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  • Functions and Operations of the Bank of Japan

    Edited by Institute for Monetary and Economic Studies

    Bank of Japan

    Institute for M onetary and Economic Studies Bank of Japan

    Functions and O perations of the Bank of Japan

  • Edited by Institute for Monetary and Economic Studies

    Bank of Japan

    Functions and Operations of the Bank of Japan

  • (Notice) This publication is the official translation of the revised Japanese edition of Functions and Operations of the Bank of Japan, published in March 2011. This is the second English edition. The Bank released the first English edition in January 2004.

    ©Bank of Japan 2012 Institute for Monetary and Economic Studies(IMES) Bank of Japan CPO Box 203, Tokyo 100-8630, Japan

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    Preface to the Revised Japanese Edition of Functions and Operations of the Bank of Japan

    The Institute for Monetary and Economic Studies (IMES) of the Bank of Japan published the first Japanese edition of this publication in 2000 in order to explain the functions and operations of the central bank. It was updated in 2004. The economic and financial environment has changed significantly since then, and it was recognized as being appropriate to produce a complete revision. This revised edition attempts to provide a broader range of information concerning the Bank’s functions and operations, so as to deepen the public’s understanding of the Bank. We hope this publication will be of use to a wide variety of readers, including undergraduates studying finance, business people interested in financial and economic issues, and those who are interested in the Bank, to capture a real picture of the Bank. The Bank is an organization established in order to ensure stability in prices and the financial system. This is to be achieved through the Bank’s daily operations. Therefore, as in the previous edition, the revised edition focuses on explaining business operations conducted by the Bank in practice, to increase the public’s understanding of the Bank’s functions and operations. On the other hand, a major difference from the previous edition is that a more detailed ex- planation is included in the pages introducing the framework for the conduct of monetary policy and the Policy Board, the Bank’s highest decision-making body. Moreover, considering the developments in the various payment and settlement systems over the last decade, the latest information on Japan’s payment and settlement systems, including the issuance, circulation, and maintenance of Bank of Japan notes, as well as services related to treasury funds and Japanese government securities, is explained. Reflecting the changes in the financial and economic environment, the revised edition also provides broad explanations related to the Bank’s initiatives for international cooperation, newly introduced operations, and measures to ensure the soundness of the financial system. The original members of the bureau for the editorial meetings for the revised Japanese edition were Tatsuya Yonetani (currently the General Manager of the Hiroshima branch), Nobuhito Ochi, Youhei Hisada, and Takahide Habuchi, with the support of Tomoo Yoshida, Sho Kotaka, and Masato Shizume of the IMES, as well as the staff members of the relevant departments. In order to encourage as many people as possible to understand the real picture of the Bank, it is essential to use the most plain language possible to provide, without bias, an explanation that is accurate, objective, and systemati- cally organized. However, those requirements could not be easily met only by

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    the staff members of the IMES and the relevant departments within the Bank. Therefore, in bringing out the revised edition, the above-mentioned core staff members initially prepared a draft as a basis for discussions, and then thoroughly discussed it in editorial meetings (a total of eight sessions) attended by editorial committee members from inside and outside the Bank, and staff members of the IMES. In this way, the draft for this edition was thoroughly revised by following the same procedures as those used in publishing the previous edition. In the editorial meetings, committee members enthusiastically took part in discussions to examine the appropriateness of the descriptions, their theoreti- cal adequacy, consistency throughout the chapters, and the use of terminology. Without the support of the editorial committee members, who took great care in reading the draft and provided direct comments and suggestions, this revised edition would not have been completed. I would like to express my sincere gratitude to the members of the editorial committee by introducing their names below.

    Amamiya, Masayoshi Executive Director, Bank of Japan (sixth to eighth sessions)

    Fukuda, Shin-ichi Professor, Graduate School of Economics, University of Tokyo

    Nakaso, Hiroshi Executive Director, Bank of Japan (first to fifth sessions)

    Nishimura, Kiyohiko G. Deputy Governor, Bank of Japan Noda, Tadao Member of the Policy Board, Bank

    of Japan Suda, Miyako Member of the Policy Board, Bank

    of Japan Ueda, Kazuo Professor, Graduate School of

    Economics, University of Tokyo *Listed in alphabetical order of surname

    Based on the comments and suggestions received from the editorial committee members, the core IMES staff members made great efforts to seek ways to balance accuracy and easy-to-follow explanations in the new edition. If any part remains for which further improvement is recommended, the blame lies with the core staff members, including myself. At the conclusion of this preface, I would like to express my wish that this book will be of assistance in enhancing your understanding of the Bank. I would like to recommend anyone who has developed an interest, and who is willing

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    to know more about the Bank’s business operations after reading through this revised edition, to refer to the Bank’s website (http://www.boj.or.jp). Further details of the topics included in the text and the reports introduced at the end of this book are available on the website.

    Wataru Takahashi Director-General

    Institute for Monetary and Economic Studies Bank of Japan

    January 2011

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    Contents

    Chapter I: Introduction ...............................................................................1

    A. Functions of the Bank of Japan ................................................................. 1 1. The Bank in the daily lives of the people 1 2. The Bank’s operations as “a bank” 2 3. Issuing central bank money 3 4. The central bank as the guardian of money 4

    B. Outline of the Bank of Japan’s Business Operations ................................... 6 1. Provision of cash, and of payment and settlement services 7 2. Conduct of monetary policy 8 3. Ensuring financial system stability 12 4. Provision of government-related services 13

    Box 1 Central Banks around the World 15 Box 2 The Three Functions of the Bank of Japan as a Central Bank 16 Box 3 Monetary Policy Independence 17 Box 4 Global Financial Crisis after Summer 2007 and Policy Measures

    Taken by the Bank of Japan 19

    Chapter II: Organization and Management of the Bank ........................... 25

    A. The Organization of the Bank of Japan ................................................... 25

    B. The Policy Board ...................................................................................... 34

    C. Communication with the Public on Monetary Policy and Other Business Management .................................................................... 35 1. Communication on monetary policy 35 2. Accountability for policies and business operations other than

    monetary policy 36 3. Other public relations activities 39

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    Box 1 The Bank of Japan’s Strategic Priorities 42 Box 2 The Bank of Japan’s Measures to Strengthen Communication on

    Monetary Policy 43 Box 3 The Bank of Japan’s Accounts 45 Box 4 Basic Accounting Principles for the Bank of Japan’s Balance Sheet 49

    Chapter III: The Issuance, Circulation, and Maintenance of Bank of Japan Notes ......................................................................... 51

    A. Cash and the Bank of Japan .................................................................... 51 1. Outline of cash and the issuance of banknotes 51 2. Characteristics of banknotes 54 3. History of the banknote issuance system 56

    B. Circulation of Banknotes ......................................................................... 57 1. Flow of banknotes and the role of the Bank 57 2. Fluctuation in demand for banknotes 60

    C. Maintenance of Banknotes ...................................................................... 60 1. Maintaining and improving the convenience of banknotes 60 2. Security measures for banknotes and international coordination 61

    Box 1 Electronic Retail Payment Instruments in Japan 64 Box 2 Demand for Banknotes in Japan 65 Box 3 Criteria for Exchange of Damaged Banknotes 66

    Chapter IV: Payment and Settlement and the Roles of the Bank of Japan ................................................................................... 67

    A. Roles of Payment and Settlement Systems ............................................... 67

    B. Major Payment Instruments ..................................................................... 69 1. Cash 69 2. Demand deposits held at financial institutions 70 3.