THE BANK OF JAPAN: A CASE STUDY IN THE EFFECTIVENESS OF CENTRAL BANK TECHNIQUES OF MONETARY CONTROL*

Abstract

THE PURPOSE OF this study is to examine the effectiveness of monetary controls by the Japanese central bank-the Bank of Japanand to analyze the relative importance of various instruments of central bank control. The study is concerned with the description and analysis of monetary policy in Japan in the tight-money periods of 1953-55 and 1957-58 only as this is necessary to demonstrate the efficacy of monetary controls in this particular institutional and environmental context. In Part I the hypothesis is examined that Bank of Japan monetary policy can be an effective means of implementing economic stabilization policy, especially in the restriction of realized business investment under conditions of excessive domestic demand. This hypothesis is significant because, (a) given its factor proportions, Japan has had to rely structurally upon imports for economic growth and, (b) given success in meeting capital formation requirements, the major operative constraint on stable growth has been periodic balance-of-payments crises emanating from excessive domestic demand and attendant inflationary pressures. The analysis focuses on corporate business reliance on external funds to finance investment activities and the reliance of the commercial banking system on central bank financing. Internal generation of funds by corporation business has been insufficient to finance the high level of business-planned investment emanating from the rapid growth of the economy. Capital markets have been relatively undeveloped; consequently, business has relied heavily on borrowing from the banking system, especially from the city banks. Under conditions of relatively interest-inelastic demand for funds and relatively low maximum legal lending rates, the availability of funds from the banking system, rather than simply their cost, has been an important determinant of realized business investment.