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1 Ekonomi monetari NAMA :HASLINDA B TAB GHANI NO. MATRIK: A SESI : 2011/2012 KOD KURSUS : EPPE2213 NAMA KURSUS : EKONOMI MONETARI TAJUK : MONETARY POLICY IN JAPAN NAMA PENSYARAH: DR MOHD AZLAN SHAH BIN ZAIDI.
2 OUTLINE 1. HISTORY OF MONETARY POLICY 2. TOOLS OF MONETARY POLICY ADOPTED 3. MONETARY POLICY VARIABLE USED 4. MONETARY POLICY EFFECTS ON ECONOMIC GROWTH AND INFLATION.
3 1. HISTORY OF MONETARY POLICY The bank of japan was established under the bank of japan act(promulgated in june 1882) and began operating on October 10, 1882, as the nation s central bank. The bank was reorganized on may 1,1942 in conformity with the bank of japan act (hereafter the act of 1942), promulgated in February The act of 1942 strongly reflected the wartime situation. For example, article 1 stated the objectives of the bank as the regulation of the currency, control and facilitation of credit and finance, and the maintenance and fostering of the credit system, pursuant to national policy, in order that the general economic activities of the nation might adequately be enhanced. The act of 1942 was amended several times after world war II. Such amendments included the establishment of the policy board as the bank s highest decision- making body in june The act of 1942 was revised completely in june 1997 under the two principles of independence and transparency. The act sets the bank s objectives to issue banknotes and to carry out currency and monetary control and to ensure smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of stability of the financial system. The act also stipulates the bank s principle of currency and monetary control as follows, currency and monetary control by the bank of japan shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy. With a view to overcoming deflation and returning japan s economy to a sustainable growth path with price stability, the bank of japan continues to consistently make contributions as the central bank, through the three- pronged approach of pursuing powerful monetary easing consisting of comprehensive monetary easing, ensuring financial market stability, and providing support to strengthen the foundations for economic growth. 1. Pursuing powerful monetary easing. 2. Ensuring financial market stability. 3. Providing support to strengthen the foundations for economic growth.
4 The bank s response to the great east japan earthquake. Since immediately after the earthquake in march 2011, the bank has been taking swift measures focusing on three major aspects: maintaining the functioning of financial and settlement systems, ensuring the stability of financial markets, and supporting economic activity. In april 2011, in addition to such measures, the bank decided to introduce the funds-supplying to support financial institutions in disaster area in order to provide financial support to these institutions initial response efforts to meet the demand for funds for restoration and rebuilding. The bank also decided to broaden the range of eligible collateral for money market operations with a view to ensuring that financial institutions in the disaster areas have sufficient financing capacity.
5 2. TOOLS OF MONETARY POLICY ADOPTED 1. Market operation 1.1. Operation - Funds supplying operations against pooled collateral. Funds-supplying operations by which the Bank extends loans to its counterparties, which are backed by collateral submitted to the Bank by them. - Securities lending facility. A means by which the Bank provides a temporary and secondary source of Japanese government securities (JGSs) to the markets. Securities are sold with repurchase agreements. - Purchase /sale of Japanese government securities with repurchase agreements. Funds-supplying/absorbing operations to purchase/sell Japanese government securities (JGSs) with repurchase agreements. Operations are conducted by a conventional auction. - Sales of bills Funds-absorbing operations to sell bills issued by the Bank. Operations are conducted by a conventional auction. - Outright purchase/sale of treasury discount bills. Funds-supplying/absorbing operations to purchase/sell treasury discount bills. Operations are conducted by a conventional auction. - Outright purchases of Japanese government bonds. Funds-supplying operations to purchase Japanese government bonds (JGBs) with coupons. Operations are conducted by a conventional auction. - Purchases of CP with repurchase agreements. Funds-supplying operations to purchase CP that are deemed eligible as collateral by the Bank with repurchase agreements. - U.S. dollar funds-supplying operations against pooled collateral. Funds-supplying operations by which the Bank, after obtaining funds under the U.S. dollar-yen swap agreement with the Federal Reserve, extends U.S. dollar denominated loans to its counterparties, which are backed by collateral submitted to the Bank by them.
6 - Asset purchase program. A program established on the Bank's balance sheet through which the Bank purchases various financial assets and conducts the fixed-rate funds-supplying operation against pooled collateral, with the aim of encouraging a decline in longer-term market interest rates and a reduction in various risk premiums to further enhance monetary easing. - Funds-supplying operation to support financial institutions in disaster areas. The Bank of Japan's funds-supplying operation to support financial institutions in disaster areas, example, fixed-rate loans to financial institutions in disaster areas that are made against eligible collateral by way of open market operations within the maximum amount determined by the Bank, with the aim of supporting financial institutions in disaster areas in their initial response efforts in meeting the demand for funds for restoration and rebuilding by conducting appropriate money market operations lending facility. - Complementary lending facility. A means by which the Bank extends loans to its counterparties upon request. Loans are limited by the counterparties' amount outstanding of pooled collateral that has been submitted. These loans are basically subject to the basic loan rate and are repayable on the following business day. - Fund- provising measure to support strengthening the foundations for economic growth. Funds-provisioning measure by which the Bank, extends loans to its counterparties based on the actual lending and investment carried out under the Plan for Strengthening the Foundations for Economic Growth submitted to the Bank by each counterparty, at the Bank's target rate for the uncollateralized overnight call rate (0.1% for the time being) Eligble collateral. - Collateral deemed eligible by the Bank. Counterparties can obtain credit from the Bank within the value of collateral submitted through funds-supplying operations against pooled collateral, the complementary lending facility, the intraday overdraft, and other means.
7 1.4. Complementary deposit facility. - A means by which the Bank pays interest on excess reserve balances (balances held at the account with the Bank in excess of required reserves under the reserve deposit requirement system). The interest rate applied is the targeted uncollateralized overnight call rate decided at the Monetary Policy Meeting less a spread that is determined by the Bank. 2. Principal terms and conditions. - These Terms and Conditions prescribe the principles of payment of interest on current account balances (excluding the balances of current account for simultaneous processing of DVP and collateralization and current account with queuing and offsetting facility) and the special reserve account balances at the Bank of Japan as a temporary measure to facilitate funds-supplying operations with the aim of ensuring stability in financial markets.
8 3. MONETARY POLICY VARIABLE USED 1. Pursuing powerful monetary easing. With regard to pursuing powerful monetary easing, the bank has been implementing comprehensive monetary easing, decided in October It is composed of three measures 1.1. Change in the guideline for money market operations. - The Bank changed the target for the uncollateralized overnight call rate to "around 0 to 0.1percent," to clarify its adoption of a virtually zero interest rate policy 1.2. Clarification of the policy time horizon based on the understanding of medium- to long- term price stability. - The bank made clear that it would continue the yirtually zero interest rate policy until it judged, on the basis of the understanding of medium- to long- term price stability that price stability was in sight Establishement of an asset purchase program. - Taking into account that there is little room for a decline in short term interest rate, the bank established asset purchase program, which aims at purchasing financial assets including risk assets to further enhance monetary easing, thereby encouraging a decline in longer- term market interest rates and a reduction in various risk premiums Ensuring financial market stability. - Regarding ensuring financial market stability, the Bank will continue to make determined efforts to ensure financial market stability by utilizing various funds-supplying operations.
9 3. Providing support to strengthen the foundations for economic growth. - As for providing support to strengthen the foundations for economic growth, the Bank will support positive efforts made by financial institutions and firms through the fund-provisioning measure to support strengthening the foundations for economic growth. It will also contribute to improving financial markets that serve the purpose of strengthening such foundations. Japan's economy faces the challenge of a decline in the economic growth trend, which is the fundamental cause of the protracted decrease in demand and deflation. In raising the potential growth rate and productivity, private economic entities such as firms and financial institutions play a large role and the government also plays an important role in providing a conducive environment for such efforts. At the same time, the Bank aims to play its part by making use of its central bank functions.
10 4. MONETARY POLICY EFFECTS ON ECONOMIC GROWTH AND INFLATION. Chart A 150,000,000, ,000,000,000 50,000,000, GDP CONSUMER PRICE INDEX Chart B EXCHANGE RATE INTEREST RATE Chart C 1,500, ,000, , M1 M2 M3
11 According to the chart A, we can see that relationship between gross domestic product and the consumer price index is negative because from year 2000 until 2010 decreasing in the consumer price index will increase the gross domestic product. However, in 2008 the consumer price index increase drastically that from to This is because of recession. In the chart B, we can see that the movement of exchange rate is almost stable and the interest rate is constant from 2000 until 2005 then increase in After that, the interest rate decrease in 2008 and costant until Based on the chart C, movement of M1,M2 and M3 is increase starting from 2000 until However, M3 is decrease in 2007 until 2008 and then increase when 2009.
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