Bank of Japan (BOJ) is the central bank of Japan

With the passing of the Bank of Japan Act in 1882, the Bank of Japan (BOJ) was officially established as the nation’s first central bank and is one of the world’s oldest central banks.

The Bank of Japan was established by Matsukata Masayoshi. As he saw it, the establishment of finance (and the consolidation of inconvertible notes) and the idea of the establishment of a central bank were inseparable. While in charge of local administration in Kyushu immediately after the Meiji Restoration, he fully realized the damage an excessive issue of inconvertible notes could cause.

In 1878, Matsukata, then vice-minister of finance, visited Europe as the assistant general director for the international exhibition in France. He inspected the financial systems of different countries and was advised by the French minister of finance, Leon Say, of the need for a central bank system and for a convertible bank note system. He was advised not to model on the French system, which was very old and would have been difficult to transfer, but to follow the system used by the Belgian National Bank, which had been recently established and for which the experiences of several countries had been considered. Here again, Japan enjoyed the advantages of a late comer.

At the time of the establishment of the Bank of Japan, Matsukata reorganized the existing banks into a tripartite system of commercial banks, with the Bank of Japan as their centre, investment, and savings banks.

Although the Bank of Japan had begun as the core bank of the commercial banks, it became the central institution for industrial financing when, after the first modern economic recession hit Japan in 1890, it began discounting promissory notes, receiving the stocks of 15 sectors, including the railway, sea transportation, and insurance, as security.

The bank’s headquarters are located in Tokyo, however the face of the bank is considered to be the Osaka branch. In the midst of World War II, the Bank of Japan Law (the Law of 1942) replaced the aforementioned act and set new guidelines for the bank. Although several changes were subsequently made to the Bank of Japan Law (many by Allied occupiers), it was only heavily revised in 1997 due to the changes of the global economy. The new law emphasized transparency and increased independence of the bank from the government.

Previously, the lack of independence from the Government was one of the marked differences between the Bank of Japan and other central banks like the Federal Reserve and the European Central Bank. In Japan, the government does have an effect on policy and the Governor of the bank must work together with the Prime Minister in order to be effective, which will ensure that the nation’s monetary policy will fit with the government’s economic policy. While the new legislation provided some separation between the two institutions, they are still linked. For instance, the Bank of Japan’s budget must still be approved by the government. Regardless of the new laws, in order for the bank to achieve its goals, collaboration between the Governor of the bank and the Prime Minister is required. Failure to do so could lead to an ineffective administration, such as the one held by previous Governor Masaru Hayami, who often bickered with the Prime Minister.