1. Failures of Monetary Policy under the Old Law
The existing Bank of Japan (BOJ) Law was passed in 1942, during World War II, with the central bank of Nazi Germany as a model. Thus, decisions are made, not by a majority vote of the Board of Executive Directors, but by the fiat of one man, the Governor, to whom the Minister of Finance has the right to issue directives on monetary policy implementation. If the Bank's policies do not please the Minister, the cabinet can even dismiss the Governor.
After World War II, the U.S. Occupation Forces ordered a revision of the law, thus creating a Policy Board consisting of the Governor and four members. The members are to be appointed by the cabinet with the approval of the Diet. Members of the Board cannot be dismissed without Diet approval. In this sense, their status is guaranteed. But the law does not make clear whether the directives of the Minister of Finance take precedence over majority decisions of the Board, nor have there been any judicial precedents on this question. Furthermore, the four members are to represent major banks, regional banks, industry, and agriculture. Thus they are not specialists in monetary policy. As a result, the Policy Board's discussions are so dull that it is often called the "Sleeping Board." The members do nothing more than give ex-post-facto recognition to the decisions of the BOJ's Board of Executive Directors. This means that the government's powers to give directives and to dismiss the Governor continue to put potential pressure on the bank's policy decisions even after the creation of the Policy Board.
The BOJ has committed two major blunders since World War II. Both took place because the government's potential powers of dismissal and ability to give directives delayed the decision to tighten monetary policy.
The first blunder took place in 1972-73, when the transition to a tight money policy was delayed, allowing excess money growth to continue and leading to the rampant, double-digit inflation of 1973-74. The then Prime Minister, Kakuei Tanaka, strenuously justified the supplementary budget of 1972 and the regular budget of 1973, both of which reflected his own policies and were conspicuously expansionary, and strongly suggested that the official discount rate should not be raised, referring in this connection to the government's power to dismiss the Governor.
The second blunder was the emergence of the bubble economy in the late 1980's because the official discount rate was pegged at a low level from February 1987, when the Louvre Accord to support the value of the dollar was reached, until May 1989. This was the period during which Finance Minister Kiichi Miyazawa, at G-7 meetings and other occasions, was telling Governor Satoshi Sumita to continue a low interest rate policy in order to support the dollar's value.
2. Essential Difference between the Old and the New Law
The new Bank of Japan law, which will come into effect in April 1998, differs from the old law mainly with regard to the following four points.
First, the government will have no power to issue directives to the BOJ. The Minister of Finance and the Minister of the Economic Planning Agency may attend meetings of the Policy Board and state their opinions, but they can only request that decisions be postponed. The board may overrule these requests.
Second, not only Policy Board members, but also the Governor and his two Deputy Governors will be named by the cabinet with the approval of the Diet. The Cabinet will not be able to dismiss the Governor or Deputy Governors on the grounds of a difference of opinions on monetary policy.
Third, the Policy Board will be composed of the Governor, two Deputy Governors, and six members. These six members will not represent any particular sector of the economy. They will be named from among recognized experts on monetary policy and the economy. We may expect debates lively enough to bury the term "Sleeping Board".
Fourth, the Bank of Japan will publish a summary transcript of the Policy Board's discussions in about two weeks time, and a full transcript in due course. Twice a year, the Board will submit a detailed report to the Diet on the management of monetary policy, and will be subject to the surveillance of the Diet, with the Governor and Board members present.
These four important points will no doubt strengthen the independence of monetary policy and remove the BOJ from the hands of the government. At the same time, the Bank will acquire a powerful new debating partner-namely, the Diet and the six monetary experts who will join the Policy Board. There is concern that, for the above reason, influence on monetary policy from outside the BOJ will grow, and that the Bank's independence will thereby be diminished.
Indeed, there are only few members in the Diet who have expertise in monetary policy implementation. It is also uncertain if appropriate experts on money, finance and economy will be appointed to the new Policy Board members. Thus, the BOJ may have to fight against their outrageous views.
But the influence of politicians exercised through debate in the Diet, and that of the Board members exercised through the Board's debates, will be transparent to the general public. Differences in viewpoints between the BOJ and politicians or the Board members will be clearly presented to the public through media reports on the Diet and through the transcripts that will become available two weeks after the Board's meetings. Thus it will become clear, with the passage of time, which side was right. So long as the BOJ's economic analyses or economic forecasts are correct and the proposals of policy decisions are appropriate, the Bank will win the support of the public.
In this respect, the new law guarantees transparent independence to the Bank of Japan. The new law demands accountability of the Bank. This is its greatest difference over the old law. The potential pressure arising from the government's right to issue directives and to dismiss the Governor was exercised through conversations in closed rooms, unseen to the public. The Bank had no way to draw the public to its side.
Whether or not the new law will strengthen the BOJ's independence ultimately depends on the extent to which the Bank of Japan is able to win the public's trust to its capacity for accountable central banking to achieve price stability. It will take some time for the Bank to establish the public's credibility under the new law. The coming few years from April 1998 will be the critical period. The present Governor Yasuo Matsushita and the Deputy Governor Toshihiko Fukui are expected to be in office after April 1998 when the new law starts through December 1999 when their term under the old law is over. I trust their abilities to fulfil their duties during the very important transition period.
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