Bank of Japan (BOJ)

4 min read

The Bank of Japan is an independent financial institution, established in 1885 and since reorganized, which manages the Japanese economy and conducts monetary policy from its headquarters in Tokyo.

The Bank of Japan’s Function

The primary function of the Bank of Japan is to control prices, stimulate economic growth, and combat stagnation with inflation. Historically, Japan has used quantitative easing and window guidance to create artificial inflation.

The Bank of Japan has also taken measures to diversify its portfolio. For example, the Bank of Japan is the largest shareholder of Japanese stocks on the Nikkei 225 index, although it does not exercise any of its voting rights consistent with the generally conservative nature of Japanese corporations. The Bank implements these procedures to decrease the value of its currency and pull the economy out of deflation.

The Bank of Japan’s Organizational Structure

The Bank of Japan is headed by a Governor and Monetary Policy Board members, who plan and administer monetary policy, and ensure that each office, department, and branch fulfils its obligations to the bank.

The Japanese Prime Minister appoints officers to the positions of governor, deputy governor, six policy board members, auditors, executive directors, and counsellors. The Governor operates the Internal Auditor’s Office and generally controls the bank’s business. That position is aided by two Deputy Governors, who offer guidance on monetary and fiscal policy, national payment settlement systems, and monitor the health of the economy through research and statistics.

Brief History of the Bank of Japan

The Bank of Japan is located in the business district of Tokyo, at the site of a historic gold mint and near the silver minting district. The Bank began operations in 1871 following The New Currency Act of Meiji, which pegged the Yen to gold and made it Japan’s legal tender.

Before the New Currency Act, various cultural factions across Japan were trading with proprietary, and thus incompatible, currencies which hindered the growth and prosperity of a national Japanese economy. Accordingly, the Bank of Japan was created to unite Japanese fiefs, or estates that controlled large geographic regions of the country, behind a common currency.

Japanese Economic Policy

The Bank of Japan has gone through several phases of economic policy. Following WWII, the Bank of Japan’s operations were temporarily suspended until its reorganization in 1949. From 1949 until 1991, the Bank’s primary mechanism of implementing monetary policy was referred to as window guidance. Window guidance was particularly effective in Japan, because commercial banks are heavily reliant on the Bank of Japan for support, and thus have an incentive to comply with its policies.

Window Guidance

In the late 1980’s, Japan became the world’s second largest economy, behind the U.S., and the Japanese Imperial Palace was worth more than all of the real estate in California. Window guidance is largely credited with enabling the Japanese economic “miracle”, where Japan quickly grew into a world economic power following WWII.

The Lost Decade

The negative effects of window guidance manifested in a period of Japanese economic stagnation in the 1990’s, otherwise known as the Lost Decade. The Lost Decade began with the asset price bubble burst in 1992, which corrected the previously inflated prices of real estate and equities caused by window guidance and unfettered monetary policy.

Stagnation and Quantitative Easing

From 1992 to 2012, the Bank of Japan lowered interest rates to near 0% and even implemented negative interest rates in an attempt to attract foreign investors that would finance Japan’s national debt.

However, economic stagnation remains a problem in Japan, so the Bank has since shifted towards a policy of quantitative easing, buying massive quantities of securities, bonds, and other assets to stimulate the economy.


Abenomics refers to the economic policies set forth by prime minister Shinzo Abe in 2012, policies that were designed to reinflate the economy and improve Japan’s position in the global economic system. Today, Japan’s economy is limited by its relative aging population, which has reduced capacity for gross domestic production growth.