• Kyodo News


A tense standoff between the Bank of Japan and the government over the BOJ’s independence occurred at the central bank’s August 2000 policy meeting, when it made the controversial decision to lift the zero-interest-rate policy, according to minutes made available Thursday.

With the government opposed to the BOJ plan to end keeping the key short-term interest rate at zero percent at the Aug. 11, 2000, meeting, then BOJ Deputy Gov. Yutaka Yamaguchi asked, “Do we always have to follow the government’s policy?”

The wrangling culminated in the government demanding a postponement of BOJ votes to decide its policy, a right granted to the government by the revised Bank of Japan Law that took effect in 1998. The government has not used the right since.

Representatives from the government, including Finance Ministry officials, attend BOJ policy meetings. They do not have voting power and can only propose postponing a BOJ vote to the next policy meeting.

The government proposal, however, was vetoed by a majority of Policy Board members, who also decided to raise the key interest rate from zero to 0.25 percent at the meeting.

The central bank’s decision to go against the government highlighted that the bank was focused at that time on demonstrating its independence, which was reinforced under the revised BOJ Law.

The minutes, meanwhile, revealed that the BOJ was trying to avoid a breakdown of talks with the government, with then BOJ Gov. Masaru Hayami saying, “We have communicated with each other on all kinds of levels, and I have also talked (with the government).”

The BOJ introduced the zero-interest-rate stance in February 1999 in the wake of a banking crisis but started to seriously consider lifting it in April 2000 as the economy picked up.

However, the BOJ’s decision to end the zero-interest-rate stance was later harshly criticized for coming too early, as the economy soon deteriorated amid the bursting of the information technology bubble in the United States.

In March 2001, the BOJ effectively revived its zero-interest-rate position, and, as further monetary easing steps, initiated so-called quantitative easing.

Under quantitative easing, the BOJ flooded the market with liquidity by targeting the outstanding balance of current account deposits held by private financial institutions at the central bank, instead of the level of the key short-term interest rate.

The lifting of the zero-interest-rate policy has been called a misstep that left a deep scar inside the central bank and caused the government to distrust the BOJ.

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