The Bank of Japan Act of 1997 and “Quantitative and Qualitative Monetary Easing (QQE)”

Abstract

In the years after the Great Financial Crisis (GFC) (2007–2008), the central banks of the advanced economies adopted the so-called unconventional monetary policies (UMPs). The Bank of Japan (BoJ), like the other central banks, gradually changed its policy instruments from conventional ones, such as open market operations, to UMPs. UMPs raise concerns about legality, i.e., whether they exceed the legal authority granted to the central bank, and concerns about legitimacy, i.e., why a central bank with a “democratic deficit” could adopt such policies. This chapter will mainly focus on a legal analysis of the BoJ’s UMPs. It begins with an overview of the BoJ’s current monetary policy framework, which consists of inflation targeting, an extensive and broad-scale asset purchase programme, and yield curve control, then the Bank of Japan Act of 1997 (1997 Act) will be described and analysed. There are several legal or constitutional issues to consider in relation to the BoJ’s independence. The 1997 Act shares the common features with the modern central bank law that has been accepted worldwide since the 1990s. The 1997 Act provides price stability as the objective of the BoJ’s monetary policy, guarantees the BoJ’s independence (autonomy) more strongly than before, and introduces mechanisms to ensure both accountability and transparency. But, the 1997 Act also gives the BoJ a variety of policy objectives other than monetary policy, adjusts the degree of independence within that scope, and pays attention to co-ordination with the government. Against these backgrounds, the compliance of the BoJ’s UMPs with the 1997 Act is examined. The BoJ’s UMPs—although admittedly in a grey zone—cannot yet be assessed as being illegal. The BoJ has repeatedly stated that the UMPs are in compliance with the 1997 Act. Both the general public and the Diet also accept this explanation, at least on the surface. It is understood that the BoJ’s monetary policy has been found to be compliant with the 1997 Act through this accountability mechanism. However, even if this is the case, this does not mean that legitimacy problems do not arise. The UMPs adopted have significant fiscal and economic consequences. Such a policy in support of fiscal and economic policy may, in some cases, lead to a situation in which the central bank is subordinated to the government.