interest rate and thereby allowing increases of market interest rates, in order toprevent a greater inflationary sentiment (Chart 10 (1)-VI).175................................
173. BOJ (1987g), pp. 6, 8, 13.
174. BOJ (1987g), pp. 8, 12.
175. BOJ (1987g), pp. 6–7, 10, 12–13, BOJ (1987c), p. 53, BOJ (1987d), p. 53, and BOJ (1987e), p. 36.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

2. Japan’s circumstances and policy stance under macroeconomic policy coordination (from spring to fall 1987)
Japan’s economy sharply recovered, led by domestic demand mainly attributable to active household consumption and fixed investments in nonmanufacturing sectors, underthe eﬀect of the eased monetary conditions and price stability with the past appreciation of the yen. In the first half of 1987, Japan’s policy authorities considered that “theeconomy remained sluggish in an adjustment process,”176 and promoted further expansion of domestic demand for the goal of reducing current account surplus, by meansof monetary easing and fiscal expansion (larger fiscal outlay and tax reduction) consistently with the intention of the Louvre Accord. In summer 1987 and afterwards, theaggressive fiscal policy such as the Emergency Economic Measures with a fiscal measure of more than 6 trillion yen announced at the end of May 1987 become eﬀective,
and the adjustments in inventory and fixed capital stock mainly in the export-oriented
manufacturing industry were becoming complete. Then, the manufacturing industry
began to show an increase in production and a sharp surge in fixed investments, mainly
for rationalizing production processes, developing new goods and entering new business fields. After summer 1987, the economy “entered a phase of vigorous economic
expansion” and the employment conditions also tended to improve (Chart 1 (1)-VI
and Chart 2 (4)-VI). Although prices were stable on the whole, in summer and fall1987 commodity prices increased sharply, mainly in construction-related items, due tothe tighter conditions of supply and demand, the higher month-on-month changes inwholesale prices, and a larger number of firms expecting higher future prices was indicated in the Tankan business survey in August 1987. In addition, land prices continued
to rise mainly in the large cities, and stock markets were active (Charts 6 (1) and (2)VI). The changes in money supply continued to grow progressively after early 1987 (asthe year-on-year change of M2+CD increased from +8.2 percent in December 1986 to+11.1 percent in September 1987). Behind the scenes, a stance of bank lending by financial institutions became aggressive, and the double-digit growth of bank loans on a
year-on-year basis accelerated further mainly due to increasing demands for so-called
zaitech (speculative investments), for constructing buildings of oﬃces and apartments,and for impact loans without a reporting requirement under window guidance (Charts 5(1) and (2)-VI). Meanwhile, on the external fronts, the trade surplus on a volume basis
was solidly decreasing, but the pace of decline in surpluses on a nominal dollar basis
was small for both trade and current accounts. In the foreign exchange markets, theyen remained generally at a range of 150–140 to the dollar, but sometimes appreciatedexcessively due to a delay in rectifying trade imbalances between the U.S. and Japan(Charts 3 (1) and (2)-VI).177
Under these circumstances, the Bank’s first priority until around May 1987 was“to strengthen coordination among major countries and thereby ensure the stability of
exchange rates,”178 and in May 1987 the Bank conducted market operations to lower
short-term market interest rates for a permeating eﬀect of monetary easing (Chart 4................................
176. BOJ Archives (1987g), p. 6.
177. BOJ (1988d), pp. 1–7 and BOJ Archives (1987j), attachment pp. 1–9.
178. BOJ Archives (1987i), p. 3.

141VI). In face of the greater protectionist movements at Congress in the U.S., the Joint
Statement on Japan-United States Relations after the meeting on April 30 and May 1
referred to the step “taken by the Bank of Japan to begin operations to lower short-term
interest rates” as part of the statement of actions by two countries regarding policy
coordination after the Louvre Accord.179
At the same time, the Bank became increasingly concerned about developments on
the financial front, such as higher growth in money supply, aggressive lending stance byfinancial institutions, and rises in both stock and land prices. The Bank acknowledgedthat “the eﬀects of the prolonged monetary relaxation and lower interest rates would
be undeniable” for supporting these developments and also considered that the eﬀects
of financial developments upon firms’ behaviors including financial institutions andfuture circumstances for prices “must be carefully monitored with full attention.”180
Against this backdrop as stated above, the Bank called for a “prudent lending attitude”
for financial institutions (or the so-called moral suasion to suppress excessive lending)from April–June quarter of 1987 in the conduct of window guidance. Furthermore,
the Bank also asked the institutions to additionally work for the consistent growth of
impact loans relative to the growth of the yen-denominated loans, despite no reporting
obligation for impact loans under the window guidance.181 Furthermore, in face of thehigher growth rate of money supply and rises in commodity and wholesale prices insummer 1987, the Bank came to recognize that “price movements and circumstances in
the future should require increasingly close attention” and that “a more cautious policy
stance with greater attention to prices is necessary.”182 In this regard, the Bank tooka stance of market operations allowing seasonal increases of interest rates toward theend of September.183 Also in the window guidance for the October–December quarterof 1987, the Bank asked for the major banks (city banks, long-term credit banks, andtrust banks) to formulate their loan planning such that “the year-on-year change of theincrement of bank lending should be reduced further than a previous quarter and to
be a level around zero” and thereby indicated “a stance of more tightening.”184 (SeeAppendix 4 for development of window guidance.)
3. Occurrence of and escape from Black Monday (from around October 1987 tospring 1988)
On October 19, 1987, stock prices crashed in the New York market and the closing
price of the S&P500 fell by 20 percent from the previous day’s level. The crash aﬀected
the markets in other countries, including Tokyo, London, Paris, and Frankfurt on thefollowing day (Chart 6 (1)-VI). Meanwhile, in the foreign exchange markets, the dollar
weakened against all major currencies (Chart 3 (1)-VI and Chart 10 (2)-VI). Behindthe scenes of the stock market crash, it was mainly considered that concerns about theoutlook of the U.S. economy grew among the market participants amid the persistenttwin deficits of the U.S. public finance and international trade. Other considerations are................................
179. BOJ Archives (1987i), p. 6.
180. BOJ Archives (1987h), p. 7.
181. BOJ Archives (1987f), p. 2.
182. BOJ Archives (1987k), p. 6.
183. Nihon Keizai Shimbun (1987b), p. 18.
184. BOJ Archives (1987l), pp. 1–4.

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that the framework of policy coordination among the major countries after the Louvre
Accord was sometimes undermined by press reports, such as Secretary of Treasury
Baker’s criticism of the rate increases in West Germany, and that the so-called program
trading185 with the purpose of mitigating the risk of price declines amplified by falling
prices in the stock market.186
In response to the occurrence of the stock market crash known as Black Monday,
the central banks in major countries supplied liquidity to markets as crisis management
measures, and also expressed their intention to maintain the framework of international
policy coordination. The FRB aﬃrmed “its readiness to serve as a source of liquidity
to support the economic and financial system” by issuing a short statement. Practically, the FRB provided liquidity through market operations and also liberalized therules for lending government securities from its own portfolio to financial institution
for mitigating a counterparty risk within transactions of good collateral felt by financial
institutions. Consequently, the decline of the federal funds rate was 1 percent in two
weeks (Chart 8 (1)-VI).187 In West Germany, the Bundesbank lowered the interest rates
for Lombard lending and for securities purchase and resale operations, and then reduced the oﬃcial discount rate in early December (Chart 10 (1)-VI).188 On October 20,
1987, the BOJ also released a statement by the governor that the Bank would “steadily
maintain the framework for coordination under the Louvre Accord.”189 While “maintaining a cautious policy stance with careful attention to prices,” the Bank provided
liquidity smoothly with a stance that “full attention should be paid to unstable developments in both domestic and overseas financial markets, and that the management ofoperations in money markets should be flexible as necessary.”190
The finance ministers of the U.S. and West Germany had a meeting immediately after Black Monday and they expressed the intention to maintain the framework of international coordination. Also after the monthly meeting at the BIS on November 9, 1987,
Group of 10 governors released a statement bearing the signature of the chairman. The
statement emphasized the importance of adopting fiscal policies for correcting external imbalances, stabilizing the foreign exchange rates and maintaining noninflationary
growth. The statement also demonstrated the readiness of the central banks to support
these objectives with appropriate monetary policies. On November 20, the U.S. government agreed with congressional leaders on a package to reduce the deficit, and on
December 23, G-7 Finance Ministers and Central Bank Governors issued a statement
reemphasizing their common interest in more stable exchange rates.191
In the foreign exchange markets, the dollar weakened from a level of 140 yen per................................
185. “Program trading” refers to the strategy calling for purchases and sales according to stock prices automatically under a prearranged program. During the crash on October 1987, transactions of selling in futures
markets of stock indexes in response to falling spot equity prices were automatically executed under a prearranged program for reducing the risk of price declines. These transactions were considered to amplify
falling prices, by causing an extra decline in futures prices and then bringing a further decline in spot prices
in the stock market.
186. BOJ Archives (1987m), p. 2. Also, see BOJ (1988d), p. 7 and BIS (1988), p. 91.
187. BOJ Archives (1987m), p. 3. Also, see BIS (1988), pp. 144–146.
188. BOJ (1987h), pp. 85–86.
189. BOJ (1987f), p. 47.
190. BOJ Archives (1987n), p. 6. Also, see BOJ Archives (1988b), p. 4.
191. MOF (2004), pp. 386–387 and BOJ (1987f), p. 47.

143

dollar at the time before Black Monday to a level of 120 yen per dollar by the end of
1987, but after early 1988 the tendency of a weaker dollar turned to flattening partly
due to an observed rectification of the U.S. trade account (Charts 3 (1) and (2)-VI).
Then, the stock market of each country bottomed out and rebounded (Chart 6 (1)VI). Therefore, the Bank in January 1988 assessed that the worldwide “evolution ofplunging stock prices into financial panics was prevented so far and their impact onreal economic activity was very small and limited.”192
Concurrently, Japan’s economy “experienced autonomous and strong expansion
led by domestic demand” on economic activity, in spite of the global plunge in stock
prices and the further appreciation of the yen. Active consumption by households andinvestments by the non-manufacturing industry continued, and fixed investments of the
manufacturing industry expanded mainly due to an increase in production and expansion of corporate profits (Chart 1 (1)-VI). On the price front, the Bank assessed that“the upward impetus of wholesale prices weakened more significantly than before”193
and that “the price stability would remain”194 for a while, mainly due to the past appreciation of the yen, increase in less expensive imports of products and decline in oil
prices (Charts 2 (1) and (2)-VI). On the financial front, the Bank maintained its cautious attitude toward a higher growth rate of money.195 At the same time, regarding
the contents of bank loans behind the money growth the Bank’s assessment was thatthe lower stock prices reduced speculative bank loans, such as speculative lending for
financial investments and real estate-related loans, and that loan demand for real economic activity was increasing such as fixed investments and working capital for small
and medium-sized firms, under the permeation of economic expansion, including thatin regional areas. In this regard, the Bank acknowledged that the stock price declines
worked toward a mitigation of financial imbalances (Charts 5 (1) and (2)-VI).196
B. The Robust Economic Growth with Stable Prices and the Consequent Maintenance of Low Interest Rates (from Spring 1988 to Spring 1989)
1. Economic conditions of major countries (from spring 1988 to spring 1989)
In the aftermath of Black Monday, the turbulence in financial markets and foreignexchange markets worldwide was contained due the prompt policy responses by thepolicy authorities of major countries to avert a crisis. The deflationary impact of market
turbulence on economic activity “was relatively mild in the major countries” and theireconomies expanded at a solid pace in 1988.197
In the U.S., exports remained buoyant under the weakened dollar after Black Monday and the improving competitiveness of U.S. firms, and then full-fledged materialization of fixed investments followed. The employment conditions also improved, as
evidenced by a decline of the unemployment rate in mid-1988 to the lower part of the
5 percent range, the lowest since 1974. With an increase in household income, per................................
192. BOJ Archives (1988b), pp. 4, 7.
193. BOJ Archives (1987n), p. 5.
194. BOJ Archives (1988b), p. 6.
195. BOJ Archives (1987n), p. 5.
196. BOJ Archives (1987o), attachment p. 1 and BOJ Archives (1988a), p. 2.
197. BOJ Archives (1988c), p. 1. Also, see BOJ (1988h), p. 5.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

sonal consumption also strengthened and the U.S. economy achieved strong growth ofaround 4 percent in 1988.198
On the price front, inflationary expectations intensified between spring and summer partly due to the dollar depreciation after Black Monday, rapid tightening in goods
and labor markets under a robust economy, and a surge in commodity prices under adrought in the Mid-West (Charts 7 (1), (2), and (3)-VI). Furthermore, oil prices rebounded in late 1988 following the OPEC conference in November 1988, where anagreement was reached on production limitation and price targeting with the re-entryof Iraq (Chart 2 (3)-VI).199 Meanwhile, the U.S. external imbalance improved considerably on a nominal basis as well as on a real basis, although the pace of improvement
somewhat slowed after mid-1988 reflecting larger imports parallel with continued economic expansion.200 In these circumstances, the FRB was concerned about inflation
by tighter conditions in goods and labor markets. In spring 1988 the FRB graduallyswitched its policy stance from accommodative to tightening and then raised the oﬃcial
discount rate in August 1988 and February 1989 (Chart 8 (1)-VI).201
As for Europe, corporate fixed investments were stimulated on the whole against
a background of increases in foreign direct investment in Europe from countries both
inside and outside the region in light of a schedule toward completion of market integration by the end of 1992.202 In West Germany, personal consumption was significantly
aﬀected by a substantial income tax cut at the top of 1988, and exports recovered due tothe weaker German mark from spring 1988 onward. Under such circumstance, corporate fixed investment was stimulated and thereby added more buoyancy to the economy
after mid-1988 (Chart 9 (1)-VI).203 The Bundesbank assessed that inflationary expectations were intensified under an economic expansion and the depreciation of the German
mark reflecting the rectification of the U.S. current account deficit, and then raised theoﬃcial discount rate in July 1988, August 1988 and January 1989 (Chart 10 (1)-VI).204
2. Coexistence of robust economic growth and stable prices (from spring 1988 tospring 1989)
In Japan, responses to Black Monday subdued by spring 1988, and Japan’s economy
maintained active consumption outlays and a strong uptrend of corporate fixed investments in both manufacturing and non-manufacturing industries. The Bank assessedthat the endogenous expansion of domestic demand drove “the economic activity witha stronger uptrend” (Chart 1 (1) and (3)-VI). The Bank also considered that the pace ofeconomic expansion was “greater than the expectation” in the past.205
As for the rectification of external imbalances, a declining trend of trade surplus
in dollar terms as well as in volume gradually became obvious, under a robust economic expansion led by domestic demand (Chart 3 (2)-VI). Meanwhile, the year-on................................
198. BOJ (1988h), p. 5.
199. BOJ (1988h), pp. 10–11.
200. BOJ (1988h), pp. 12–13.
201. BOJ (1988h), p. 11, BOJ Archives (1988g), pp. 1–2, BOJ (1989h), p. 13, and BOJ Archives (1989c), p. 2.
202. It was pointed out that movements toward market integration in Europe were activated further after eﬀectuation of “Single European Act” in July 1987. See BOJ (1989a), pp. 24–25, 35.
203. BOJ (1988h), p. 6.
204. BOJ Archives (1988g), p. 2 and BOJ Archives (1989b), p. 4.
205. BOJ Archives (1988c), p. 4.

145

year change in wholesale prices remained negative and the change in consumer prices
remained at 1 percent or less on a year-on-year basis (Charts 2 (1) and (2)-VI). Considering the eﬀect for more stable prices by a stronger yen and subdued oil prices (Chart
2 (3)-VI) along with the contribution of past fixed investment for expanding supply
capacity and enhancing productivity, the Bank assessed that “price stability would not
be jeopardized” in the near future.206 In this regard, the Bank in 1988 recognized that
“Japan’s economy achieved a favorable balance of the vigorous increase in domestic
demand under price stability and the resulting rectification of external imbalances andalso showed favorable economic performance relative to other economies.”207
On the monetary and financial fronts, the year-on-year change in money supply(M2+CD) once reached the 12 percent level from late 1987 to early 1988, and thengradually declined throughout 1988 to a level of 10 percent at the end of 1988. The
year-on-year change in bank loans remained at a double-digit level. However, thegrowth in bank loans leveled oﬀ and declined during 1988, partly owing to the decline
of loan demand for speculative financial or real estate-related investments after Black
Monday and the shift by large firms’ funding through securities issuance instead ofbank borrowing under favorable market conditions (Charts 5 (1) and (2)-VI). On theother hand, under a robust economic expansion led by domestic demand, bank lending
for small and medium-sized firms was buoyant owing to demand for fixed investment
in domestic demand-oriented industries. Their business projects included distribution
centers, new branches by retailers, the construction of oﬃce buildings and the development of resort areas in the non-manufacturing industry, as well as investment inelectrical machinery, precision instruments, and automobile subcontractors in the manufacturing industry. Bank lending also increased in personal loans for constructing a
rental apartment or loans with no use restrictions.208 On the geographical front, due tothe permeation of robust economic expansion across regional areas, demand for bankloans widened from city to regional areas after late 1987. In summer 1988 the yearon-year change in loans provided by regional banks (regional banks and sogo banks)
tended to exceed that in loans provided by major banks (city banks, long-term credit
banks and trust banks).209 The Bank cautiously acknowledged the continuous highgrowth rates of money supply and bank loans as well as the excessive easing of firms’
financial conditions. Meanwhile, regarding borrowers’ demand, the Bank recognizedthat demand for speculative real-estate-related or financial investments was declining
whereas demand for real economic activity under economic expansion was increasing.210
Under these circumstances, the Bank took a tighter policy stance in market operations and window guidance, but did not tighten monetary policy completely. In
the short-term money markets during summer 1988, stronger demand for fund-raisingunder the robust economic activity along with higher overseas interest rates brought
about higher interest rates in open markets, such as markets for euroyen deposits, CDs................................
206. BOJ Archives (1988c), p. 5.
207. BOJ Archives (1988c), p. 7. Also, see BOJ Archives (1988f), p. 7 and BOJ (1988g), pp. 26–27.
208. BOJ Archives (1988d), attachment pp. 3–7 and BOJ Archives (1988h) attachment pp. 6–7.
209. BOJ Archives (1989a), p. 5.
210. BOJ Archives (1988g), p. 6, BOJ Archives (1988h), attachment p. 8, and BOJ (1988l), pp. 1–2.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

and repurchase bonds (gensaki). The interest rate diﬀerential between the open markets and the interbank markets, such as bill discount markets, widened considerably(Chart 4-VI). The Bank “assessed that the rising interest rates in bill discount markets
due to changes in market conditions were reflecting actual and autonomous market
developments,” and then “accepted” these developments to some extent. At the sametime, the Bank recognized that “a growing excessive expectation for higher interest
rates across financial markets was not favorable.” In the money market operation, theBank conducted “flexible operations” in the markets for bill discount, CDs and repurchase bonds, and thereby suppressed a possible sharp rise in market interest rates
consequently.211
In window guidance, the Bank continued to request commercial banks to carry out“the maintenance of a prudent lending attitude.” For the October–December quarterof 1988, the Bank intended to “maintain the request of prudent lending attitude with
the nuance of the similar or slightly stronger magnitude relative to the July–September
quarter.”212 At the same time, the Bank recognized that there would be “obviously limited room” in calling for “a more restrictive lending stance than ever before under thecurrent basic principle” without a change of policy stance for full-fledged tightening.213
Among the aforementioned economic recovery becoming gradually clearer fromspring 1987 onward along with the conspicuous signs of high money growth and risingasset prices, the Bank gradually took a cautious stance in monetary policy management. Regarding the stance in 1988 after Black Monday, the Bank acknowledged thatit “should continue to call for restrictive loan planning” for commercial banks throughwindow guidance.214
However, considering the aforementioned assessment of economic and financial
conditions as well as the policy stance reflected on money market operations, the Bank
appears to have assessed also that the desirability of monetary tightening slightly diminished after Black Monday as well. It also appears that the Bank intended to “havea direction of maintaining the current stance basically in the near term” without aturnaround to complete tightening.215, 216
The wider interest rate diﬀerential between the open and interbank markets causeda shift of transaction to open markets with higher interest rates, and the outstanding
amount of the bill market as a primary market for the Bank’s monetary operations
declined sharply. Partly triggered by this incident, the Bank implemented the reform of
the interbank money market in November 1988 for conducting market operations more................................
211. BOJ Archives (1988g), pp. 6–7.
212. BOJ Archives (1988h), p. 2.
213. BOJ Archives (1988i), p. 6.
214. BOJ Archives (1988d), p. 2.
215. BOJ Archives (1988k), p. 9.
216. In this regard, Okina, Shirakawa and Shiratsuka (2001, p. 423) stated developments in window guidancefrom the April–June quarter of 1987 onward, as follows: “In the situation where the oﬃcial discount rate
was unchanged, the BOJ could not conduct eﬀective moral suasion on financial institutions to suppresslending, and even if it did lending would probably not have declined. On the other hand, if the BOJ did noteﬀect strong moral suasion, there was a risk that the market would think the BOJ had no concern over theaggressive lending attitude of commercial banks. Under such circumstances, although the BOJ graduallystrengthened window guidance with respect to the lending of commercial banks, more decisive policy action
had to wait until the oﬃcial discount rate was raised.”147

smoothly (also see Appendix 3 for a review of short-term money market operations).217
3. The Bank’s recognition about changes in the economic structure
Prior to the Plaza Accord, the Bank recognized that the most important and immediatetask for Japan was “a correction of external imbalances along with the continuous andstable growth for avoiding a surge of protectionist moves and thereby preventing a collapse of the free trade regime which was the most beneficial for Japan.”218 The Bank
also believed that “the nature of the Japanese economy that exports can increase easily
while imports hardly increase” was formed because Japan’s economy “adjusted itself
to the two oil crises, when eﬀorts were made to strengthen export competitiveness andto convert the economic structure to promote resource conservation.”219 Accordingly,
the Bank also considered that the “promotion of yen appreciation seemed basically tobe the only macroeconomic measure for correcting the external imbalance as well as
pursuing a more balanced and stable growth.” In this regard, the Bank acknowledgedthat yen appreciation had the short-term “eﬀect of depressing exports and stimulating
imports” as well as the “eﬀect of stimulating personal consumption” through lower import prices (or better terms-of-trade conditions). The Bank also believed in the longer
term that a higher yen had “the eﬀect of absorbing resources for investments in domestic demand” by improving the relative profitability of economic activity related tothe domestic sector over that relative to the external sector, and therefore a higher yen“would enable a more balanced growth on a medium- and long-term basis.”220
After the Plaza Accord, the Bank still acknowledged that “rectification of the external imbalance remained the major policy mandate for Japan’s economic growth inharmony with the growth of world economy.” For this task, the Bank recognized that“the persistent appreciation of the yen as an undertone could be the fulcrum for solidtransformation of Japan’s industrial structure” and that “the shift of resources toward
technology-intensive industries or industries aiming at domestic demand, as well as
the promotion of foreign direct investments or horizontal trade through larger productimports” should be materialized in the long term.221 , 222
In 1988, the Bank believed that the above-mentioned long-standing concerns werebeing resolved. Specifically, the Bank considered that “increasing imports caused by
the yen’s appreciation [would] continue to play a role in stabilizing prices”223 throughcompetition between domestic and imported products, as “the safety valve”224 eﬀect
of imports would remain functioning in the near term. Under such circumstances, theBank recognized that “the terms-of-trade gains and stable prices stimulated domestic
demand through increases in the real income of firms and households, which, in turn,contributed to correcting external imbalances.” The Bank acknowledged the surfac................................
217. Kinyu Zaisei Jijo (1988b), pp. 18–19.
218. BOJ (1985a), p. 24 in Japanese original. Also see BOJ (1985b), pp. 2, 18.
219. BOJ (1985a), p. 2 in English version.
220. BOJ (1985a), p. 25 in Japanese original. Also see BOJ (1985b), pp. 18–19.
221. BOJ (1986d), p. 17. Also see BOJ (1986f), pp. 7–8.
222. In this regard, Okina, Shirakawa and Shiratsuka (2001, p. 421) stated that monetary policy was influenced
by the economic policy agenda of the time that the current account surplus should be reduced by expanding
domestic demand.
223. BOJ (1988c), p. 2.
224. BOJ (1988c), pp. 2, 14 and BOJ (1989b), p. 2.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

ing “terms-of-trade gains accompanying the yen’s appreciation” in short. Furthermore,from the medium- and long-term perspectives, the Bank considered that “in these circumstances, a number of structural changes started to appear, e.g., a rapid increasein the import of manufactures and a shift in corporate marketing strategy from being
export- to domestic-market oriented” and that “all this not only tended to reduce external payment imbalances, but also contributed to price stability through promoting
competition in the domestic market.” In this regard, the Bank considered that “in short,a favorable nexus emerged in the economy in the sense that economic growth, pricestability and external adjustment augmented each other.”225
Under such circumstances, the Bank recognized that “the expansion of overseas direct investment, the substitution of imported semi-finished goods for domestic supplies,
and the penetration of imported final goods in domestic markets” started to reduce thelevel of structurally persistent trade surplus. The Bank also considered that under thesecircumstances “the reallocation of resources is also under way with capital and labor
shifting towards production aimed at domestic sales, which, in turn, increases supply
potential as well as corporate and household income, and hence domestic demand,”and eventually “a dynamic process involving demand, supply and income” was emerging.226
The Bank particularly recognized corporate fixed investments as key to supporting
the high growth under stable prices from the aspects of creating new demand, enhancing supply capacity and improving productivity, and then gradually became confident
in their sustainability. Specifically, the Bank assessed that investments of manufacturing industries such as for developing new products, rationalizing, increasing new
production capacity and expanding the domestic network “are expected to materialize
gradually towards the end of the year [1988].” Accordingly, the Bank believed that“the increase in supply capacity was a precondition for realizing sustained growth,and it would also reinforce price stability.”227 The Bank also recognized for nonmanufacturing industries that “vigorous corporate demand for oﬃce automation andstrong consumption induced active investment especially by the leasing and distribution industries” and that “in light of the high return on capital and potential demand
related to resort and urban development, fixed investment in the non-manufacturingsector will continue to increase for some time.”228
Despite the limited availability of documents, it appears to imply that the Bank
concurrently assessed the robust economic growth under price stability as an indication of the higher potential growth rate of Japan’s economy. Not only the Bank but
also the wider public shared this bullish expectation of Japan’s economy. For example, Economic Survey of Japan (1988–1989) by Japan’s Economic Planning Agency inAugust 1989 reported that the characteristics such as “sophistication of both industry
and daily life,” greater “globalization,” and an “accumulation of assets” (such as financial assets and rising asset prices) led to the “Japanese economy . . . as having entereda new phase in its history” and thereby discussed the development of the “economy................................
225. BOJ (1988f), pp. 7–8.
226. BOJ (1988b), p. 1.
227. BOJ (1988f), p. 11.
228. BOJ (1988f), p. 12.

149

at the new phase.” The report also saw “advances toward information intensification,
high-technology application and manufacture of higher added value products” and considered that “this new sophistication has set the stage for the powerful expansion ofdomestic demand.” In this regard, it appears that bullish expectations for higher productivity were widely shared.229
4. Diﬀerences in the situation between major overseas countries and Japan
While other central banks in major countries, including the FRB and the Bundesbank,changed their policy stance and raised the interest rates in 1988, the BOJ maintained
the oﬃcial discount rate at 2.5 percent until May 1989. Regarding such diﬀerence inactions, the Bank considered that “the recent policy responses in major overseas countries for raising the interest rates shared common characteristics in growing concerns
for higher inflation under economic expansion.”230 At the same time, the Bank assessedthat “the relatively large depreciation of home currencies and the concerns on domestic
prices toward acceleration occurred in West Germany and the U.K. but did not occur inJapan” by pointing out Japan’s diﬀerences from West Germany and the U.K. Thus the
Bank acknowledged that Japan’s current economic condition should diﬀer from thesecountries in this regard.231 The Bank also recognized that in the background were thesolid aspects of real economic activity such as “strong economic fundamentals” and“higher productivity” as well as the eﬀect of the safety valve of imports under the past
appreciation of the yen.232
Concurrently, opinions of “Japan as the anchor” were prevalent, such that fromthe perspective of international policy coordination “for propelling the world economy
similarly to the prosperous years of the U.K. and the U.S., Japan should maintain low
interest rates and monetary accommodation as long as possible.”233 Regarding such
opinions, the Bank considered that, in order to sustain stable prices for the long term,
an assurance of flexible monetary policy was necessary. The Bank also consideredthat “in Japan’s monetary policy implementation, if circumstances such as a situation
in foreign exchange markets or conditions surrounding prices were to have changed
significantly and the fundamental policy stance were to have altered, proper measureswould be taken without hesitation.”234 The Bank also considered that “preemptive eﬀort
for containing inflation would be necessary for avoiding sharp tightening of interest
rates across every country and such eﬀort must be truly consistent with a spirit of................................
229. EPA (1989), p. 2. In this regard, MOF (2003a, p. 55) assessed that a critical opinion for containing the surge
in asset prices supported under people’s excessively optimistic view could have been considered “with aknowledge of hindsight, but the experience and knowledge in that time was not enough to make a decision”
for taking such policy. Ishii (2011, p. 137) also considered that surges in stock prices and land price inthe buoyant economic expansion “were later regarded as bubble but that recognition was not general before
1989.”
230. BOJ Archives (1988g), p. 2.
231. BOJ Archives (1988e), p. 6.
232. BOJ Archives (1988e), p. 6.
233. Nihon Keizai Shimbun (1988a), p. 3. Although the article implied that the view was increasingly supported
in the Bank, the authors cannot find any primary sources ratifying this from the Bank’s archived documents.
For arguments about “Japan as an anchor for low interest rates in the global market,” see Tanaka (1989),
pp. 207–208 and Shukan Toyo Keizai (1989), pp. 26–34.
234. BOJ Archives (1988g), p. 8.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

international coordination.”235 In this regard, the Bank negatively acknowledged that“an opinion of the so-called Japan as the anchor by taking the unchanged low interest
rates as the best policy would be obviously myopic in that sense,” and dismissed theopinion.236

VIII. Monetary Tightening and a Tight Monetary Policy Retained(from Spring 1989 to Summer 1991, Phase VII)

• Under eased monetary conditions maintained during the second half of the 1980s,
Japan’s economy continued to expand mainly led by private domestic demand,and adjustment in current account imbalance steadily progressed. Among a gradual rectification of macroeconomic external imbalance, issues of economic friction between Japan and the U.S. shifted toward structural factors such as structural impediments in certain sectors and accessibility to markets. At the sametime, mainly due to the progress in current account adjustment and the monetary
tightening in the U.S. ahead of that in Japan, the yen ceased to appreciate andstarted to depreciate from late 1989 to mid-1990.
• Although inflation in the near term did not rapidly accelerate, the Bank considered that inflationary pressure started to be elevated, reflecting an increase in labor
cost due to a tightened labor market on the domestic front and yen appreciationon the international front. The Bank also considered that an increase in asset
prices might raise inflationary sentiment. The Bank turned its policy stance andraised the oﬃcial discount rate five times between May 1989 and August 1990 inorder to prevent inflationary sentiments from arising.
• Japan’s economic conditions remained strong amid the sequence of tightening,
and land prices continued to rise. Therefore, the Bank assessed that a cautious
consideration for rising asset prices remained necessary.
• In November 1990 and afterwards, the growth of money supply slowed down
rapidly due to the eﬀect of interest rate increases to date and a more cautious attitude in extending credit by financial institutions, and then in summer 1991 thedeceleration in economic expansion was gradually becoming clear. Meanwhile,
the Bank maintained its tightening of monetary policy until June 1991, emphasizing the risk of recurrent inflation and assessing that that upward pressure on
prices remained strong against a background of tightness in product and labormarkets. Then, in July 1991 the Bank turned its policy stance and lowered theoﬃcial discount rate, on the assessment that the upsurge of inflationary pressure
weakened.
• The Bank gradually strengthened recognition that the framework for window
guidance, where the Bank ex-ante adjusted loan plans submitted from each commercial bank in consideration of the rivalry and equality among the banks, was................................
235. BOJ Archives (1988g), p. 7.
236. BOJ Archives (1988k), p. 10.

151

getting out of date as financial deregulation progressed. However, from 1989 to
mid-1991, the Bank tightened the guidance for commercial banks. Specifically,
the Bank induced commercial banks to provide smaller loans than those in thesame period in the previous year. Then from July 1991 onward the Bank abolished the framework, considering that the growth of bank lending was expected
to be moderate even if the loan plan of each bank was fully left to its discretion.
A. Shift to Monetary Tightening (from Spring 1989 to Summer 1990)
1. Economic conditions in major overseas economies (from spring 1989 to summer 1990)
In the U.S., exports continued to increase reflecting economic expansion in Japan andEurope as major trading partners, but in 1989 and afterwards domestic demand suchas household consumption started to slow down due to penetration of tightening by
the FRB. The overall pace of the U.S. economic expansion decelerated.237 At the sametime, inflationary pressure remained strong mainly due to higher growth reflecting tightlabor markets, such as a low unemployment rate in the lower part of the 5 percent
range from fall 1988 to mid-1990 in addition to rising oil prices around early 1990
after bottoming out in fall 1988 with stronger world demand (Charts 7 (1), (2) and (3)VII).238 The FRB raised the oﬃcial discount rate in August 1988 and February 1989
to 7 percent. From spring 1989 the FRB lowered the target for the FF rate gradually,
but the level of the oﬃcial discount rate was maintained until December 1990 (Chart 8(1)-VII).
Meanwhile, economic friction between Japan and the U.S. were persistent among
micro-level sectors. The 1988 Omnibus Trade and Competitiveness Act, enacted inAugust 1988, contained the Super 301 provision articulating both an identification of an
unfair trading partner by the Oﬃce of the United States Trade Representative (USTR)
and a sanction for that trading partner in case of trade impediments left unchanged bya deadline.239 In May 1989, Japan was identified as an unfair trading partner under theSuper 301 provision of the Omnibus Trade Act.240 At the same time, the U.S. trade
deficit and current account deficit was oscillating but on a downtrend from fall 1987
(Chart 8 (2)-VI and VII). As a rectification of the macroeconomic external imbalance
gradually progressed around 1989, issues of economic friction between Japan and the
U.S. shifted toward structural factors such as structural impediments in certain sectors
and accessibility to markets, such as those related to semiconductors, land policy anddistribution networks in retail sales.241
In West Germany, the pace of economic growth remained high due to intraEuropean exports, fixed investment and consumption, with a background of continued
developments for market integration of the European Community by 1992, democratictransformation in Eastern Europe from spring 1989, progress in reunification of East................................
237. BOJ (1989h), pp. 4–5.
238. BIS (1990), pp. 23–33.
239. Miyazato (1989), pp. 110–125.
240. Mitsuhashi and Uchida (1994), pp. 234–235.
241. MOF (2004), p. 392.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

and West Germany, and an income tax cut in early 1990.242 The unemployment rate,already on a downtrend after mid-1988, continued to decline in 1989 and 1990. Dueto these tight conditions in product and labor markets, inflationary pressure remained
high and the year-on-year change in consumer prices remained around 3 percent(Charts 9 (1), (2) and (3)-VII). In addition, the adoption of a conversion rate which
over-evaluated the currency of former East Germany upon the monetary unification ofGermany in July 1990 was conjectured to strengthen inflationary pressure further.243
Under these circumstances, the Bundesbank, which tightened monetary policy twice
in summer 1988, again raised the oﬃcial discount rate in January, April, June andOctober 1989 to 6 percent, and then kept the rate unchanged in 1990 (Chart 10 (1)-VI
and VII).244
In the foreign exchange markets, the dollar appreciated against the yen from late1988 to spring 1990, due to an oscillating downtrend in the U.S. trade deficit andcurrent account deficit, tightening in the U.S. ahead of that in Japan, and the Tiananmen
Square incident in June 1989, which was recognized as a geopolitical risk factor forJapan (Chart 3 (1)-VII). Meanwhile, the German mark tended to appreciate against the
dollar until early 1991 due to economic growth and greater tightening in West Germany
relative to that in the U.S. (Chart 10 (2)-VII).245
2. Economic conditions in Japan (from spring 1989 to late 1990)
Japan’s economy continued to expand led by robust domestic demand. Although a
deceleration in the U.S. economy and a steady increase of overseas production by
Japanese manufacturers contributed negatively, corporate fixed investment expanded
strongly and personal consumption remained robust under sustained price stability as
well as favorable conditions in employment and income (Chart 1 (1)-VII). Regarding factors behind the robustness of corporate fixed investments, the Bank pointed out
high capacity utilization, high corporate profits and firms’ vigorous eﬀorts to adjust
medium- to long-term strategy thereby increasing R&D investment and promoting
industrial restructuring with new businesses. Furthermore, the adjustment in current
account imbalance progressed steadily, due to structural changes such as a shift in demand from domestic products to imported products and an export-substitution eﬀect
of increased overseas production by Japanese manufacturers, along with the cyclicalaspect of economic conditions with strong domestic demand in Japan and slowing economic expansion overseas (Chart 3 (2)-VI and VII).246
On the price front, although both wholesale prices and consumer prices remained
generally stable in the near term, the Bank assessed that upward pressure on prices
was mounting gradually around spring 1989 (Charts 2 (1), (2), (4)-VII), considering
the yen’s depreciation and oil price rises after late 1988 (Charts 3 (1) and 2 (3)-VI andVII) as well as the gradual increase in service prices with a gradual upturn in labor cost
under tighter conditions in the labor market.247................................
242. BOJ (1989h), pp. 5–6 and BOJ (1990f), pp. 4–6.
243. BOJ (1989h), p. 10 and BOJ (1990f), pp. 19–20.
244. BOJ (1989h), p. 14.
245. BIS (1990), pp. 183–190.
246. BOJ (1990d), pp. 1–3.
247. BOJ Archives (1989f), pp. 6–9 and BOJ (1989c) pp. 8–9. It also should be noted that the Bank started

153

On the monetary and financial front, stock prices rose sharply in late 1989. Also,
under the economic expansion and higher land prices permeating across Japan (Charts
6 (1), (2)-VII), bank lending continued double digit growth on a year-on-year basis
around summer 1990 mainly due to the development of the resort industry, redevelopment of cities, and development of industrial estates. Money supply also maintained
a growth rate of around 10 percent over the previous year (Charts 5 (1), (2)-VII).248
Bank lending by the regional banks in particular grew sharply in summer 1989 and afterwards due to their use of impact loans.249 The BOJ displayed more serious concern
about the asset price increases by using strong words of “asset price inflation,” with arecognition that “the excessive increase in asset prices would create larger social inequality in distribution of income or assets, and cause other large detrimental impacts
such as pressure on general prices, growing instability in economic and financial conditions and temptation of banks for reckless lending behavior.250
3. Monetary policy response (from spring 1989 to late 1989)
In late March 1989, the Bank recognized that “it becomes increasingly desirable torequest commercial banks for further restraint in their lending plan given tighter economic conditions for upward pressures on prices” in the window guidance for the
April–June quarter of 1989. However, the Bank also assessed that “it would not beappropriate for the Bank to actively and quantitatively tighten commercial bank lending at this time prior to any change in the stance of interest rate policy” such as a change
in the oﬃcial discount rate, in light of “consistency with the stance of overall monetary
policy implementation” including the oﬃcial discount rate.251
Meanwhile, further progress in financial deregulation and the money market reform
helped market interest rates to reflect changes in economic conditions more rapidly anddirectly. From spring 1989 onward, sustained economic expansion and rising pressure
on prices heightened further anticipation for higher interest rates, and caused an uptrend in both short- and long-term market interest rates (Chart 4-VII).252
The Bank considered that as the monetary condition eased over the years, the uptrend in market interest rates reflected tighter conditions in product and labor markets,the increase in wages, and inflationary pressure on prices from the yen’s depreciation
and rise in oil prices. Accordingly, the Bank decided to raise the oﬃcial discount rate
by 0.75 percentage points to 3.25 in May 1989.253 After this action, the Bank successively raised the oﬃcial discount rate by 0.5 points to 3.75 percent in October 1989
and by 0.5 points to 4.25 percent in December 1989, with a recognition of strong andenhanced upward pressure on prices due to tighter market conditions in general andhigher import costs.254..........................................................................................................................................
to compose the Corporate Service Price Index (CSPI) with a recognition of necessity in grasping developments of prices including service prices more comprehensively, and started to release the index in 1991 andafterwards. See Nihon Keizai Shimbun (1989a) and Nihon Keizai Shimbun (1991a).
248. BOJ Archives (1989e), p. 4.
249. BOJ Archives (1989l), p. 3.
250. BOJ Archives (1989m), pp. 1, 5–6.
251. BOJ Archives (1989d), p. 2.
252. BOJ Archives (1989g), pp. 2–3.
253. BOJ (1989d).
254. BOJ (1989g), BOJ Archive (1989k), pp. 1–3, BOJ (1989j), and BOJ Archive (1989o), pp. 2–3.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

Meanwhile, the year-on-year changes of both consumer prices and wholesale prices
around this time still moderately remained at around the 3 percent level including theeﬀect of 3 percent of the consumption tax introduced in April 1989. The Bank regarded
these policy actions as “precautionary measures” in a sense that “inflationary expectation should be contained in advance for assuring price stability in the future” and that
actions should be necessary at an early stage.255
On the decisions of rate raises, the Bank acknowledged the increase in market
interest rates reflecting changes in economic conditions more rapidly and directly byfinancial deregulation and the money market reform, and emphasized that “greater consideration for developments in market interest rates” enabled the Bank to act in a timely
manner.256
Regarding window guidance, the Bank assessed that “further decline in lending
growth by commercial banks was necessary” in light of the rate rise in May 1989, andaimed to request the major banks to contain their loans with respect to the increased
lending amount on a year-to-year basis from the level of “growth at a lower half ofsingle digit” to the level of “change basically at a negative single digit” in providing
guidance for the July–September quarter of 1989.257 Then, among circumstances where“no change was observed in strong demand for bank loans in spite of increase in market
interest rates and lending rates,” the Bank took a direction for the October–December
quarter of 1989 to “call for more restraint in bank loan plans” than in the previous quarter. The Bank maintained the same direction for the January–March quarter of 1990.
The major banks formulated their loan plans with more discipline, consistent with theBank’s intention.258 The Bank also called for restraint in bank lending against the regional banks, but reconciliation among them was diﬃcult to achieve. Strong demandfor bank loans was seen in their regional areas. The regional banks’ recognition that“the business opportunity should not be missed” derived their “excessively aggressive
lending attitude” and resulted in a continuing higher growth rate of their loans relative
to those provided by the major banks (Chart 5 (1)-VII).259
On the Bank’s rate raise in December 1989, a newspaper article260 reported a possible rate raise before the oﬃcial release, and other articles reported that the financeminister Hashimoto “told the rate raise be called oﬀ.” The head of Policy Planning
Department of the BOJ, Mr. Tamura, made a comment denoting that “the news reports
insisting that the Bank already made decision to raise the rate were not related withreality.”261 After all, the Bank raised the oﬃcial discount rate six days after the first
speculative article.
4. Japan’s economic conditions (from early 1990 to summer 1990)
From early 1990, Japan’s economy continued to steadily expand mainly led by buoyant corporate fixed investment and steady growth of household income under favorable................................
255. BOJ Archive (1989k) Q&A#1 at exhibit. Also, see BOJ Archive (1989o), p. 5.
256. BOJ Archive (1989m), pp. 1–3.
257. BOJ Archive (1989h), pp. 2–4.
258. BOJ Archive (1989j), pp. 2–3. Also, see BOJ Archive (1989p), pp. 2–3.
259. BOJ Archive (1989l), pp. 4–5.
260. Yomiuri Shimbun (1989), p. 1.
261. BOJ Archive (1989n), pp. 1–2 and Nihon Keizai Shimbun (1989b), p. 3.

155

conditions of income and employment (Chart 1 (1)-VII). The Bank particularly assessed that growth of investment for purposes other than capacity expansion would
be expected to remain high in response to the progress of technological innovation.262
On the price front, consumer prices and wholesale prices remained stable, but upward
pressures on prices from economic conditions remained, such as increasing wage costs
under tight labor market conditions and raising import prices due to yen depreciation.
In addition, upward pressures on prices from financial conditions were strengthened
mainly by a continuous increase in land prices and a higher growth rate in money
supply with a backdrop of accelerated funding behaviors and heightened further anticipation for higher interest rates. The Bank assessed that “a risk of resurgent inflation
is higher than a risk of economic downturn” (Charts 2 (1), (2), (4)-VII, 5 (2)-VII and 6(2)-VII).263
Meanwhile, stock prices declined in early 1990 after the yen’s depreciation anddecreasing bond prices (increasing long-term yield), and the triple declines of stock,bond and exchange rate occurred in spring 1990.264 In short-term money markets,
market interest rates increased from late February onward in anticipation of a next
raise in the oﬃcial discount rate. Turmoil broadened in financial markets, such as a
sharp drop in stock prices (in the Nikkei Stock Average) with a drop of 1,569 yen on
February 26 from the previous day, due to overseas news reports pointing out “a stanceof the Ministry of Finance against tightening and an uncertainty in monetary policy
formulation.” Market participants strongly wanted “to create a circumstance indicating
an end of further rate raises” by raising the oﬃcial discount rate quickly and largely(Charts 4-VII and 6 (1)-VII).265
5. Monetary policy response (from early 1990 to summer 1990)
In the aforementioned circumstances, the Bank took a fourth action to raise the oﬃcial
discount rate from 4.25 percent to 5.25 percent on March 20, as “the final precautionary
measure to forestall price increases in advance” (Chart 4-VII). The raise of 1 percentage point was determined, from the viewpoint that “a raise should be large enough forfinancial markets to make them believe a cease of further rate raises and thereby curtailing anticipation in money markets and capital markets.” The Bank also consideredthat “a raise should not be too large for markets to concern about bringing a surge inmarket interest rates or halting economic growth.”266
The Bank also continued to guide loan plans by commercial banks in window guidance in accordance with the rate raises, and tried to tighten further restraints on bankloans provided by the regional banks, which were increasing, while maintaining restraints on bank loans provided by the major banks. Regarding the major banks, suchas city banks, long-term credit banks and trust banks, the BOJ recognized that “their
management at the head oﬃce was shifting their policy from a quantity-oriented to aquality-oriented lending attitude.”267 Meanwhile, regarding the regional banks, it was................................
262. BOJ (1990c), pp. 1–2, 10–11.
263. BOJ Archives (1990b), p. 2. Also, see BOJ Archives (1990e), pp. 5–6 and BOJ (1990c), pp. 15–16.
264. BOJ Archives (1990e), p. 1.
265. BOJ Archives (1990c), p. 2.
266. BOJ Archives (1990c), pp. 4–5. Also see BOJ (1990a).
267. BOJ Archives (1990d), p. 4.

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seen that as “their tendency for quantity-oriented lending and herding was basically unchanged.”268 The growth rate of commercial bank lending accelerated in the first halfof 1990 mainly due to the regional banks, and the year-on-year growth rate of money
supply also increased (Charts 5 (1) and (2)-VII).
Facing the accelerated growth in bank lending in spite of the tightened restraint
in guiding commercial banks’ loan plans, the BOJ recognized that the borrowers ofcommercial banks were very confident in their business profitability under favorable
business conditions and that “immediate changes such as downward revision in corporate fixed investment would not be very likely to prevail.”269 The Bank also consideredthat “the traditional lending behavior of the past monetary easing period strongly remained in lender’s policy”270 with a perspective of the lenders such as the regionalbanks.271
After the rate raise in March 1990, the Bank basically recognized the increase ininterest rates and drop in stock prices in early 1990 as a “contraction of bubble” owing
to “the deeper penetration of lagged eﬀect of the previous rate raises.” The Bank also
assessed that “active entrepreneurship and economic dynamism remained healthily”
and “the important challenge with top priority was still a prevention of inflation.” At
the same time, the Bank also became cautious about downside risks of future economic
conditions, considering that “in face of rapid changes in financial circumstances, closer
attention than before should be paid to a possibility whether economic activity would
worsen sharply.” Furthermore, the Bank recognized that “a possibility of upcoming
diﬃculties for nonbank and other financial institutions would not be ruled out,” and that
“if a partial repercussion of asset prices spilled over to land prices then a further spreadof detrimental impact would be inevitable.” With the above recognition, the Bank came
to consider that “development of economic conditions and changes in financial systemand circumstances should be assessed without prejudice.”272
However, in July 1990, the Bank came to recognize that the economic activity led
by corporate fixed investment and personal consumption was “stronger than expectedin spite of the so-called triple decline in early 1990,” and that “potential upward pressure for prices might be piling up again.” At the same time, the Bank also consideredthat “prices in the near term were stable in general,” and that “there would be a room
for the previous rate raises to be permeated further.” For these considerations, theBank assessed that “the current circumstances were not too urgent to require an immediate policy action” and then maintained the same level of tightening as that in March
1990.273
Regarding a relationship between asset prices and monetary policy implementation, the Bank understood an outer opinion that a decline in land prices “would worsen
business of commercial banks substantially and the policy authorities would be intim................................
268. BOJ Archives (1990f), p. 5.
269. BOJ Archives (1990d), p. 2.
270. BOJ Archives (1990a), p. 5.
271. In this regard, Iwata (1993, p. 183) assessed that the Bank’s stance to avoid large fluctuations in interest rates
consequently led to large fluctuations in money supply.
272. BOJ Archives (1990e), pp. 1–2, 5, 7–8. Also, see BOJ (1990b), pp. 3–5, 29.
273. BOJ Archives (1990g), pp. 4–6.

157

idated for actions bringing such circumstance.” Then, the Bank regarded this opinion
as “a complete misunderstanding” and assessed that a possibility of asset price decline
would not constrain maintenance of tightened policy in the near term under a solid
economic growth with stock prices bottoming out.274
In addition, regarding “financial market instability brought by speculation about apossible rate raise” in March 1990, the Bank “keenly acknowledged again a diﬃcultyin monetary policy implementation during a period of greater market influence.” Accordingly, the Bank recognized that “monetary policy formulation and money market
operations in a time of greater market influence should always be studied continuously
from various aspects including the Bank’s stances on financial markets and media,” andconsidered that future tasks remained in its communication with financial markets.275
6. Changing circumstances around international policy coordination (fromspring 1989 to summer 1990)
As stated, the period between the Plaza Accord and the Louvre Accord included a subperiod of March and April 1986 when the central banks of Japan, the U.S. and Germany
took closer communication with one another beforehand and lowered their discountrates almost simultaneously. There also existed another sub-period between October1986 and February 1987 when an achievement of international accordance for stableforeign exchange rates took priority over a reduction of the oﬃcial discount rate by the
Bank, under the buildup to international macroeconomic coordination such as fiscal
and monetary policies among major countries such as the U.S. and Japan. Regarding these developments, then-Governor Sumita mentioned in a speech in December
1989 that the specific goals in the international policy coordination during this period
were “(1) symmetric actions by the major countries with either surplus or deficits inadjusting each policy and thereby rectifying fundamental economic conditions such asexternal imbalances in particular; and (2) coordinated actions by policy authorities ineach country one another for achieving exchange rate stability.”276
An aggravation of external imbalances ceased in 1987 among Japan, the U.S., andother major countries. From 1988 afterward, they started to improve and major industrial countries maintained high growth in general.277 The Bank considered around 1989
and 1990 that “Japan’s economy would currently be less likely to be worsened immediately by the developments in the U.S. or Europe mainly through foreign exchange
rates.” The Bank also assessed that “currently the Bank would be able to shift a weightof consideration less for external factors and more for domestic factors in formulating
and implementing monetary policy.”278 In this regard, the Bank considered that “for thecountries with deficits as well as countries with surplus, favorable domestic economic
conditions should be maintained first” to achieve the goals in the international policy
coordination.279
Regarding the changes in circumstances for international policy coordination, the................................
274. BOJ Archives (1990g), pp. 6–7.
275. BOJ Archives (1990e), pp. 3–4.
276. BOJ (1989i), p. 46.
277. BOJ (1989i), p. 46.
278. BOJ Archives (1990g), p. 3.
279. BOJ (1989i), p. 46.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

BIS noted in the annual report that “the policy implications of the need to bring down
current-account deficits or surpluses were relatively obvious” because a reduction incurrent account imbalances was a major issue for international policy coordination.
BIS also noted that “with the reduction of current-account imbalances international
policy co-ordination . . . lost a clear focus in 1990.”280
B. Further Monetary Tightening and a Continuation of Tight Monetary Policy(from Summer 1990 to around May 1991)
1. Advent of the Gulf war and conditions of major overseas economies
Against a backdrop of the Iraqi invasion of Kuwait in early August 1990, oil prices
temporarily surged during fall 1990 and then dropped, with the WTI price at 18.6
dollars per barrel in July 1990, peaking at 35.9 dollar in October 1990, and then fallingto 19.9 dollars in March 1991 (Chart 2 (3)-VII).
The U.S. in a mature stage of economic expansion experienced a decline in housing
investment and a slower growth in consumption occurred during the former half of1990, partly due to the past increase in interest rates. Then from fall 1990 onward,
personal consumption declined further due to dampened consumer confidence by oil
price rises and a lower growth in real income. The U.S. was in a recession until mid1991, for the first time since 1982.281 The unemployment rate, once being in the lower
part of the 5 percent range from spring 1988, started to rise after mid-1990 and reachedaround 7 percent in spring 1991 (Charts 7 (1) and (2)-VII). At the same time, under
declining prices in commercial real estate, U.S. financial institutions experienced asurge in nonperforming loans and a worsening profitability from summer 1990 onward,
and then their attitude in bank lending became more cautious.282 The FRB, from theviewpoint of avoiding unintentional and excessive tightening, lowered the target for
the federal funds rate in July 1990, and then lowered the target rate three times in
October 1990 and afterwards in response to a further tightening of credit conditions bycommercial banks and a risk of further stagnation in economic activity. Furthermore,
the FRB lowered its discount rate three times from 7 percent to 5.5 percent between
December 1990 and April 1991, and also lowered the target of the federal funds rate
(Chart 8 (1)-VII).283
In Germany (former West Germany area), the economy maintained buoyancy. Consumption and corporate fixed investment expanded under the currency unification in
July 1990 (introduction of the German mark in East Germany) and an increased number of immigrants from East Germany, in addition to a rapid fiscal expansion for reconstruction and redemption of East Germany (Chart 9 (1)-VII).284 The Bundesbank
raised the Lombard rate twice in November 1990 and February 1991 and then raised
the discount rate from 6 percent to 6.5 percent in February 1991, in order to curb strong
inflation pressure under the strong fiscal expansion and the requests of higher wages in................................
280. BIS (1991), p. 8. It mainly covers fiscal year of 1990.
281. BOJ (1990f), pp. 6, 16–17.
282. BOJ (1990f), pp. 18, BIS (1990), pp. 106–107, and BIS (1991), pp. 104–106.
283. BOJ (1990f), pp. 18 and BIS (1991), pp. 155–156.
284. BOJ (1990f), pp. 6, 20.

159the former West Germany area (Chart 10 (1)-VII).285
2. Japan’s economic conditions after the advent of the Gulf war
During the period between summer 1990 and fall 1990, Japan’s economy was considered to be on an expansionary trend led by domestic demand, such as steady growth incorporate fixed investment under firms’ bullish attitude in face of technological developments and labor shortage, and growth in personal consumption mirroring favorable
conditions in employment and income.286 Product market conditions remained tightand the corporate sector was experiencing an intensifying labor shortage in the labormarket, regardless of type of industry or size of firm (Charts 1 (1) and 2 (4)-VII).287 Although somewhat losing momentum, land price increases remained high, particularly
in areas other than Tokyo (Chart 6 (2)-VII). On the financial front, the year-on-year
growth rate of money supply peaked in April and May 1990 and then slightly decelerated, but the growth rate was still high, at a double digit level (Chart 5 (2)-VII).
Meanwhile, both long- and short-term market interest rates rose considerably in faceof increases in crude oil prices with anticipation of tightening (Chart 4-VII).288
On the price front, wholesale prices were generally stable except those of oil-related
products which surged after the Gulf crisis. Meanwhile, conditions in demand andsupply were generally tighter, and the increasing costs in wages and distribution were
gradually accelerating consumer prices. Under these circumstances, a further buildup
of inflationary pressure should have been a concern (Charts 2 (1) and (2)-VII).289
In foreign exchange markets, yen appreciation along with dollar depreciation occurred again from May 1990 onward mainly due to declining interest rates and economic weakness in the U.S. as well as increasing interest rates in Japan (Chart 3 (1)VII).290
3. Monetary tightening and a tight policy maintained after the Gulf war (fromAugust 1990 to spring 1991)
The Bank recognized that “economic activity was very strong, market conditionsin products and labor were tighter, and the recent increase in wages appeared to be
noteworthy” in Japan’s economy, and that “eased monetary conditions were not fullychanged such as visibly remaining high growth rate” in money supply. The Bank
also considered that “current circumstances should not be left in terms of preventing
inflation.” Under these circumstances, the Gulf crisis was recognized as an additional
shock for inflation because its nature was similar to the two oil crises in the past
although the size of the shock was smaller.291 In light of the experiences of the past
two oil crises, the Bank assessed that “inflation in import prices and decrease in real
economic growth could not be unavoidable” as “the first-round eﬀect” of an increasein oil prices, and that the main issue was “how to avoid rapid increase in domestic
prices stimulated by the surge in oil prices as the second-round eﬀect.” The Bank................................
285. BOJ (1990f), p. 21 and BIS (1991), p. 157.
286. BOJ (1990e), pp. 1–2, 4, 10–12.
287. BOJ (1990e), p. 6.
288. BOJ (1990e), pp. 14–16. Also, see BOJ Archives (1990h), p. 3.
289. BOJ (1990e), pp. 6–7, 13.
290. BIS (1991), pp. 180–181.
291. BOJ Archives (1990h), pp. 1–2.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

assessed that “avoiding inflation in domestic prices by rapid and preemptive policy
action” was the best choice and decided to raise its oﬃcial discount rate by 0.75
percentage points, from 5.25 percent to 6 percent, on August 30 (Chart 4-VII).292 On
this occasion, the Bank recognized as the internal assessment that “the intention of theraise this time was to adjust aggregate demand, stepping up from the other past raisesin this tightening phase as precautionary raises,” and strongly acknowledged its stanceof containing inflation by weakening economic growth with tightening policy.293
Commercial banks “considerably restrained loan plans in accordance with tightened monetary policy stance” in response to the Bank’s request to do so in window
guidance for the October–December quarter of 1990, with a recognition that demand
for funds in equipment and operations by small and medium-sized firms “was still
strong owing to strong business sentiments and higher profit.” With a possibility ofabolishing window guidance in the future in mind, the Bank also strongly recommended to commercial banks in the guidance that “solidifying stronger managerialbase voluntarily and drastically” should be strongly encouraged. The Bank also considered a departure from the “simple quantity-oriented tendency and a herding culture”
in the behavior of commercial banks familiar with past window guidance as an “urgent
necessity for stronger capital base and higher profitability.” In the Bank’s recognition,
each of the commercial banks understood the BOJ’s intention in the guidance under“their potential momentum surfacing for an internal control for a tendency of quantity
orientation as well as a reappraisal of their loan assets.” As a result, the year-on-yearchange of the increase in loan plans by the major banks for the October–December
quarter of 1990 recorded the largest decline (−32.4 percent) since the tightening phasein 1973 and 1974, and the year-on-year growth rate of the loans provided by the majorbanks at the end of 1990 was likely to decline solidly.294 The regional banks made theirloan plans with further restraint than that they had done in the July–September quarterwith eﬀorts to restrain bank loans outstanding, with a view of “fortifying profit base andsatisfying regulatory capital adequacy requirements of the BIS” (Chart 5 (1)-VII).295
In November 1990 and afterwards, the growth rate of money supply sharply declined, from the 12.0 percent year-on-year change of M2+CD in September 1990 to
3.6 percent in May 1991 (Chart 5(2)-VII). In this period, the eﬀect of higher interest
rates permeated, lending rates of bank loans rose, and the sentiment of easy corporate
finance receded. Demand for funds weakened owing to slower economic growth andless asset transaction, as well as a drop in both fundraising and investment by firms
simultaneously. In addition, the Ministry of Finance imposed quantitative restrictions
on lending to real estate-related industries (which were introduced in March 1990 andceased in December 1991) and also requested commercial banks to report their current
status of bank lending for the three industries of real estate, construction, and nonbanks (leasing and finance companies). Commercial banks clarified their direction................................
292. BOJ Archives (1990k), p. 2.
293. BOJ Archives (1990h), p. 2.
294. BOJ Archives (1990i), pp. 1–5, attachment p. 7. The loan plans covered only yen denominated loans provided by domestic branches. (They neither covered foreign currency denominated loans nor loans provided
by overseas branches.)295. BOJ Archives (1990j), pp. 2–3.

161

of larger importance on credit risks and profitability, and their lending stance became
more cautious mainly for such industries as real estate, in order to achieve BIS capital adequacy standards (above 8 percent for the financial year ending March 1993 andabove 7.25 percent for the financial year ending March 1991 as a transition period).
The Bank assessed that the above-noted developments caused the sharp decline in thegrowth rate of money supply.296 Judging from the velocity of money and the ratio of
liquidity to sales in the corporate sector, however, the Bank assessed that overall liquidity relative to economic activity was “still at a fairly high level against the backgroundof substantial money stock increases in the past.”297 Meanwhile, from spring 1990 to
October 1990, the yen appreciated mainly due to the U.S. economic downturn andsmaller interest diﬀerentials, and then remained at a level between 130 and 140 yen
to the dollar (Chart 3 (1)-VII). Long-term interest rates declined, reflecting heightened
expectations for lower rates under dropping oil prices, the yen’s appreciation, and the
U.S. monetary easing (Chart 4-VII).298
As for the real economy from fall 1990 to spring 1991, Japan’s economic growthmoderated gradually mainly due to slower domestic demand, such as corporate fixed
investments and personal consumption, but overall economic activity was still at a highlevel and products and labor market conditions remained tight (Chart 1 (1)-VII). Under
these circumstances, prices were considered to remain broadly within a stable range.
At the same time, it was noted that a surge in costs of goods and labor as well as
a surge in oil prices started to be passed on to prices in products and services. The
year-on-year change in consumer prices shifted upward from the 2 percent level before
the Gulf crisis to a level around 4 percent during the period between fall 1990 andspring 1991 (Charts 2 (1), (2) and (3)-VII).299 Furthermore, stock prices, which had
been declining in 1990, regained their footing in spring 1991. The surge in land prices
remained high, particularly in regional areas where the year-on-year change increased
to the double-digit level, although overall growth was somewhat moderating (Charts
6 (1) and (2)-VII). The Bank recognized that land price increases in the second halfof the 1980s occurred “partly due to real demand for economic activity” as well as “abelief of land prices on an uptrend without decline.”300
The Bank assessed that “the pace of economic expansion moderated but overall
economic activity was still at a fairly high level,” and that “market conditions in demandand supply as the most important aspect for future development in prices remained
tight.”301 The Bank also considered that “in the current circumstance land prices should
rather tend to be moderated than be cautious for large falls.”302 The Bank regarded“securing price stability by calming inflationary expectations” as the greater priority,and then maintained the high level of its oﬃcial discount rate until May 1991, “topursue prudent policy management with price stability as its prime objective, while................................
296. BOJ (1991a), pp. 1–2, BOJ (1991b), p. 16, and BOJ (1991c), pp. 1, 6, 12. Also, see MOF (2003a), pp. 171–173 and BOJ (1989e), pp. 54–55 for BIS capital adequacy requirement.
297. BOJ (1991b), pp. 16–18.
298. BOJ (1991c), p. 5.
299. BOJ (1991a), pp. 1–2, BOJ (1991b), pp. 1–2, 7, and BOJ (1991c), p. 1.
300. BOJ Archives (1990k), p. 9.
301. BOJ Archives (1991b), p. 2.
302. BOJ Archives (1990k), p. 9.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

simultaneously keeping a close eye on various developments and the eﬀects of interest
rate increases to date” (Chart 4-VII).303
In late 1990, the lending stance of commercial banks became more cautious, andthe financial diﬃculties of some firms in the real estate-related and nonbank industries
surfaced. The Bank recognized that “the firms with speculative investments for realestates and securities excessively in the past would not be able to avoid confronting
severe funding diﬃculty in the future, and a risk of their failure badly involving large
lenders such as finance companies and commercial banks would not be ruled out perfectly.”304 At the same time, the Bank recognized that “monetary policy implementationin the future should be considerate so as not to repeatedly ignite asset price inflation
at all.”305 The Bank also assessed that “it would be diﬃcult in a near term to imagine
a circumstance where a sound firm would face severe diﬃculties in funding.”306 Consequently, the Bank acknowledged that it should “encourage market mechanisms to
make the firms with excessive speculative investments disappear autonomously,” for“normalization of the bubble economy and the sound development of Japan’s economy
while accepting risks to some extent.”307
As stated above, the Bank maintained the monetary tightening until mid-1991 witha perspective that a normalization of the bubble economy would lead to a sound development of Japan’s economy. In July 1991, the Bank turned to monetary easing,but the readjustment process of balance sheets in Japan’s economy thereafter continued for more than ten years during the 1990s and early 2000s. With the knowledge ofhindsight, the Bank’s assessment about the impact of financial imbalance on macroeconomic development in the medium to long term, and the resultant adjustment processes
in balance sheets was not adequate, particularly for the financial imbalance represented
in the large fluctuation in asset prices and money supply. The adjustment had probably
amplified the fluctuation in economic conditions as a result. A reflection of this lesson
appears to evolve into a perspective on the Bank’s monetary policy formulation that
financial imbalances should be examined as a risk in terms of achieving price stability
in the medium to long term.
C. End of Monetary Tightening (around June and July 1991)
1. Policy rate reduction in July 1991
In the former half of 1991, Japan’s economy continued to expand, under favorable income conditions in firms and households. Around summer 1991, however, the growthof domestic demand started to decelerate partly because monetary tightening and accumulation of capital stock in the past came to moderate growth in fixed investment.
Also, the product market eased somewhat and the labor market stopped tightening,among tight conditions of markets in general. Regarding prices, the pace of increasein wholesale prices decelerated owing to lower prices in oil related products, and theyear-on-year change in consumer prices moderated somewhat (Charts 1 (1)-VII, 2(2)................................
303. BOJ (1991a), p. 4.
304. BOJ Archives (1990l), p. 3.
305. BOJ Archives (1991b), p. 3.
306. BOJ Archives (1991a), p. 2.
307. BOJ Archives (1990l), p. 3.

163

and (2)-VII). On the financial front, money supply growth sharply decelerated against
the backdrop of permeation of higher interest rates and cautious lending attitude bycommercial banks (Chart 5 (2)-VII). Firms’ financing was less easy than that in previous quarters, although corporate liquidity was more abundant than that in the pastphase of monetary tightening. In light of these financial and economic developments,
in particular some weakening of inflationary pressures and declines in both short andlong-term market interest rates from their respective peaks, the Bank lowered the official discount rate by 0.5 percentage points, from 6 percent to 5.5 percent on July 1,
1991 (Chart 4-VII).308 , 309
Looking at editorials of major newspapers discussing the rate reduction by the Bankon July 1991, both the timing and the magnitude of the reduction were assessed as appropriate in general. For example, the Nihon Keizai Shimbun noted that “the reductionof the rate was appropriate, in light of a slower pace of economic growth, stable prices
including land prices, and a stagnation of world economy.”310 Also, the Yomiuri Shimbun noted that “the Bank’s policy decision was appropriate in terms of the timing of
implementation and extent of rate reduction.”311 The Mainichi Shimbun stated that“economic activity remained strong in corporate fixed investment and personal consumption, but the turnaround of monetary policy stance at this timing appeared to beappropriate if economic conditions in a year ahead were envisaged.”312 On the other
hand, the Asahi Shimbun recognized that “the recent Tankan survey by the Bank ofJapan indicated persistent strong economic activity in spite of decelerating economic
growth,” and regarded the timing of the reduction as too early by noting that “the reason of the rate reduction at this earlier timing appeared to be doubtful.”313 As statedabove, it was diﬃcult to find media opinions to the eﬀect that the rate reduction was
tardy in those days.
2. Abolition of window guidance
From spring 1981 onward, the Bank showed and maintained a basic attitude of “respecting loan plans at discretions” of each commercial bank. However, from 1987 theBank asked each commercial bank to apply discipline in making loan plans on every
quarter, and thereby restarted to use window guidance as a supplement tool of monetary policy. Particularly, in the tightening phase from 1989 to the first half of 1991,
the Bank strengthened the guidance by asking commercial banks to suppress lending
such that the increase of loans should be reduced below that of the same period in
the previous year. And in June 1991 the Bank abolished the window guidance for theJuly–September quarter of 1991 and afterwards, with the judgment that a growth of................................
308. BOJ Archives (1991e), pp. 1–2 and BOJ (1991d), pp. 1–2.
309. There are various discussions regarding this point. For example, Kuroda (2005, p. 100) assessed that monetary policy from 1990 onward “lagged behind the subsequent economic downturn and deflation under way.”
Iwata (1993, p. 215) also noted out that the Bank “implemented monetary policy in 1991 absorbing brisklyexcess liquidity” (which occurred by insuﬃcient tightening in the past), and that “this policy was considered
to rapidly lower the growth rate of money supply, to derive a rapid drop in asset prices, and to cause a sharp
decline in real GNP.”
310. Nihon Keizai Shimbun (1991b), p. 2.
311. Yomiuri Shimbun (1991), p. 3.
312. Mainichi Shimbun (1991), p. 5.
313. Asahi Shimbun (1991), p. 2.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

bank lending by each bank would be moderate without guidance on loan plans. Specifically, instead of ex-ante submission of loan plans by each bank, with them abiding
by it for the following quarter, bank lending “was left to its discretion of each bankformulating a loan plan.”314
Under the progress of financial deregulation, the Bank gradually strengthened its
recognition that the framework for window guidance, whereby the Bank adjusted theloan plans of commercial banks in advance with the herding culture in consideration,
was becoming out of date. In this regard, the further progress of financial deregulation
appeared to be changing the managerial policy of commercial banks for both greater
discretion and discipline. It was also recognized under window guidance that “eachshare of banks in the past loan plans tended to remain as ossification in a following
quarter” regardless of funding costs or profitability of commercial banks. The Bank
acknowledged that the adverse eﬀect of window guidance was increasingly problematic.315 Based on these considerations, the Bank pointed out three reasons why window
guidance was to be abolished at that time. First, “quantitative expansionism of herding culture receded and financial conditions of respective banks appeared to be fully
considered in the decision making” of lending activity by commercial banks. Second, commercial banks were reflecting on the excessively active lending attitude of thepast and “re-adoption of more prudent lending policy” was becoming prevalent among
them. Third, “owing to the solid permeation of the past interest rate policy as well as
the restrictive eﬀect of BIS regulatory capital standards, the growth of bank lending
was likely be modest even if the formulation of loan plans was totally left to discretionby respective commercial banks.”316 (See Appendix 4 for the historical development of
window guidance and its abolition.)................................
314. BOJ Archives (1991c), p. 1.
315. Kinyu Zaisei Jijo (1991), pp. 16–17.
316. BOJ Archives (1991c), pp. 2–3.

165

Chart 1 Economic conditions(1) Real economic growth rate

Note: Data in 1978, 1979–1983, 1984–1988 and 1989–1991 are prices in 1970, 1975,1980 and 1985, respectively.
Source: Economic Planning Agency (currently Cabinet Office)(2) Industrial production

Note: 1990 base.
Source: Ministry of International Trade and Industry (currently Ministry of Economy, Trade and Industry)(3) Diffusion index of business conditions, principal enterprises

Source: Bank of Japan, Economic Statistics Annual

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

Chart 2 Prices(1) Consumer price index

Note: Data from January 1978 to June 1981, from July 1981 to June 1986, from July 1986 to June 1991,
and from July 1991 onward have the base year of 1975, 1980, 1985 and 1990, respectively. The
dotted line from April 1989 to March 1990 is data adjusted for value-added tax in April 1989 bysubtracting the difference of the year-on-year rates between March and April 1989.
Sources: Cabinet Office; Bank of Japan, Economic Statistics Monthly/Annual(2) Domestic wholesale price index

Note: Data from 1978 to 1981, from 1982 to 1986, from 1987 to 1991 have the base year of 1975
(special grouping, domestic), 1980, and 1985, respectively. The dotted line from April 1989 toMarch 1990 is data adjusted for value-added tax in April 1989 by subtracting the difference of theyear-on-year rates between March and April 1989.
Source: Bank of Japan, Economic Statistics Monthly/Annual(3) Crude oil priceNote: Data until 1983 are prices of imports. Data from 1984 onward are WTI monthly averages.
Sources: Toyo Keizai, Economic Statistics Annual; FRB St. Louis, FRED database(4) Diffusion index of number of employees, principal enterprises

Source: Bank of Japan, Economic Statistics Monthly/Annual

167Chart 3 Exchange rate, external balance and public finance(1) Exchange rate

Note: Data are from the end of the day in the Tokyo foreign exchange market.
Sources: Toyo Keizai, Kawase kinri souran (Comprehensive interest and exchange rates); Gaikoku
Kawase Johosha, Gaitame nenkan (Foreign exchange annual)(2) External balance

Source: Bank of Japan, Economic Statistics Monthly/Annual(3) Fiscal conditions

Source: Ministry of Finance, Showa zaiseishi showa 49–63 nendo dai5kan (The history of public finance during the fiscal years from 1974 to 1988, vol. 5)

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

Chart 4 Interest rates

Note: The official discount rate is that at the end of month. The call rate until October 1988 and from
November 1988 onward is the monthly average of overnight collateralized and uncollateralized,
respectively. Government bond yield is for over-the-counter sales (end of the month). Euroyen
rates are London Interbank Offer Rates on three-month deposits (monthly average).
Sources: Bank of Japan, Economic Statistics Monthly/Annual ; IMF, International Financial Statistics

169

Chart 5 Bank lending and money(1) Bank lending

Note: Data include only those for banking accounts in five bank categories: city banks, long-term credit
banks, trust banks, regional banks, and regional banks II. The figure of each month is the averageof both the year-on-year rate at the end of the current month and the year-on-year rate at the endof previous month. Lending is denominated both in yen and foreign currency for both residents
and nonresidents and offshore lending. Lending include only that by domestic branches, notoverseas branches.
Euroyen impact loans are bank lending for domestic borrowers provided by overseas branches
of Japanese banks permitted for foreign exchange business. Data are from the end of March and
September each year. Data for June and December are linearly incorporated.
Sources: Bank of Japan, Economic Statistics Monthly/Annual ; Ministry of Finance, Ginkokyoku nenpo(Banking bureau annual)(2) Money

Note: Projection ranges are drawn such that a projection of “around 8 percent” covers a range from 7.5
to 8.5.
Source: Bank of Japan, Economic Statistics Monthly/Annual, Monthly Bulletin, et al.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

Chart 6 Asset prices(1) Stock prices

Source: The Nikkei Inc.
(2) Land prices

Note: The year-on-year rate at the beginning of January and July. January data are land prices officiallypublished by the National Land Agency, and July data are prefectural land prices.
Sources: National Land Agency (currently Ministry of Land, Infrastructure, Transport and Tourism), Officially Published Land Prices; The Diamond Inc., Tochikakakuno suiito bunseki (Development
and analysis of land prices)171

Chart 7 Economic conditions in the United States (1)(1) Real economic growth rate

Note: Data until 1988 and from 1989 onward are constant prices in 1982 and 1987, respectively.
Source: OECD, Quarterly National Accounts(2) Consumer price index

Source: Department of Labor, Bureau of Labor Statistics(3) Unemployment rate

Note: Nonagricultural industries, civilian labor force, seasonally adjusted.
Source: Department of Labor, Bureau of Labor Statistics

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

Chart 8 Economic conditions in the United States (2)(1) Interest rates

Note: The official discount rate is that at the end of the month. The federal funds rate, eurodollar rate,
and treasury notes yield are monthly averages.
Sources: Bank of Japan, Foreign Economic Statistics Annual and Economic Statistics Monthly ; IMF, International Financial Statistic; Nomura Research Institute, Shouken toukei youran (Securities
statistics directory)(2) External balances

Source: IMF, International Financial Statistics

173

Chart 9 Economic conditions in West Germany (1)(1) Real economic growth rate

Note: Data until 1988 and from 1989 onward are constant prices in 1980 and 1991, respectively. Data
from October 1990 onward covers the area of former West Germany.
Source: OECD, Quarterly National Accounts(2) Consumer price index

Source: IMF, International Financial Statistics(3) Unemployment rate

Note: Seasonally adjusted.
Source: OECD, Historical Statistics

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

Chart 10 Economic conditions in West Germany (2)(1) Interest rates

Note: The official discount rate is that at the end of the month. The call rate, euromark rate, andlong-term federal bond yield are monthly averages.
Sources: Bank of Japan, Foreign Economic Statistics Annual and Economic Statistics Monthly ; IMF,
International Financial Statistics; Nomura Research Institute, Shouken toukei youran (Securities statistics directory)(2) Exchange rate

Source: Bloomberg

175

Chart 11 Progress in financial deregulation(1) Increase in time deposits with unregulated interest rates

Note: Deposits with unregulated interest rates are the sums of: time deposits with unregulated interest
rates, money market certificates (MMC), small denomination MMC, nonresident yen deposits andforeign currency deposits in five bank categories (city banks, long-term credit banks, trust banks,regional banks, and regional banks II [formerly sogo banks of mutual loan business]).
Source: Bank of Japan, Economic Statistics Annual(2) Firms’ funding from the flow of funds

Source: Bank of Japan, Economic Statistics Annual(3) Firms’ security financing

Source: Tokyo Stock Exchange, Annual Securities Statistics

176 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

Chart 12 Major events in the 1980s

177

Chart 13 Major economic friction between Japan and the United States

Sources: Tsusho hakusho 1990 (Report of trade and commerce in 1990); Komine (2011), et al.

178 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

References
The Advisory Group on Economic Structural Adjustment for International Harmony, “Keizaikouzou
chousei kenkyukai houkokusho (Report of the Advisory Group),” Kinyu zaisei jijo (Kinzai
Magazine), Kinzai Institute for Financial Aﬀairs, April 14, 1986.
Asahi Shimbun, “Kinyukanwa ha sororito (Monetary policy should be eased gradually),” The Asahi
Shimbun, July 2, 1991.
Bank for International Settlements (BIS), 57th Annual Report: 1st April 1986–31st March 1987, June1987.
, 58th Annual Report: 1st April 1987–31st March 1988, June 1988.
, 60th Annual Report: 1st April 1989–31st March 1990, June 1990.
, 61st Annual Report: 1st April 1990–31st March 1991, June 1991.
Regarding the references for the Bank of Japan below, some are available only in Japaneseand others are available in both English and Japanese. We basically show information in English for brevity with the date of the original Japanese version in angled brackets. (Author’stranslations are in sentence-style capitalization.) The list is in an ascending order of originaldates. For the complete references, see the Bank of Japan Discussion Paper No. 2015-E-12.
Bank of Japan (BOJ), “Monetary targeting in the major western economies and their background,”Chosa Geppo (Monthly bulletin), Bank of Japan, March 1975, 1975a.
, “Role of the Money Supply in the Japanese Economy,” Bank of Japan Special Paper No. 60,
October 1975 [July 1975], 1975b.
, “Chronology of domestic events,” Monthly Bulletin, Bank of Japan, August 1978.
, “Recent Economic Trends in Japan—in 1978 and thereafter,” Economic Research Department, Bank of Japan, 1979 [August 1979].
, “The Annual Review of Monetary and Economic Developments in 1979,” Economic Research Department, Bank of Japan, 1980 [August 1980].
, “The world economy 1980: developments and prospects,” Monthly Bulletin, Bank of Japan,
January 1981, 1981a.
, “Bank Rate and Reserve Requirement Ratios Lowered (decision on March 17),” Supplement
to Monthly Economic Review, Bank of Japan, April 1981 [March 1981], 1981b.
, “The Annual Review of Monetary and Economic Developments in 1980,” Research andStatistics Department, Bank of Japan, 1981 [May 1981], 1981c.
, “Bank Rate Lowered (decision on December 10),” Supplement to Monthly Economic Review, Bank of Japan, December 1981, 1981d.
, “The world economy 1981: developments and prospects,” Monthly Bulletin, Bank of Japan,
December 1981, 1981e.
, “The Annual Review of Monetary and Economic Developments in 1981,” Research andStatistics Department, Bank of Japan, 1982 [May 1982], 1982a.
, “Recent Trends in Exports,” BOJ Special Paper No. 106, May 1983 [October 1982], 1982b.
, “The world economy 1982: developments and prospects,” Monthly Bulletin, Bank of Japan,
December 1982, 1982c.
, “Structural Adjustment Problems of the Japanese Economy after the Second Oil Shock,”
BOJ Special Paper No. 108, July 1983 [February 1983], 1983a.
, “Annual Review of Monetary and Economic Developments in 1982,” Research and Statistics
Department, Bank of Japan, 1983, 1983b.
, “The world economy 1983: developments and prospects,” Monthly Bulletin, Bank of Japan,
December 1983, 1983c.
, “Recent Trends in Imports,” BOJ Special Paper No. 115, September 1984 [April 1984],
1984a.
, “Annual Review of Monetary and Economic Developments in 1983,” Research and Statistics
Department, Bank of Japan, 1984 [May 1984], 1984b.

179

, “Recent Developments in Money Supply,” BOJ Special Paper No. 120, June 1985 [November 1984], 1984c.
, “The world economy 1984: developments and prospects,” Monthly Bulletin, Bank of Japan,
Bank of Japan, December 1984, 1984d.
, “Annual Review of Monetary and Economic Developments in 1984,” Research and Statistics
Department, Bank of Japan, 1985 [May 1985], 1985a.
, “On the Present Payment Disequilibrium,” BOJ Special Paper No. 124, July 1985, 1985b.
, “The world economy 1985: developments and prospects,” Monthly Bulletin, Bank of Japan,
December 1985, 1985c.
, “The centennial history of the Bank of Japan,” Volume 6, Bank of Japan, 1986, 1986a.
, “Recent developments in the money market,” Monthly Bulletin, Bank of Japan, February
1986, 1986b.
, “Bank Rate Lowered (decision on March 7),” Supplement to Monthly Economic Review,
Bank of Japan, March 1986, 1986c.
, “The Recent development of the Japanese economy and macroeconomic policy objectives,”
Monthly Bulletin, Bank of Japan, March 1986, 1986d.
, “Bank rate lowered (decision on April 19),” Monthly Bulletin, Bank of Japan, April 1986,
1986e.
, “Annual Review of Monetary and Economic Developments in Fiscal 1985,” Research andStatistics Department, Bank of Japan, 1986 [May 1986], 1986f.
, “On the U.S. Trade Imbalances,” BOJ Special Paper No. 144, September 1986 [August1986], 1986g.
, “Bank rate lowered (decision on October 31),” Monthly Bulletin, Bank of Japan, October
1986, 1986h.
, “The world economy 1986: developments and prospects,” Monthly Bulletin, Bank of Japan,
December 1986, 1986i.
, “Bank rate lowered (decision on February 20),” Monthly Bulletin, Bank of Japan, February
1987, 1987a.
, “Annual Review of Monetary and Economic Developments in Fiscal 1986,” Research andStatistics Department, Bank of Japan, 1987 [May 1987], 1987b.
, “Overseas developments,” Monthly Bulletin, Bank of Japan, June 1987, 1987c.
, “Overseas developments,” Monthly Bulletin, Bank of Japan, September 1987, 1987d.
, “Review of overseas economic trends,” Monthly Bulletin, Bank of Japan, October 1987,
1987e.
, “Domestic developments,” Monthly Bulletin, Bank of Japan, November 1987, 1987f.
, “Developments and Prospects of World Economy: 1987–88,” BOJ Special Paper No. 156,
January 1988 [December 1987], 1987g.
, “Domestic developments,” Monthly Bulletin, Bank of Japan, December 1987, 1987h.
, “Recent Growth of Money Stock,” BOJ Special Paper No. 161, February 1988, 1988a.
, “Balance of Payments Adjustment Processes in Japan and the United States,” BOJ Special
Paper No. 162, March 1988, 1988b.
, “Quarterly Economic Outlook,” BOJ Special Paper No. 163, Spring 1988 [April 1988],
1988c.
, “Annual Review of Monetary and Economic Developments in Fiscal 1987,” Research andStatistics Department, Bank of Japan, 1988 [May 1988], 1988d.
, “Flow of Funds in Japan in 1987,” BOJ Special Paper No. 165, August 1988 [June 1988],
1988e.
, “Quarterly Economic Outlook,” BOJ Special Paper No. 164, Summer 1988 [July 1988],
1988f.
, “Corporate Fixed Investment in Japan: Recent Expansion and Its Sustainability,” BOJ Special Paper No. 167, September 1988, 1988g.
, “The World Economy 1988–89: Developments and Prospects,” BOJ Special Paper No. 171,
January 1989 [December 1988], 1988h.

180 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials, “Movements toward internal market integration inside the European Community by 1992,”
Monthly Bulletin, Bank of Japan, January 1989, 1989a.
, “A Study on potential Supply and Market Conditions: A Production-function Approach Including the Stabilizing Eﬀect of Imports,” BOJ Special Paper No. 175, March 1989 [February1989], 1989b.
, “Quarterly Economic Outlook,” BOJ Special Paper No. 177, Spring 1989 [April 1989],
1989c.
, “Bank rate increased (decision on May 30),” Monthly Bulletin, Bank of Japan, May 1989,
1989d.
, “Annual Review of Monetary and Economic Developments in Fiscal 1988,” Research andStatistics Department, Bank of Japan, 1989 [May 1989], 1989e.
, “Flow of Funds in Japan in 1988,” BOJ Special Paper No. 180, August 1989 [June 1989],
1989f.
, “Bank rate increased (decision on October 11),” Monthly Bulletin, Bank of Japan, October
1989, 1989g.
, “The world economy 1989: developments and prospects,” Monthly Bulletin, Bank of Japan,
December 1989, 1989h.
, “Conduct of monetary policy and challenge: speech by Governor Sumita on December 1,
1989,” Monthly Bulletin, Bank of Japan, December 1989, 1989i.
, “Bank rate increased (decision on December 25),” Monthly Bulletin, Bank of Japan, December 1989, 1989j.
, “Bank rate increased (decision on March 20),” Monthly Bulletin, Bank of Japan, March
1990, 1990a.
, “The Recent Rise in Japan’s Land Prices: Its Background and Implication,” BOJ Special
Paper No. 193, December 1990 [April 1990], 1990b.
, “Quarterly Economic Outlook,” BOJ Special Paper No. 188, Spring 1990 [April 1990],
1990c.
, “Annual Review of Monetary and Economic Developments in Fiscal 1989,” Research andStatistics Department, Bank of Japan, 1990 [May 1990], 1990d.
, “Quarterly Economic Outlook,” BOJ Special Paper No. 192, Autumn 1990 [October 1990],
1990e.
, “The world economy 1990: developments and prospects,” Monthly Bulletin, Bank of Japan,
December 1990, 1990f.
, “Quarterly Economic Outlook,” BOJ Special Paper No. 194, Winter 1991 [February 1991],
1991a.
, “Quarterly Economic Outlook,” BOJ Special Paper No. 201, Spring 1991 [May 1991],
1991b.
, “Annual Review of Monetary and Economic Developments in Fiscal 1990,” in Annual Review 1991, Public Relations Department, Bank of Japan, 1991 [June 1991], 1991c.
, “Quarterly Economic Outlook,” BOJ Special Paper No. 201, Summer 1991 [August 1991],
1991d.
, “The ‘Price Stability Target’ under the Framework for the Conduct of Monetary Policy,”
January 22, 2013 (available at http://www.boj.or.jp/en/announcements/release_2013/).
Regarding the references for the Bank of Japan Archives below, all of them are in Japanese.
We basically show information in English translation for brevity. Also, “No.” indicates a Bankof Japan Archive Reference number corresponding to a folder (its name truncated for brevity)with documents in the Archive.
Bank of Japan Archives, “Letter from the Director-General of Policy Planning Department: bank rateincreased,” April 16, 1979, No. 51418, 1979a.
, “Governor’s speech at the General Managers’ meeting,” July 23, 1979, No. 51421, 1979b.
, “Letter from the Director-General of Policy Planning Department: bank rate increased,”181

November 1, 1979, No. 51418, 1979c.
, “Governor’s speech at the General Managers’ meeting,” January 22, 1980, No. 51422,
1980a.
, “Letter from the Director-General of Policy Planning Department: bank rate and reserve
requirement rate increased,” February 18, 1980, No. 39903, 1980b.
, “Letter from the Director-General of Policy Planning Department: bank rate and reserve
requirement rate increased,” March 18, 1980, No. 39903, 1980c.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,” August 19, 1980, No. 39903, 1980d.
, “Letter from the Director-General of Policy Planning Department: bank rate and reserve
requirement rate lowered,” November 5, 1980, No. 39903, 1980e.
, “Governor’s speech at the General Managers’ meeting,” January 20, 1981, No. 51422,
1981a.
, “Letter from the Director-General of Market Operations Department: window guidance forthe second quarter of 1981,” March 17, 1981, No. 10585, 1981b.
, “Letter from the Director-General of Policy Planning Department: establishment of a separate lending facility,” March 17, 1981, No. 39927, 1981c.
, “Governor’s speech at the General Managers’ meeting,” April 21, 1981, No. 51422, 1981d.
, “Governor’s speech at the General Managers’ meeting,” July 21, 1981, No. 51422, 1981e.
, “Letter from the Director-General of Policy Planning Department: issuance of nonmarketable government bond,” August 6, 1981, No. 39927, 1981f.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,” December 11, 1981, No. 39927, 1981g.
, “Letter from the Director-General of Market Operations Department: window guidance forthe first quarter of 1982,” December 25, 1981, No. 10585, 1981h.
, “Governor’s speech at the General Managers’ meeting,” April 13, 1982, No. 51422, 1982a.
, “Governor’s speech at the General Managers’ meeting,” July 20, 1982, No. 51422, 1982b.
, “Governor’s speech at the General Managers’ meeting,” October 26, 1982, No. 51422,
1982c.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,” October 21, 1983, No. 39993, 1983a.
, “Governor’s speech at the General Managers’ meeting,” October 25, 1983, No. 9264, 1983b.
, “Governor’s speech at the General Managers’ meeting,” January 24, 1984, No. 9268, 1984a.
, “Governor’s speech at the General Managers’ meeting,” April 17, 1984, No. 9266, 1984b.
, “Letter from the Director-General of Policy Planning Department: regarding the Yen–Dollar
Committee and the report by its working group,” May 31, 1984, No. 39993, 1984c.
, “Governor’s speech at the General Managers’ meeting,” July 24, 1984, No. 9268, 1984d.
, “Governor’s speech at the General Managers’ meeting,” October 23, 1984, No. 9267, 1984e.
, “Governor’s speech at the General Managers’ meeting,” January 22, 1985, No. 9268, 1985a.
, “Governor’s speech at the closed meeting with regional bankers,” February 15, 1985,
No. 51467, 1985b.
, “Governor’s speech at the General Managers’ meeting,” April 23, 1985, No. 9269, 1985c.
, “Governor’s speech at the General Managers’ meeting,” July 22, 1985, No. 9270, 1985d.
, “Governor’s speech at the Closed Meeting with regional bankers,” September 12, 1985,
No. 51467, 1985e.
, “Governor’s speech at the General Managers’ meeting,” October 22, 1985, No. 9270, 1985f.
, “Letter from the Director-General of Policy Planning Department: the result of the studies
for report to the Governor,” October 30, 1985, No. 39993, 1985g.
, “Executive Director-General Ogata’s Speech at the closed meeting with regional bankers,”
December 19, 1985, No. 51467, 1985h.
, “Governor’s speech at the General Managers’ meeting,” January 27, 1986, No. 9271, 1986a.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,” January 29, 1986, No. 39993, 1986b.

182 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials, “Governor’s speech at the closed meeting with regional bankers,” February 20, 1986,
No. 51436, 1986c.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,”
March 8, 1986, No. 39993, 1986d.
, “Governor’s speech at the closed meeting with regional bankers,” April 17, 1986, No. 51436,
1986e.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,” April
19, 1986, No. 39993, 1986f.
, “Governor’s speech at the General Managers’ meeting,” April 22, 1986, No. 9271, 1986g.
, “Governor’s speech at the closed meeting with regional bankers,” May 15, 1986, No. 51436,
1986h.
, “Governor’s speech at the closed meeting with regional bankers,” September 11, 1986,
No. 51436, 1986i.
, “Letter from the Director-General of Market Operations Department: window guidance forthe fourth quarter of 1986,” September 24, 1986, No. 10606, 1986j.
, “Governor’s speech at the General Managers’ meeting,” October 28, 1986, No. 9271, 1986k.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,”November 1, 1986, No. 39993, 1986l.
, “Governor’s speech at the closed meeting with regional bankers,” January 23, 1987,
No. 51432, 1987a.
, “Governor’s speech at the General Managers’ meeting,” January 26, 1987, No. 9273, 1987b.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,”
February 20, 1987, No. 40050, 1987c.
, “Governor’s press briefing,” February 24, 1987, No. 27972, 1987d.
, “Letter from the Director-General of Market Operations Department: regarding the newspaper article about window guidance,” March 18, 1987, No. 10607, 1987e.
, “Letter from the Director-General of Market Operations Department: window guidance forthe second quarter of 1987,” March 27, 1987, No. 10607, 1987f.
, “Governor’s speech at the closed meeting with regional bankers,” April 16, 1987, No. 51432,
1987g.
, “Governor’s speech at the General Managers’ meeting,” April 21, 1987, No. 9273, 1987h.
, “Governor’s speech at the closed meeting with regional bankers,” May 21, 1987, No. 51432,
1987i.
, “Letter from the Director-General of Market Operations Department: window guidance forthe third quarter of 1987,” June 25, 1987, No. 10607, 1987j.
, “Governor’s speech at the closed meeting with regional bankers,” September 10, 1987,
No. 51432, 1987k.
, “Letter from the Director-General of Market Operations Department: window guidance forthe fourth quarter of 1987,” September 24, 1987, No. 10607, 1987l.
, “Governor’s speech at the closed meeting with regional bankers,” November 19, 1987,
No. 51432, 1987m.
, “Governor’s speech at the closed meeting with regional bankers,” December 17, 1987,
No. 51432, 1987n.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the first quarter of 1988,” December 24, 1987, No. 10607, 1987o.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the regional banks for the first quarter of 1988,” January 11, 1988, No. 10608, 1988a.
, “Governor’s speech at the General Managers’ meeting,” January 25, 1988, No. 9274, 1988b.
, “Governor’s speech at the General Managers’ meeting,” April 5, 1988, No. 9274, 1988c.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the third quarter of 1988,” June 27, 1988, No. 10608, 1988d.
, “Governor’s speech at the closed meeting with regional bankers,” July 14, 1988, No. 51471,
1988e.

183

, “Governor’s speech at the General Managers’ meeting,” July 18, 1988, No. 9274, 1988f.
, “Governor’s speech at the closed meeting with regional bankers,” September 14, 1988,
No. 51471, 1988g.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the fourth quarter of 1988,” September 26, 1988, No. 10608,
1988h.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the regional banks for the fourth quarter of 1988,” October 11, 1988, No. 10608,
1988i.
, “Letter from the Director-General of Market Operations Department: the management of
the money markets,” October 21, 1988, No. 10608, 1988j.
, “Governor’s speech at the General Managers’ meeting,” October 25, 1988, No. 9274, 1988k.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the first quarter of 1989,” December 26, 1988, No. 10608, 1988l.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the regional banks for the first quarter of 1989,” January 10, 1989, No. 10610, 1989a.
, “Governor’s speech at the closed meeting with regional bankers,” February 16, 1989,
No. 51439, 1989b.
, “Governor’s speech at the closed meeting with regional bankers,” March 16, 1989,
No. 51439, 1989c.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the second quarter of 1989,” March 28, 1989, No. 10610, 1989d.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the regional banks for the second quarter of 1989,” April 10, 1989, No. 10610, 1989e.
, “Governor’s speech at the General Managers’ meeting,” April 25, 1989, No. 9276, 1989f.
, “Letter from the Director-General of Policy Planning Department: bank rate increased,”
May 30, 1989, No. 40050, 1989g.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the third quarter of 1989,” June 29, 1989, No. 10610, 1989h.
, “Governor’s speech at the General Managers’ meeting,” July 24, 1989, No. 9276, 1989i.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the fourth quarter of 1989,” September 28, 1989, No. 10610,
1989j.
, “Letter from the Director-General of Policy Planning Department: bank rate increased,”
October 11, 1989, No. 40050, 1989k.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the regional banks for the fourth quarter of 1989,” October 13, 1989, No. 10610,
1989l.
, “Governor’s speech at the General Managers’ meeting,” October 24, 1989, No. 9276, 1989m.
, “Letter from the Director-General of Policy Planning Department: memo about news reportsof the bank rate,” December 19, 1989, No. 40050, 1989n.
, “Letter from the Director-General of Policy Planning Department: bank rate increased,”
December 25, 1989, No. 40050, 1989o.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the first quarter of 1990,” December 28, 1989, No. 10610, 1989p.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the regional banks for the first quarter of 1990,” January 12, 1990, No. 28326, 1990a.
, “Governor’s speech at the General Managers’ meeting,” January 22, 1990, No. 30840,
1990b.
, “Letter from the Director-General of Policy Planning Department: bank rate increased,”
March 20, 1990, No. 40050, 1990c.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the second quarter of 1990,” March 29, 1990, No. 28326, 1990d.

184 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials, “Governor’s speech at the General Managers’ meeting,” April 24, 1990, No. 41807, 1990e.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the regional banks for the third quarter of 1990,” July 10, 1990, No. 28326, 1990f.
, “Governor’s speech at the General Managers’ meeting,” July 16, 1990, No. 41807, 1990g.
, “Letter from the Director-General of Policy Planning Department: bank rate increased,”
August 30, 1990, No. 40050, 1990h.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the fourth quarter of 1990,” September 27, 1990, No. 28326,
1990i.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the regional banks for the fourth quarter of 1990,” October 12, 1990, No. 28326,
1990j.
, “Governor’s speech at the General Managers’ meeting,” October 23, 1990, No. 41807,
1990k.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the first quarter of 1991,” December 27, 1990, No. 28326, 1990l.
, “Letter from the Director-General of Market Operations Department: window guidance
towards the major banks for the second quarter of 1991,” March 29, 1991, No. 34090, 1991a.
, “Governor’s speech at the General Managers’ meeting,” April 2, 1991, No. 41807, 1991b.
, “Abolition of window guidance,” June 27, 1991, No. 40318, 1991c.
, “Reference memo for Market Operations Department: overview and transition of window
guidance,” June 1991, No. 40318, 1991d.
, “Letter from the Director-General of Policy Planning Department: bank rate lowered,” July
1, 1991, No. 39500, 1991e.
Bank of Japan, Institute for Monetary and Economic Studies (BOJ IMES), “Symposium in commemoration of the establishment of the IMES, on the role of monetary policy in our time and the
direction of monetary studies,” Kin’yu kenkyu, 2(1), 1983, pp. 83–100.
Economic Planning Agency (EPA), Showa 55nen nenji sekai keizai houkoku (Survey of World Economy 1980), Economic Planning Agency, 1981.
, Economic Survey of Japan (1988–1989), Economic Planning Agency, 1990 [originally August 1989].
The Federal Reserve (FRB), Federal Reserve Bulletin, 72(9), September 1986.
Funabashi, Yoichi, Managing the Dollar: From the Plaza to the Louvre, Institute for International
Economics, 1988.
Ginkokeiri mondai kenkyukai (Group of accountants in banking business), Ginkokeiri no jitsumu(Accounting for banking business in practice), Kinzai Co. Ltd., 2008.
Ishii, Susumu, “Plaza goui, naiju kakudai seisaku to baburu (Plaza accord, domestic demand expansion policies and bubble from 1985 to 1989),” in Takao Komine, ed. Nihon keizai no kiroku—
dai 2ji sekiyukiki eno taiou kara baburu houkai made (Record of the Japanese economy—
from responses to the second oil shock to the collapse of the bubble from 1970s to 1996),
Economic and Social Research Institute, Cabinet Oﬃce, 2011, pp. 129–370.
Iwata, Kikuo, Kinyu seisaku no keizaigaku (The economics of monetary policy), The Nikkei Inc.,
1993.
Kinyu Zaisei Jijo, “Shimbun no mouten: denka no houtou mo chiratsuku enyasu taisaku no kuno
(Dilemma against counter measures against yen depreciation),” Kinyu zaisei jijo (Kinzai Magazine), Kinzai Institute for Financial Aﬀairs, February 18, 1985.
, “Tanki kinyushijo kouzou kaikaku no inpakuto (Impact of money market reforms on November 1988),” Kinzai Magazine, Kinzai Institute for Financial Aﬀairs, November 7, 1988, 1988a.
, “Obata Yoshiharu interview (Interview with the Chief of Money Market Division, Market
Operations Department, Bank of Japan),” Kinzai Magazine, Kinzai Institute for Financial
Aﬀairs, November 21, 1988, 1988b.
, “Tamura Tatsuya interview (Interview with the Director-General of Credit and Market Man-185

agement Department, Bank of Japan),” Kinzai Magazine, Kinzai Institute for Financial Affairs, July 15, 1991.
Kinri chosei shingikai (Interest adjustment council), “Yochokin kinri kettei no arikata tou ni tsuite(Comments on adjustment process of deposit rates),” Kinzai Magazine, Kinzai Institute forFinancial Aﬀairs, December 5, 1983.
Komine, Takao, ed. Nihon keizai no kiroku—dai 2ji sekiyukiki eno taiou kara baburu houkai made(Record of the Japanese economy—from responses to the second oil shock to the collapseof the bubble from 1970s to 1996), Economic and Social Research Institute, Cabinet Oﬃce,
2011.
Komiya, Ryutaro, and Miyako Suda, Gendai kokusai kinyuron rekishi seisaku hen (International
finance: history and policy), The Nikkei Inc., 1983.
Kondo, Makoto, “Sekiyukikigo no keizaikouzouchousei to guroobarizeishon eno taiou (Structural adjustment after the oil shock and globalization),” in Takao Komine, ed. Nihon keizai no kiroku—
dai 2ji sekiyukiki eno taiou kara baburu houkai made, Economic and Social Research Institute, Cabinet Oﬃce, 2011.
Kosai, Yutaka, “Koutei buai anrakushi no susume (Diminishing role of oﬃcial discount rate),” Shukan
Toyo Keizai (Weekly Toyo Keizai), September 3, 1983.
Kure, Bunji, Kinyu seisaku (Monetary policy), Toyo Keizai Inc., 1973.
Kure, Bunji, and Kinzo Shima, Kinri jiyuka: kinyu shisutemu ha kou kawaru (Interest liberalization:changing Japanese financial system), Yuhikaku Publishing Co., 1987.
Kuroda, Haruhiko, Zaisei kinyu seisaku no seikou to shippai (The success and failure in monetaryand fiscal policies), Nippon Hyoron Sha, 2005.
Mainichi Shimbun, “Shasetsu: jigiwo eta kouteibuai sage (Editorial: timely lowering of bank rate),”July 2, 1991.
Meltzer, Allan H., A History of the Federal Reserve, Volume 2, Book 2, 1970–1986, The Universityof Chicago Press, 2009.
Mieno, Yasushi, “Nihon keizai to chuo ginko: zen nichigin sousai kouenroku (Japan’s economy andthe central bank: speeches by the former BOJ governor),” 1995.
Mitsuhashi, Tadahiro, and Shigeo Uchida, Showa keizaishi gekan (An economic history: the Showa
period, Vol. 2), The Nikkei Inc., 1994.
Miyazato, Seigen, USTR: Beitsushoseisaku no ketteito daihyoubuno yakuwari (United States Trade
Representative: policy formulation and its role), Japan Times, 1989.
Morita, Tatsuro, and Makoto Hara, Tokyo manee maaketto dai3han (Tokyo money market 3rd edition), Yuhikaku Publishing Co., 1988.
Ministry of Finance (MOF), Showa zaiseishi (The history of public finance during the fiscal years
from 1974 to 1988, Vol. 6), Toyo Keizai Inc., 2003, 2003a.
, Showa zaiseishi (The history of public finance during the fiscal years from 1974 to 1988,
Vol. 11), Toyo Keizai Inc., 2003, 2003b.
, Showa zaiseishi (The history of public finance during the fiscal years from 1974 to 1988,
Vol. 7), Toyo Keizai Inc., 2004.
Nakagawa, Yukitsugu, Taikenteki kinyu seisakuron (Experiential note in monetary policy formulation), The Nikkei Inc., 1981.
National Land Agency, Shuto kaizou kaikaku: takakugata rengou toshiken no kouchiku ni
mukete (Plan for reconstructing Tokyo into a multicore metropolis), Shutoken seibi kyokai(Metropolitan areas development association), 1985.
Nihon Keizai Shimbun, “Nichigin sousai shisa kijungai kashitsuke hatsudou mo (BOJ governor implies rate hike by special facility if yen remains weak),” February 7, 1985.
, “Manee sapurai no kai (jou) teitaika de naze takainobi (Strange flow of money with a highgrowth rate amid stagnating business activity),” May 20, 1986.
, “Nishidoku sousenkyo renritsu yotou ga shouri (Ruling coalition wins at the general election
in West Germany),” January 26, 1987, 1987a.
, “Nichigin no kinyuchosetsu ni engun (Tighter money market conditions help BOJ’s market
operations),” September 20, 1987, 1987b.

186 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials, “Teikinri = saiken taikoku no yakuwari nichigin naibu de takamaru (A stronger view within
the BOJ that Japan as a large creditor nation should maintain low interest rates for the world
economic growth as a capital exporter),” August 28, 1988, 1988a.
, “Ginkoukan shijo kinri 2shukan mono ijou wa shijo jissei torihiki ni (Interbank rates are to
be encouraged for more free determination),” October 31, 1988, 1988b.
, “Rainen kara nichigin ga shinkakaku shisu (BOJ plans to create a new price index for corporate service prices next year),” August 15, 1989, 1989a.
, “Saimatsu riage kyosokyoku ageru agenu yureta ichinichi (Ambiguity in the late year about
whether the rate will be raised or not),” December 20, 1989, 1989b.
, “Sabisu kakaku josho ukibori kigyomuke nichigin ga shinshihyo (BOJ’s new corporate service price index showing rise in service prices),” January 11, 1991, 1991a.
, “Shasetsu: naigai kinkou wo mezasu juunan na kinyu seisaku wo (Editorial: flexible monetary policy to be desired to achieve both internal and external balances),” July 2, 1991, 1991b.
Ohta, Takeshi, Kokusai kinyu genba karano shougen (International finance: witness at negotiation),
Chuokoron Shinsha Inc., 1991.
Oba, Tomomitsu, Futatsu no kuudouka wo koete (Beyond the two impacts of hollowing out), NHK
Publishing Inc., 1995.
Ogata, Shijuro, En to nichigin sentoraru bankaa no kaisou (Yen and the Bank of Japan: a memoir),Chuokoron Shinsha Inc., 1996.
Okina, Kunio, Masaaki Shirakawa, and Shigenori Shiratsuka, “The Role of Monetary Policy under
Low Inflation: Deflationary Shocks and Policy Responses, Background Paper: The Asset
Price Bubble and Monetary Policy: Japan’s Experience in the Late 1980s and the Lessons,”
Monetary and Economic Studies, 19(S-1), Institute for Monetary and Economic Studies, Bankof Japan, February 2001, pp. 395–450.
Shinkai, Yoichi, “Kokusai makuro keizaigaku to furooto kano keizai seisaku (International macroeconomics and economic policy under floating exchange rate),” Kikan gendai keizai,
56, The Nikkei Inc., December 1983.
Shukan Toyo Keizai, “Nichigin ankaaron wa kuzureruka (Does BOJ have to maintain low interest
rates as an anchor?),” March 18, 1989.
Suzuki, Yoshio, Nihon no kinyu seisaku (Japanese monetary policy), Iwanami Shoten Publishers,
1993.
Tachi, Ryuichiro, Kinyu seisaku no riron (Theory of monetary policy), University of Tokyo Press,
1982.
Tanaka, Naoki, Nichibei keizai masatsu (Economic friction between Japan and the United States),
NHK Publishing Inc., 1989.
Volcker, Paul A., and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat toAmerican Leadership, Times Books, 1992.
Yuseisho yusei kenkyujo (Postal services research institute), Yuucho kanpo no saishin jijo (Current
status of postal savings and insurance), Toyo Keizai Inc., 1996.
Yomiuri Shimbun, “Koutei buai shunai ni 0.5% age (Likely increase in bank rate this week),” December 19, 1989.
, “Shasetsu: ikinagai naiju keiki sasaeru risage (Editorial: lower bank rate to support thelonger expansion),” July 2, 1991.
Yoshitomi, Masaru, Nihonkeizai: sekaikeizai no aratana kiki to nihon (Japanese economy: Japan andthe new economic crisis facing the world), Toyo Keizai Inc., 1981.

187

APPENDIX 1: A Framework of Determining Deposit and Savings
Rates under Interest Rate Control and Postal Savings
As of 1980, under the Temporary Money Rates Adjustment Act enacted in 1949 in theimmediate postwar period, the Bank’s Policy Board was responsible for determining
the ceiling on the deposit rates of private financial institutions subject to consultation
with and a report from the Interest Rates Adjustment Council. On the other hand,under the Postal Savings Act, which was enacted in 1947 and amended in 1963, thepostal savings interest rate was consulted on and reported with the Postal Service Council as the advisory body for the Minister of Posts and Telecommunications, and thenapproved by the cabinet, following which it was published and enforced as a government ordinance. Under this framework, the deposit rates of commercial banks werepractically changed in case of necessity after a change in the oﬃcial discount rate(and the deposit rates were not lowered unless the Bank considered it necessary). At
the same time, prior discussions between the Ministry of Finance and the Ministry of
Posts and Telecommunications were held regarding the date and extent of the interest
rate changes in order to prevent a shift of funds between the saving deposits of commercial banks and the postal savings. When a reduction of interest rates was issued
for discussion, the Ministry of Posts and Telecommunications often called for smaller
reduction or some alternative measures on the grounds of protecting the depositors’
benefits in postal savings. The Bank had considered this as a problem in terms offlexible implementation of monetary policy since the 1960s.317
During the phase with higher interest rates after the oil crises, the characteristics
of fixed-amount postal savings (such as compound of interest semiannually up to 10
years as the maximum term with a withdrawal option with no penalty after the initial 6 months) were very attractive for depositors. A large amount of funds shiftedfrom commercial bank deposits to postal savings, and then criticism mounted that thequasi-government enterprise put a burden on private-sector corporations. For this reason, the Conference on the Character of Government Enterprises in the Financial Field
was established as an advisory body for the Prime Minister in January 1981, and thenthe conference report requesting a unified decision-making process on deposit interest
rates for both commercial banks and postal savings was submitted to Prime Minister
Zenko Suzuki in August 1981. Based on this report, an agreement among three cabinet
members of the Minister of Posts and Telecommunications, the Minister of Finance,
and the Chief Cabinet Secretary was attained in September 1981. The three ministers
agreed to “promote communication between the Ministry of Posts and Telecommunications and the Ministry of Finance suﬃciently enough for consistent and flexible
determination of the deposits rates.”318................................
317. Deposit rates for postal saving were determined by the Postal Savings Act from 1947 to 1963, and a change
in deposit rates required a revision of the Act. In light of the experience in 1961 when the deposit rates
were lowered for the first time since the war, the postal savings act was revised in 1963 for enabling flexible
changes of deposit rates by the determination of rates through consultation with the postal committee, its
reply, and a government decree. However, diﬃculties in adjustments among related parties often became aproblem. See BOJ (1986a), pp. 29–32, 359–360, 446–448, 455–458, 468–469, 547–548.
318. BOJ (1986a), pp. 561, 579–584.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

Based on the developments as described above, the BOJ started to take practicalprocedures about changes in deposits rates after a reduction of the oﬃcial discountrate in December 1981 without prior discussions. When the Bank lowered the oﬃcial
discount rates in October 1983, however, it took about two months to lower depositinterest rates. The Interest Rate Adjustment Council submitted a formal comment to
the Policy Board of the Bank of Japan, stating “it is deplorable from the viewpoint of
ensuring the flexibility and eﬀectiveness of monetary policy.”319 The problems were
not resolved.
After the report of the working group of the Japan–U.S. Yen–Dollar Committee
in May 1984, deregulations of deposits interest rates progressed in the second halfof the 1980s and early 1990s. The interest rates of fixed-amount postal savings andother similar products were determined in line with market interest rates from 1993
onward.320................................
319. Kinri chosei shingikai (1983).
320. Yuseisho yusei kenkyujo (1996), pp. 97–100.

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APPENDIX 2: “Mayekawa Report”
With the recognition that the economic conflict between Japan and the U.S. caused byexternal imbalance could completely jeopardize Japan’s external economic relations,
Prime Minister Nakasone’s government seriously acknowledged the necessity to implement policy measures for fundamental adjustments of economic structure in orderto maintain the free trade system. Under this recognition, “the Advisory Group on
Economic Structural Adjustment for International Harmony” organized by the requestof Prime Minister Nakasone in October 1985 (chaired by former BOJ Governor Haruo
Mayekawa) submitted the report (the so-called Mayekawa report) to the Prime Minister
in April 1986 immediately before the Tokyo Summit.
With a purpose to “attain the goal of steadily reducing the nation’s current accountimbalance to one consistent with international harmony” by “setting [it] as a mediumterm national policy goal,” the Report stated that “an urgent need for Japan” was “toseek to transform the Japanese economic structure into one oriented toward international coordination.” Specifically, the Report proposed five imperative goals as follows:(1) economic growth led by domestic demand; (2) basic transformations in the nation’s
trade and industrial structure; (3) the realization and stabilization of the exchange rate
at an appropriate level; (4) the liberalization and internationalization of the nation’s
capital markets; and (5) review of the preferential tax treatment for saving.321
In the conclusion, the Report emphasized that “each and every Japanese should also
be fully aware that Japan cannot develop unless it also contributes actively to the international community” and that “it is imperative that every eﬀort be made for attainmentof this national goal.” Regarding these points, Governor Sumita “completely agreed
with the conclusion and we should further strengthen our recognition.”322 In practice,
the Bank supported the Report’s policy direction for reducing the nation’s current account imbalance by expanding domestic demand and continuing long-term eﬀorts toreform the economic structure. In monetary policy implementation, the Bank’s policy stance tended to promote domestic demand expansion and a structural adjustment
process consistent with international harmonization so far as price stability was maintained.

................................
321. The whole report can be seen at Advisory Group on Economic Structural Adjustment for International
Harmony (1986).
322. BOJ Archives (1986g), p. 6.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

APPENDIX 3: Financial Deregulation and Money Market Reform
Japan’s financial deregulation gradually progressed after the late 1970s, in terms ofboth the interest rate deregulations and the scope of business and international financial transactions, such as commencement of Certificates of Deposits as free interest instruments (in 1979), deregulation of foreign currency deposits for residents and impact
loans due to an introduction of the new Foreign Exchange Control Law (in 1980), andover-the-counter sales of public bonds by banks (in 1983). The pace of deregulation
accelerated in the second half of the 1980s after the announcement of the “Japan–U.S.
Yen–Dollar Committee Report” in May 1984, containing a drastic schedule for further
financial deregulation. Specifically, the yen-swap limit was removed in June 1984, interest rates on large time deposits were gradually liberalized, and the use of the “spreadmethod” where loan rates were determined by adding a spread to short-term market
rates increased. These raised the proportion of market interest rates in both assets andliabilities of financial institutions. For firms’ funding, due to financial deregulation andhigher stock prices under low interest rates, both equity financing and funding by issuance of other securities such as Commercial Paper permitted in November increased,
mainly by large firms (Charts 11 (1), (2) and (3)).323
During the first half of the 1980s, the Bank acknowledged the necessity of reformin monetary policy implementation due to the progress in financial deregulation. For
example, during 1984 the Bank recognized that the most important issue concerning financial liberalization was “how to secure the eﬀectiveness of monetary policy,” and thatthe Bank had to “make use of the functions of interest rate during ongoing liberalization.” The Bank also recognized that “the role of interest rates should be increasingly
important in monetary policy implementation, considering further deregulation for interest rates including deposit rates, integration of both domestic financial markets andeuroyen financial market and increased international financial transactions.”324
Meanwhile, the Bank also acknowledged that “there existed the various practices
and tacit understanding as the long-lasting common knowledge among market participants in Japan’s financial markets and they were sometimes employed as a precondition
for monetary policy implementation.” The Bank was concerned about the possibilityof causing diﬃculties by radical deregulation, considering that “the existing practices
being obsolete would not necessarily mean to quickly initiate a new alternative framework or practice that enhances eﬀects of monetary policy implementation.” The Bank
tried to seek a gradual and orderly progress of financial deregulation consistent witheﬀective implementation of monetary policy.325
In the middle of the 1980s, the Bank recognized that “with the progress of financial
liberalization and internationalization as well as greater linkage among various market
interest rates, there has been active interest arbitrage among diﬀerent financial markets
both within Japan and between Japanese and overseas financial markets.” In addition,
the Bank assessed that “the eﬀective use of freely-determined market interest rates has................................
323. Morita and Hara (1988), pp. 381–383, BOJ (1988e), pp. 1–2, 14–17, and BOJ (1989f), pp. 1–2, 15–24,
49–53.
324. BOJ Archives (1984d), p. 6.
325. BOJ Archives (1984e), p. 7.

191

become an increasingly important tool of monetary policy management,” and that “liberalization and internationalization have imposed new constraints on Japanese monetary policy, thereby calling for new devices and techniques in the conduct of monetary
policy.”326
As Japan’s economic activity strengthened during the second half in 1987, the interest rates in open markets such as euroyen and CD rose more rapidly (the rate of
euroyen 3M monthly average rising from 3.96% in June 1987 to 4.87% in October),relative to a moderate increase in the bill rate (monthly average rising from 3.64% inJune 1987 to 3.91% in October). The interest rates in open markets declined once after
the occurrence of Black Monday, but after buoyancy in economic activity was moreacknowledged, the rates tended to rise again and widen the interest rate diﬀerential
between the open markets and the bill markets (Chart 4-VI). This diﬀerence induced ashift of funds from the bill markets to the open markets and thereby the sharp decline
in the outstanding amount of the bill market where monetary adjustment was mainly
conducted by the Bank.327
These circumstances made the Bank recognize the necessity of reforming management in interbank money markets including bill markets. In November 1988, thepractices in the money market were reviewed on the Bank’s initiative, for the purposeof “a further induction of active and smooth arbitrage between interest rates amongmarkets and a smoother conduct of money market adjustment.” Specifically, (1) the
Bank started short-term operations (less than one month) using bills as instruments toreinforce the flexibility of monetary adjustment tools; (2) the Bank asked market participants to discuss measures to increase both transactions with a short term (less than one
month) in bill discount markets and transactions in uncollateralized call money markets with terms of more than one month.328 In addition, (3) the quotation system where
the kehaichi rates were quoted every morning by the call loan dealers conjecturing theBank’s intention was abolished for transactions with terms of more than one week, anda competitive oﬀer-bid system was then adopted, where rates were formed through amarket mechanism between bids by fundraisers and oﬀers by fund investors for thesetransactions.329 After the review of these market practices, restrictions of short termmoney markets were largely reduced, and interest rates were formed through market
conditions smoothly both in name and in reality.
Meanwhile, in January 1989, the new short-term prime lending rates linking tomarket rates instead of the oﬃcial discount rate were introduced by major banks, andthen the new prime rates were adopted steadily for existing loans. Then regional banks
also started to adopt the new prime lending rates.330................................
326. BOJ (1986f), p. 5.
327. Kinyu Zaisei Jijo (1988a) and Kinyu Zaisei Jijo (1988b), p. 19.
328. BOJ Archives (1988j), pp. 1–2 and the press release attached to the document.
329. See Kinyu Zaisei Jijo (1988b), p. 21 and Nihon Keizai Shimbun (1988b), p. 1. Regarding (3) the change
from a quoted system to an oﬀer-bid system, the money market participants such as dealers and banks werein charge of implementation. Although we do not find oﬃcial documents by the Bank promoting the change,
we suspect that the change should be consistent with the Bank’s intention considering market practices atthat time.
330. BOJ Archives (1989d), p. 7 and BOJ Archives (1989h), pp. 6–7.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

APPENDIX 4: Development of Window GuidanceWindow Guidance331 was “a supplementary policy tool supporting the other policy
tools for controlling market interest rates, such as the changes in the oﬃcial discountrate, the securities and bills operations, and the changes in reserve requirement ratio,”such that “the Bank request for its client financial institutions to keep the respective
loan plans to the adequate extent being consistent with the current financial conditions.” Window guidance was initiated in July 1947 when the section for credit banksurveillance was established at the Market Operations Department (the Banking Department then), and in the tightening phase in 1957 the Bank solidified the role of theguidance as a complementary tool for the Bank’s lending policy. In May 1957, thenGovernor Yamagiwa first emphasized the necessity of the guidance by using the term
“window guidance.” The June 1957 issue of the Bank’s monthly bulletin referred towindow guidance for the first time.
The financial institutions and their categories subject to the guidance were city
banks as well as the Industrial Bank of Japan in July 1947, and then both the city banks
and three long term credit banks in May 1957. In January 1964 the city banks, longterm credit banks, trust banks, regional banks were covered, and then in April 1973 thecoverage was enlarged by additionally including sogo banks (mutual financing banks)and some large shinkin banks (credit cooperatives). Some large foreign banks in Japan
were subject to the guidance for a period of time.
Specific contents of the guidance varied across periods. Up to around 1963 theBank requested banks to limit the increase of lending on a monthly basis. In the tightening phase of 1964 the Bank adopted a framework (“directive for increase in lending”) under which the Bank decided the total allocation for the increases of lending byrespective banks on a quarterly basis and then decided the increments for respective
banks in line with recent shares of their loans outstanding. Then in the loosened period
the Bank chose “the guidance for positions of funds” where the guidance focused on
the positions of funding and investments by respective banks. In the short tightening
phase the Bank adopted “restraint loan guidance” where the Bank requested revisionof the loan plans submitted by respective banks as necessary. In the complete tightening phase, the Bank allocated the increases of lending by respective banks according
to “directive for increase in lending” with recent shares of their loans outstanding, inaddition to various factors such as the position of funds.
From spring 1981 onward, the Bank’s attitude toward commercial banks was to accept their formulation of loan plans at their discretion. In the period of accommodative
monetary policy from 1987 onward the Bank requested commercial banks to adopt a“prudent lending attitude” (moral suasion) while maintaining the attitude of respecting
the autonomous formulation of their loan plans as a principle. After the raise in the official discount rate in May 1989, for the purpose of containing loans quantitatively anddirectly against increasing demands for loans related to land and financial investments,
the Bank tried to tighten the guidance by adjusting the increments of loans for respective banks. The principle of “respecting autonomous formulation” was becoming a................................
331. The text and reference without specific notes in this appendix are based on BOJ Archives (1991d).

193

mere slogan and losing substance in nature.
Window guidance “was not a legally binding guidance” but “a demand for cooperation in nature” by the BOJ for commercial banks. Meanwhile, commercial banks
also expected to lower the risk of a liquidity shortage in daily funding management by
maintaining a good relationship with the BOJ functioning as a Lender of Last Resort(LLR). In addition, the oﬃcial discount rate was lower than short-term market rates(such as the call rate) in the 1980s. Under such circumstances, there was a consideration in the Bank that for commercial banks “their borrowing from the Bank of Japanwas beneficial so that commercial banks as beneficiaries should cooperate with the policy of the Bank of Japan.”332 Meanwhile, the commercial banks gradually consideredthat the borrowing from the central bank was slowly becoming less beneficial, owing toan end of Japan’s high growth period with vigorous domestic demand, a dissipation of
the so-called over-loan situation with greater loans than deposits for commercial banks,
and a development of secondary bond markets in the 1980s allowing them to increaseliquidity in ordinary times.
Among an acceleration of financial deregulations after a release of the report of
the Japan–U.S. Yen–Dollar Committee in 1984, such as the removal of the yen-swap
limit, deregulation measures for euroyen transactions and gradual deregulation of interest rates for deposits,333 the Bank considered it necessary to make “further eﬀective
use of interest rates” in monetary policy implementation.334 Furthermore, among theincreasing proportion of instruments with freely-determined market interest rates forboth sides of funding and investments at commercial banks, the Bank also recognizeda “securing managerial soundness based on independent judgments of respective financial institutions by their own” as another important perspective.335
At the same time, in October 1985, the Bank recognized that “although a proportion of market-based funding by financial institutions was growing under progress offinancial deregulations, the proportion was just around twenty percent even for city
banks in terms of total amount outstanding, so there appeared to exist a constraint in
the transmission mechanisms of interest rate policy.” The Bank also assessed that “window guidance still played an important role of permeating policy intention and gathering information through daily oversight of funding for commercial banks.” The Bank
therefore considered that “the functions and the framework of the guidance should bemaintained as a supplementary policy tool of the interest rate managements.”336
After the removal of the yen-swap limit in 1984, arbitrage between the yendenominated loans provided by domestic branches and impact loans (foreign currency
denominated loans) became increasingly active, and then from fall 1986 onward theinterest rates declined further. Under these circumstances, the high growth rate of
impact loans, which were not subject to the guidance, became outstanding.337 Against
this background, the BOJ strongly recommended to city banks, long-term credit banks................................
332. Kure (1973), p. 160.
333. BOJ Archives (1985c), p. 5.
334. BOJ Archives (1985a), p. 7.
335. BOJ Archives (1985f), p. 6.
336. BOJ Archives (1985g), attachment #1, p. 9.
337. BOJ Archives (1987f), pp. 1–3.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

and trust banks in the guidance that the growth of impact loans “should be as consistent
as possible with the growth in the yen-denominated loans” for the April–June quarterof 1987.338 However, in light of “the attitude of respecting autonomous formulationof loan plans as a basic principle,” the Bank considered that “a tighter guidance ina wider range would possibly be diﬃcult in practice and thus would not necessarily
be adequate” for impact loans, which remained outside the scope of the guidance.339
Furthermore, regarding the formulation of loan plans as the managerial core of afinancial institution, the Bank assessed the role and framework of window guidance
itself by adjusting the allocation of lending increments beforehand according to “abalance of share in respective banks.” The BOJ came to recognize that the guidance“gradually became contradictory with the broader policy direction where respective
commercial banks should pursue their own managerial policies with discretion forbank lending as asset side in line with a further progress in deregulation in funding
as a liability side.”340 After the money market reform on November 1988, the Bank
tried to “implement policy operations with a greater focus on eﬀective usage ofinterest rate functions,” and thus market interest rates “became more influential on
lending behavior by financial institutions.”341 Furthermore, the Bank assessed that “theimpact of the rate raises was becoming both wider and more direct, under a surge inloans with lending rates linking to market interest rates (instead of lending rates incorrespondence with the oﬃcial discount rate) and a greater corporate funding from
capital markets.” In this regard, the Bank considered that “transmission channels ofmonetary policy became more diversified than before under the recent progress offinancial deregulations.”342
In face of these considerations, the role and framework of window guidance had tobe reconsidered. However, in the tightening phase from May 1989 “a level of overallliquidity so far accumulated in the period of long-lasting monetary easing remained
fairly high in relation to economic activity.” The Bank assessed that it should put moreweight on curbing inflationary pressure in the near term and it “should induce the everlower growth rate of bank loans than before.” Accordingly, the Bank adjusted portionsof loan increments for respective commercial banks with a policy “requesting a further
discipline in formulating loan plans with respect to both quantity and quality” andthereby tightened window guidance.343
Then in June 1991 the Bank disclosed the abolition of the window guidance for
the July–September quarter of 1991 and afterwards. Regarding the backgrounds, first,
the Bank pointed out that “a herding culture of quantity expansionism weakened andmanagerial decisions according to conditions of respective banks were considerably
recognized” in lending activity by commercial banks and that “function of interest rates
tended to work more eﬀectively in lending activity by commercial banks.” Second, it
appeared to the Bank that respective commercial banks recognized “an actualization of................................
338. BOJ Archives (1987f), pp. 1–2.
339. BOJ Archives (1987f), p. 2.
340. BOJ Archives (1987e), pp. 1–2.
341. BOJ Archives (1989h), p. 2.
342. BOJ Archives (1989i), p. 5.
343. BOJ Archives (1989h), pp. 1–2.

195

credit risks” such as failures in nonbank or real estate-related firms and conducted reforms toward a “more prudent lending attitude” along with a review of the easy lending
attitude of the past. Third, as partly seen in developments in money supply, the Bank
considered that “the growth in bank lending would be moderate even if formulationof loan plans were totally left to discretion of respective commercial banks, owing tosolid permeation of the past rate raises and the BIS regulatory capital standards.”344................................
344. BOJ Archives (1991c), pp. 2–3.

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Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

APPENDIX 5: Role of Money Supply
After the late 1960s, a view that money supply should be weighed heavily as an intermediate target in monetary policy implementation was strengthened mainly in theWestern countries, and central banks in these countries started to disclose a target ofgrowth rate of M1 or M2 as a monetary objective.345 Regarding the background, threereasons are pointed out. First, under the higher inflation of the industrial countries after
the late 1960s, the monetary policy with relatively less emphasis on monetary aggregates was heavily criticized for the acceleration in money supply and resultant highinflation. Second, with high and volatile inflation in the economy at that time, nominal interest rates might not be eﬀective indicators for monetary policy implementation
due to discrepancy between nominal interest rates and real interest rates. Third, in
contrast to a greater criticism of Keynesian policy as a source of stagflation, the monetarist view that excessive increases in money supply simply caused inflation without
increasing real output in the long run was widely accepted.346
After the second half of the 1970s, the Bank gave greater importance to money
supply than before in monetary policy implementation in light of “excessive liquidity”
around the first oil crisis and the subsequent high inflation.347 Specifically, the Bank
published an article entitled “The importance of the money supply in Japan”348 in 1975,
and then the Bank started to publish in the first month of every quarter a forecast of theincrease in the money supply for that quarter, for the July–September quarter of 1978
and afterwards.349
At the same time, the Bank of Japan never adopted money supply as a formal monetary objective, contrary to the central banks in the U.S. and Europe adopting money
supply as an intermediate target. The Bank rather considered money supply deserving
close attention within overall developments of other indicators. In this regard, the research paper in July 1975 stated that “in the process of realizing optimum economic
development while maintaining stable prices, suﬃcient attention should be paid to themoney supply in the operation of monetary policy in order to prevent excesses.” Meanwhile, it also wrote that “in view of the fact that the quantitative relation between themoney supply and prices is subject to change depending on the economic situation, it
is not desirable or appropriate to set a specific target of growth of the stock of M2 andattempt to realize the target mechanically.” In this regard, the Bank maintained this................................
345. Tachi (1982), p. 209. Also, see BOJ (1975a), p. 1.
346. Tachi (1982), p. 211.
347. Nakagawa (1981), pp. 63, 67, 189–194. Specifically, he noted the recognition (p. 67) that heavy competition
remained for lending by commercial banks around the first oil crisis and brought about easier monetaryconditions quantitatively, and this caused a problematic increase of money supply in fall 1972, reaching 28
percent in the year-on-year growth rate. In addition, he also remembered the advice given to then-Governor
Teiichiro Morinaga at his inauguration in December 1974 (p. 63) that monetary policy should be eased
at a measured pace to avoid excessive relaxation and also in this regard that attention should be paid fordevelopments of money supply.
348. BOJ (1975b).
349. BOJ (1978), p. 39. It stated that “the Bank of Japan closely monitored the development of money supply
together with other indicators, and the purpose for announcing a forecast was to further enhance attention
and understanding for various sectors in the developments of money supply.” The words “forecast” and“projection” were used interchangeably.

197

basic direction afterwards.350
As the backdrop of the Bank’s intention about this direction, the Centennial History of the Bank of Japan pointed out two factors. First, the relationship between
money supply and prices or economic activity would change according to time andeconomic conditions and the Bank considered it diﬃcult to publish a suﬃciently stableoﬃcial target. Second, the oﬃcial target in the form of a fixed number with normative
significance could later be interpreted regardless of the Bank’s intention in transient
economic conditions, and it could be detrimental to flexibility and options in smooth
implementation of monetary policy.351
In the 1980s, financial deregulation caused two changes. First, an outstanding
amount of quasi-money assets (such as government bonds and postal savings) wereon an uptrend and arbitrage transactions between money and quasi-money were stimulated. Various monetary aggregates were examined for grasping the liquidity of theoverall economy more adequately and thereby improving monetary indicators.352 Second, prices remained stable in spite of the high growth rate in money supply, and it wasnoted around 1988 that the relation between the rates of inflation and money growth
were considered to become blurred.353
Under these circumstances, the Bank’s stance for monetary policy implementation
was to prepare “for action in an appropriate and timely manner, through close monitoring developments in domestic and overseas economic conditions” including that ofmoney supply, “so as not to damage conditions for price stability by a developmentof money.”354, 355 For example, the higher growth rates in money warranted attention in
1988, and the Bank considered that “the growth rate of money supply was at a considerably high level, although its pace was mildly decelerating.” Meanwhile, the Bank
“intended to maintain the current basic stance for monetary policy implementation for
the time being”356 and maintained an accommodative policy mainly because prices
were stable. As stated, money supply was to be considered as an important indicatorwithin developments of other indicators in monetary policy formulation, but it appears
that the information from this indicator could not be utilized practically at the stage ofmonetary policy formulation.357................................
350. BOJ (1975b), p. 2. It should be noted that some of the document is available in two languages because theEnglish version was released in October 1975 after the release of the original paper in Japanese in July 1975.
From a contemporaneous perspective, we basically refer to the earlier date of the Japanese version in the
body text while taking a citation from the English version.
351. See BOJ (1986a), pp. 474–482 for the background discussion.
352. BOJ (1984c), pp. 11–18.
353. BOJ (1988a), pp. 1–2, 8–18.
354. The Governor’s response to questions at the upper house budget committee (August 23, 1988). See thesearch system (http://kokkai.ndl.go.jp) for transcripts in the Diet by the National diet library.
355. Also during the former half of the 1980s, the growth rate of money supply was regarded as an important
indicator. The Bank considered that the ideal growth rate of money supply was hard to specify and thatthe “monetary control mechanism should be monitored carefully in addition to developments in prices” (theGovernor’s response to questions at the upper house budget committee, on March 31, 1983).
356. BOJ Archives (1988k), p. 9.
357. In this regard, it was pointed out in the literature that money supply remained relatively stable in the first halfof the 1980s, but became volatile in the latter half (see Suzuki [1993], pp. 141–142 and Iwata [1993], pp. 196,
210 for examples). For the background, there are some views suggesting that “unintentional inclination of
the Bank toward the lesser attention for money supply would partly contribute to the background” (see198 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015

Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archived and Other Materials

In a speech by then-Governor Yasushi Mieno in August 1994, he recalled monetary
policy implementation in the latter half of the 1980s. The speech stated that “money
supply clearly displayed relatively irregular movement among various indicators, but
our expertise and confidence was not enough to read precise implication of changes
in money supply along with a suﬃcient assessment of other contemporary incidents
such as greater shifts of funds among financial instruments and volatile asset prices.”
Furthermore, it was added as the resultant lessons and tasks that “a central bank should
sharpen the insights for the developments of the economy including that of money supply and the expertise for monitoring on the basis of deep understanding of history.”358
The reflection of the experiences in the second half of 1980s appears to have evolved
into a perspective on the Bank’s monetary policy formulation that financial imbalances
should be examined as a risk for achieving price stability in the medium to long term.

..........................................................................................................................................
Suzuki [1993]). However, considering the views mainly by the Bank in the body text, it appears that thediﬀerence in developments of money supply between the first half and the second half the of 1980s was
mainly attributed to the existence of changes in external conditions causing large swings in money during
the respective periods, rather than the existence of changes in the Bank’s stance regarding monetary policy
implementation.
358. Speech by then-Governor Mieno on August 31, 1994, taken from Mieno (1995), p. 40.

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200 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2015