Like other central banks, the Bank of Japan's primary goal is to maintain price stability of the financial system to provide the foundations for sound economic growth. Unlike other central banks, the Bank of Japan has been fighting deflation — falling prices — rather than keeping a lid on price increases or inflation. The BoJ finally announced an inflation target of 1.0 percent after being prodded to do so for many years at its February 2012 monetary policy board meeting. However, many thought it should have been set higher.

 

There are nine members of the monetary policy board, which includes the governor and two deputy governors of the bank. Haruhiko Kuroda succeeded Masaaki Shirakawa in March 2013 as governor. The BoJ MPB meets monthly except in April and October when they meet twice. While the Bank seeks to normalize interest rates, the latest credit crisis and weakening economic growth has once again put that goal on hold.

 

 

The Bank of Japan maintained an interest rate of 0.5 percent from February 2007 to October 2008. Now the BoJ rate is virtually zero. At its February 2012 meeting the monetary policy board surprised Bank watchers and increased its asset purchase program to ¥65 trillion from ¥55 trillion. The BoJ increased its long-term JGB buying to ¥19 trillion from ¥9 trillion. In April it increased its asset purchase program to ¥70 trillion. It subsequently raised the limit of its asset buying fund to ¥101 trillion.

 

At its January 2013 meeting, the monetary policy board adopted a 2.0 percent inflation target, giving in to government pressures from the new Prime Minister, Shinzo Abe. It also said it would begin open ended asset purchases — but that would not begin until 2014. At its first meeting under its new governor, the BoJ shocked bank watchers with a wide reaching plan.

 

The Bank of Japan announced a plan for reversing chronic deflation and achieving its 2 percent inflation target in two years. The BoJ's new leadership pledged to do "everything possible" to attain these goals. The Bank left its interest rate target at zero to 0.1 percent. However, the BoJ went further than expected. Its then new governor, Haruhiko Kuroda, shocked markets with a radical overhaul of its policymaking — it adopted a new balance sheet target and pledged to double its government bond holdings in two years as it seeks to end nearly two decades of deflation. The scope of the changes drove the yen down and knocked the 10-year bond yield to its lowest in a decade.

 

The BoJ said it will buy about ¥7 trillion of bonds per month, equivalent to about 1.4 percent of gross domestic product. The BoJ will also increase purchases of exchange traded funds by ¥1 trillion per year and real estate trust funds by ¥30 billion per year. The BoJ has maintained that policy since April 2013 at each monetary policy board meeting.

 

At its October 31, 2014 meeting the BoJ left official interest rates on hold but eased its overall stance by announcing its intention to expand the monetary base at an annual rate of about ¥80 trillion, up from ¥60-70 trillion previously. To this end, the central bank will step up its annual rate of JGB purchases to about ¥80 trillion from around ¥50 trillion currently and in so doing extend the average remaining maturity to 7 to 10 years from 7 years at the moment. The increase in purchases should see the BoJ's JGB holdings climb to ¥200 trillion at the end of 2014 from ¥143 trillion at the end of 2013. At its subsequent meetings, the BoJ left its policy unchanged.

 

The most closely watched Japanese indicator next to the annual change in the core CPI is the Tankan Survey, which measures in detail, industry sentiment in Japan. Originally created to help the Bank of Japan in its decision making, the Tankan is followed worldwide as a barometer of Japan's economic health. Sentiment improved for both large and small manufacturers for a third quarter in the first quarter of 2014. However, sentiment slumped in the second quarter mainly due to the increased sales tax. The Tankan still shows the wariness among manufacturers going forward as they try to assess business opportunities. Morale shows virtually no improvement into the second quarter of 2015.