In its 2003 Financial System Stability Assessment of Japan, the International Monetary Fund (IMF) states that observance by the Bank of Japan (BoJ) with respect to transparency practices in the conduct of monetary policies met a high standard. This evaluation is reaffirmed and further buttressed by the IMF's 2006 and 2007 Article IV Consultations with Japan, which conclude that monetary policy transparency in Japan was appropriately accommodative. The BoJ is independent by virtue of the Bank of Japan Law of 1997 (BJL 1997), which also specifies the BoJ's roles and objectives as overseer of the day-to-day handling of monetary policy in Japan. Additionally, the roles, responsibilities and objectives of the central bank are clearly and comprehensively disclosed, described, and explained in a variety of BoJ-issued reports, publications and speeches by BoJ officials. All of these publications and pronouncements are posted on the BoJ's website. Also, Japan has a sufficiently transparent process for formulating and reporting all monetary policy frameworks. The BoJ reports its progress in quarterly, semi-annual and annual monetary policy reports, all of which are published on its website and address Japan's progress toward achieving its monetary policy objectives and on the evolving macroeconomic situation and their implications for monetary policy. Japan subscribes to the IMF's Special Data Dissemination Standard (SDDS), and meets its specifications for the coverage, periodicity, and timeliness of monetary data.

General Overview

According to the 2003 International Monetary Fund's (IMF) Financial System Stability Assessment of Japan, the Bank of Japan (BoJ) meets a high standard regarding transparency in monetary policy. The BoJ is independent by virtue of the Bank of Japan Law of 1997 (BJL 1997), which also specifies the BoJ's roles and objectives as overseer of the day-to-day handling of monetary policy in Japan. Furthermore, the roles, responsibilities and objectives of the central bank are clearly and comprehensively disclosed, described, and explained in a variety of BoJ-issued reports, publications and speeches by BoJ officials, and these publications and pronouncements are posted on the BoJ's website.

Japan has a sufficiently transparent process for formulating and reporting all monetary policy frameworks. The BoJ reports its progress in quarterly, semi-annual and annual monetary policy reports, all of which are published on its website and address Japan's progress toward achieving its monetary policy objectives and on the evolving macroeconomic situation and their implications for monetary policy. While commending the BoJ's commitment to increasing the transparency of its decision-making process, the IMF, in its 2007 IMF Article IV Consultations, recommends that the BoJ increase its communication with the markets by more frequently releasing forward-looking analysis of risks in-between the publications of the BoJ's semi-annual Outlook. The FSSA report notes that taking this action is important because the Outlook only contains interim assessments and could benefit from a more systematic coverage of risks. In its response, the BoJ stated "major changes in the outlook could be communicated as needed through a wide variety of channels" (p. 19), adding that it feared further outreach could give away the timing of future policy moves.

Regarding the public availability of information on monetary policy, the 2003 FSSA report notes that Japan subscribes to the IMF's Special Data Dissemination Standard (SDDS), and meets its specifications for the coverage, periodicity, and timeliness of monetary data. Perhaps most importantly, the BoJ provides this information through a variety of publications required by the Bank of Japan Law of 1997 (BJL 1997) to be submitted to the Diet and available to the public by specific dates in the year, including the Semiannual Report on Currency and Monetary Control.

According to the 2003 FSSA report, to ensure accountability and integrity, BoJ officials are required to regularly appear before Diet committees and members to brief them on the BoJ's policy objectives, its progress in achieving these objectives and the state of the economy and the financial system. To maximize accountability, the BoJ discloses information on the expenses in operating the Bank. The Bank of Japan Law of 1997 (BJL 1997) mandates that the BoJ's Financial Statements, which the BoJ must prepare on a scheduled basis, are audited by its Executive Auditors according to a pre-announced schedule.

According to the 2008 Article IV Consultations with Japan, monetary conditions remain accommodative in Japan with inflation expectations seemingly contained despite the increase in commodity and fuel prices. As a result, the consultation concurs with Japanese authorities that its policy rate be "maintained at the current level until concerns over domestic activity and the external environment have eased" (p. 3). Most importantly, given the aforementioned uncertainties, the 2008 IMF Consultation recommends that the BoJ increase the "discussion of the risks to the outlook and of the views of the Policy Board Members on growth and CPI inflation" (p. 3) in the BoJ's upcoming Outlook for Economic Activity and Prices report, adding that this would help increase the public's understanding of the outlook and conduct of monetary policy and also help anchor inflation expectations.

In March 2008, international confidence in Japan's monetary policy was threatened by a power vacuum created when erstwhile Bank of Japan Governor Toshihiko Fukui retired from his post on March 19, 2008. A lengthy power struggle soon ensued between the ruling Liberal Democratic Party (LDP) and the opposition Democratic Party within the Japanese Diet over which candidate would replace Fukui. The Democratic Party argued that the LDP's nominations were not independent enough since they had previously served within the Ministry of Finance. On April 9, 2008, after previously rejecting the LDP's first two nominations, the Japanese parliament approved Masaaki Shirakawa as governor of the central bank.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

FC

According to its 2003 Financial System Stability Assessment of Japan (henceforth 2003 FSSA report), the IMF states that "there is considerable good transparency practiced by the Bank of Japan (BoJ) with regard to clarity of roles, responsibilities, and objectives of monetary policies" (p. 62). The BoJ is independent by virtue of the Bank of Japan Law of 1997 (BJL 1997), which also specifies the BoJ's roles and objectives as overseer of the day-to-day handling of monetary policy in Japan. Additionally, the roles, responsibilities and objectives of the central bank are clearly and comprehensively disclosed, described, and explained in a variety of BoJ-issued reports, publications and speeches by BoJ officials. All of these publications and pronouncements are posted on the BoJ's website, even though most of these documents are only in Japanese. For example, according to the BoJ website, BJL 1997 clearly defines roles for the BoJ including: 1) handling of treasury funds in compliance with relevant laws and regulations (Art. 35), and 2) handling of the affairs of the government relating to currency and finance in compliance with relevant laws and regulations (Art. 36).

The Bank of Japan Law and the Public Finance Law primarily define the institutional relationship between the BoJ (monetary) and the government of Japan (fiscal), with roles of the BoJ and the conditions according to which it may make advances to the government clearly stated. Notably, under this legislation, the government does not have the authority to override decisions made by the BoJ, thereby assuring the BoJ's independence. Furthermore, Article 33 and 43 of the BJL 1997 clearly specifies the scope of business in which the BoJ may engage for the purpose of achieving the objectives of monetary policy, conditional upon the authorization of the Minister of Finance and the Commissioner of the Financial Services Agency.

Open process for formulating and reporting monetary policy decisions.

FC

The 2003 IMF FSSA report states that the BoJ "follows good transparency practices related to open process for formulating and reporting of monetary policies" (p. 62), adding that Japan has a sufficiently transparent process for formulating and reporting all monetary policy frameworks, instruments and targets through speeches and periodic reports, amongst other media. As in most countries, public confidence in a credible central bank is crucial to the inflation targeting regime framework working efficiently. Thus, according to the 2007 IMF Article IV Consultations with Japan, the BoJ considers transparency a strategic operating principle and communication efforts are constantly being improved.

The BoJ reports its progress in quarterly, semi-annual and annual monetary policy reports, all of which are published on its website and address Japan's progress toward achieving its monetary policy objectives and on the evolving macroeconomic situation and their implications for monetary policy. All monetary policy decisions are announced and posted on the BoJ's website immediately after each of the two monthly Monetary Policy Meetings, for which an advance meeting schedule is publicly disclosed in a scheduled manner. Changes in policy frameworks and reasons for monetary policy decisions by the Policy Board are promptly disclosed in BoJ publications, in speeches and press conferences by BoJ officials, and in reports to the Diet, replete with explanations and appropriate projections.

While commending the BoJ's commitment to increasing the transparency of its decision-making process, the IMF, in its 2007 IMF Article IV Consultations, recommends that the BoJ increase its communication with the markets by more frequently releasing forward-looking analysis of risks in-between the publications of the BoJ's semi-annual Outlook. The FSSA report notes that taking this action is important because the Outlook only contains interim assessments and could benefit from a more systematic coverage of risks. In its response, the BoJ stated "major changes in the outlook could be communicated as needed through a wide variety of channels" (p. 19), adding that it feared further outreach could give away the timing of future policy moves.

Public availability of information on monetary policy.

FC

According to the 2003 IMF FSSA report, the BoJ "observes all of the practices of the Code with regard to public availability of information on monetary policies" (p. 62), adding that Japan subscribes to the IMF's Special Data Dissemination Standard (SDDS), and thus meets its specifications for the coverage, periodicity, and timeliness of monetary data. In other words, as confirmed by the BoJ website, the central bank provides timely and sufficient coverage of daily, weekly, monthly, quarterly and annual data related to the monetary sector on a pre-announced schedule, including information about foreign exchange reserve assets, liabilities and commitments by the monetary authorities.

Perhaps most importantly, the BoJ provides this information through a variety of publications required by the Bank of Japan Law of 1997 (BJL 1997) to be submitted to the Diet and available to the public by specific dates in the year, including the Semiannual Report on Currency and Monetary Control. The BoJ publishes its balance sheets on a pre-announced schedule, and the balance sheets contain aggregate information on all lending to the banking sector and government. The 2003 IMF FSSA report states that all publicly available information on monetary policy, including texts of speeches by BoJ officials and texts of regulations, is published on the BoJ's well-structured and user friendly website, which features both Japanese and English language material.

Finally, Article 3 Paragraph 2 of the BJL 1997 requires the BoJ to "clarify to the public the content of its decisions as well as its decision-making process regarding currency and monetary control, and defines a specific framework for doing so," (BoJ 2002, p. 16) including the publication of minutes and transcripts of Monetary Policy Meetings and the publication of the Outline of Business Operations.

Accountability and assurances of integrity by the central bank.

FC

The 2003 IMF FSSA report observes that the BoJ "meets all of the transparency practices of the Code with regard to accountability and assurances of integrity by the central bank" (p. 63). The report adds that BoJ officials are required to regularly appear before Diet committees and members to brief them on the BoJ's policy objectives, its progress in achieving these objectives and the state of the economy and the financial system. To maximize accountability, the BoJ discloses information on the expenses in operating the Bank. The Bank of Japan Law of 1997 (BJL 1997) mandates that the BoJ's Financial Statements, which the BoJ must prepare on a scheduled basis, are audited by its Executive Auditors according to a pre-announced schedule. The BoJ readily discloses and publishes information and standards guiding the conduct of employees regarding personal financial affairs, and BoJ employees are regulated by the Bank itself, not by federal public service agencies, further assuring accountability.

According to the BoJ's 2002 Self-Assessment Report on Transparency Practices for Monetary Policy, Japanese law does not give BoJ executives and staff any special legal protection relieving them of civil liability for actions taken in the course of their duties. Furthermore, Article 32 of the Bank of Japan Law of 1997 (BJL 1997) "requires the establishment of rules regarding ethical discipline to ensure appropriate discharge of duties by executives and staff members" (BoJ 2002, p. 20), and these rules must be reported to the Minister of Finance and publicly announced. The rules governing ethical discipline by BoJ executives and staff members are posted in the BoJ's "Rules Regarding Ethical Discipline" and the "Code of Conduct for the Bank of Japan Executives and Staff." Finally, Article 26 of the BJL 1997 prohibits BoJ executives (other than counselors) from engaging in other paid positions.