Japan's new central banking law: A critical view

Japan's new central banking law, enacted in June 1997 with effect from April 1, 1998, takes several steps in the direction of assuring greater transparency, independence, and accountability for the Bank of Japan's conduct of monetary policy. But with respect to the other functions of a central bank, it does no such thing. Instead, the approach has been to leave these traditional banking functions which are at least important as monetary policy narrowly defined - as much as practicable under the control of the government's finance ministry. Most disappointing has been the opaque and haphazard process by which the new law was drafted and passed. This reflects badly on the maturity of Japan's democratic institutions, and represents a discouraging start to the government's "Big Bang" program of financial reform. However, the law does not, in itself, preclude the emergence of an independent and successful central bank: That outcome will depend much more on actions taken by BoJ officials over the next few years

Japan's Financial Crisis and Its Parallels to U. S. Experience

Japan is only one of many industrialized economies to suffer a financial crisis in the past 15 years, but it has suffered the most from its crisis--as measured in lost output and investment opportunities, and in the direct costs of clean-up. Comparing the response of Japanese policy in the 1990s to that of US monetary and financial policy to the American Savings and Loan Crisis of the late 1980s sheds light on the reasons for this outcome. This volume was created by bringing together several leading academics from the United States and Japan--plus former senior policymakers from both countries--to discuss the challenges to Japanese financial and monetary policy in the 1990s. The papers address in turn both the monetary and financial aspects of the crisis, and the discussants bring together broad themes across the two countries' experiences. * As the papers in this Special Report demonstrate, while the Japanese government's policy response to its banking crisis in the 1990s was slow in comparison to that of the US government a decade earlier, the underlying dynamics were similar. A combination of mismanaged partial deregulation and regulatory forebearance gave rise to the crisis and allowed it to deepen, and only the closure of some banks and injection of new capital into others began the resolution. The Bank of Japan's monetary policy from the late 1980s onward, however, was increasingly out of step with US or other developed country norms. In particular, the Bank of Japan's limited response to deflation after being granted independence in 1998 stands out as a dangerous and unusual stance.