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What is the Bank of Japan (BoJ)? What are its Objectives?

What is the Bank of Japan (BoJ)? What are its Objectives?

Introduction

The Bank of Japan (BoJ) is the central bank of Japan and is responsible for implementing monetary policy, issuing currency, and overseeing the stability of the financial system in the country. It was established in 1882 and operates under the Bank of Japan Act.

BOJ's Primary Objectives

The objectives of the Bank of Japan are outlined in its governing legislation and include:

  • Price Stability: One of the primary objectives of the BoJ is to achieve price stability. The Bank of Japan Act specifies that the BoJ should aim to achieve price stability, defined as a "sustainable growth rate of the economy" while keeping inflation rates at a level conducive to economic growth and stability. In practice, the BoJ typically targets an inflation rate of 2% over the medium term.
  • Economic Growth and Employment: While price stability is the primary objective, the Bank of Japan also aims to support sustainable economic growth and contribute to the creation of jobs in Japan. By maintaining stable macroeconomic conditions and supporting domestic demand, the BoJ seeks to promote economic growth and employment opportunities.
  • Financial System Stability: The BoJ has a responsibility to oversee the stability of the financial system in Japan. This includes monitoring and assessing risks to financial stability, such as excessive credit growth, asset price bubbles, and systemic vulnerabilities. The BoJ works to ensure that banks and other financial institutions maintain adequate capital and liquidity levels and comply with prudential regulations to prevent financial crises.
  • Exchange Rate Stability: While the Bank of Japan does not have an explicit mandate to target exchange rates, it closely monitors developments in the foreign exchange market and intervenes when necessary to prevent excessive volatility or disorderly movements in the yen exchange rate. Exchange rate stability is considered important for maintaining macroeconomic stability and supporting trade and investment flows.
  • International Cooperation: The BoJ engages in international cooperation with other central banks and international institutions to address global economic and financial issues. This includes participating in forums such as the G7, G20, and the Bank for International Settlements (BIS) to promote global financial stability and cooperation.

Conclusion

Overall, the Bank of Japan plays a critical role in conducting monetary policy, ensuring price stability, supporting economic growth and employment, and maintaining the stability of the financial system in Japan. These objectives guide the BoJ's decision-making processes and actions in pursuing its mandate to promote the economic welfare of the country.