The Bank of Japan (BoJ) plays a crucial role not only in shaping Japan’s domestic economy, but also in influencing global financial markets. Its policies directly affect the Japanese yen, which remains one of the world’s most traded currencies and a cornerstone of global capital flows.
Understanding how the BoJ operates, the tools it uses, and the implications of its decisions is essential for traders, investors, and anyone with exposure to financial markets.
1. What is Bank of Japan?
The Bank of Japan (BoJ) is Japan’s central bank, established under the Bank of Japan Act of 1882, with the mandate to issue currency, implement monetary policy, and ensure financial system stability. Since its reorganization in 1942, the BoJ has been tasked with three primary responsibilities:
- Formulating and executing monetary policy
- Regulating and issuing banknotes
- Maintaining financial stability in Japan
As with other major central banks, the BoJ operates independently of the government, though its policies inevitably shape both the domestic and global financial landscape.
2. Structure of the BoJ
The Bank of Japan has a structured decision-making framework designed to ensure policy effectiveness. It consists of three main components:
- Executive Board – Led by the Governor and two Deputy Governors, this body manages daily operations and overall policy direction. The current Governor is Kazuo Ueda, appointed in April 2023.
- Monetary Policy Board – The BoJ’s highest decision-making body for monetary policy. It is composed of the Governor, two Deputy Governors, and six appointed members who serve renewable five-year terms. This board sets interest rates, determines the scale of asset purchases, and guides the bank’s overall strategy toward price stability and economic growth.
- Departments and Bureaus – Specialized divisions such as the Monetary Affairs Department, Financial Markets Department, and International Department execute policies, oversee banking activities, and manage foreign exchange reserves.
The Monetary Policy Board in particular attracts global attention. Its announcements and press conferences often move markets instantly, given the yen’s central role in global trade and finance.
3. Goals and Responsibilities of the BoJ
The BoJ’s primary goal, as outlined in its charter, is price stability. Like almost every central bank in developed economies, the central bank aims to maintain inflation around 2%, a level considered consistent with sustainable economic growth.
Bank of Japan Primary Goal
Price Stability—inflation at around 2% target
The inflation target of the Bank of Japan is to control the Inflation rate (CPI) at around 2%. However, due to various factors such as slowing economic growth, an aging population, and declining export demand, the Bank of Japan has struggled to achieve this target, and inflation has often remained below the target level in recent years.
As a result, the Bank of Japan has been implementing various monetary policy measures to stimulate inflation, including ultra-low interest rate and aggressive quantitative easing policies.
4. The Bank of Japan Benchmark rate
The BoJ Rate refer to the interest rates which Japanese commercial banks borrow from each other. They serve as the benchmark rates in the Japanese financial market and their fluctuations depend on the decisions made by the Bank of Japan’s Monetary Policy Board, which announces its interest rate decisions after each meeting.
Changes in the Bank of Japan’s interest rates directly impact lending and deposit rates in the Japanese financial market. In simple terms:
- When the Bank of Japan raises its benchmark interest rates, market borrowing and deposit rates also increase, which can have the effect of slowing down economic growth.
- Conversely, when the Bank of Japan lowers its benchmark interest rates, market borrowing and deposit rates decrease, which can have the effect of stimulating economic growth.
For decades, however, Japan’s policy rate has hovered near zero, with periods of even negative rates, as the BoJ sought to stimulate its economy and counter persistent deflationary pressures.
5. Bank of Japan Unconventional Monetary Policy
Japan’s economic situation differs significantly from that of most other countries. Japan faces economic challenges such as an aging population, insufficient consumer demand, and declining export demand.
These issues have led to a prolonged period of deflationary pressure on the Japanese economy. Additionally, Japan’s benchmark interest rates have remained near 0% for an extended period, and we rarely hear news of interest rate hikes or cuts, until the 2024 hike.
Considering these circumstances, it is evident that conventional monetary policy measures, such as lowering benchmark interest rates, have been insufficient to effectively stimulate Japan’s economy.
As a result, the Bank of Japan has continuously adopted a series of innovative unconventional monetary policy tools:
5.1. Quantitative Easing (QE)
Quantitative easing (QE) refers to the policy of monetary stimulus through the purchase of government bonds and other assets, primarily implemented by the Bank of Japan. The core measure of QE involves increasing the monetary base by injecting a significant amount of cash into the market through the purchase of government bonds and other assets.
This aims to stimulate economic growth by increasing the availability of capital funds in the market. QE is a tool used by central banks to address deflationary pressures, stimulate lending, and support economic recovery.
5.2. Qualitative & Quantitative Easing (QQE)
In April 2013, the Bank of Japan implemented a monetary policy known as “Quantitative and Qualitative Easing” (QQE) with the aim of further stimulating the Japanese economy and addressing the long-standing issues of deflation and economic stagnation.
Under the QQE policy, in addition to significantly expanding its asset purchases, the Bank of Japan started buying various types of assets, including stocks, in addition to government bonds.
5.3 Negative Interest Rate Policy and Yield Curve Control (YCC)
Alongside the QQE policy, the Bank of Japan implemented a negative interest rate policy and Yield Curve Control (YCC). In January 2016, Japan lowered the interest rate on excess reserves to a negative 0.1%. This meant that commercial banks in Japan had to pay interest on their excess reserves. The negative interest rate policy aimed to incentivize commercial banks to lend more, thereby promoting economic growth in Japan.
In September 2016, the Bank of Japan introduced Yield Curve Control (YCC), which aimed to stimulate the economy by controlling long-term government bond yields.
6. How Does BoJ Monetary Policy Affect the Currency Market?
The Bank of Japan’s prolonged commitment to ultra-loose monetary policy has given the Japanese yen a unique role in global finance: it has become one of the world’s primary safe-haven currencies.
While the yen’s safe-haven appeal partly comes from Japan’s economic stability and large current account surplus, there is another, more structural reason for this status—the yen’s role as a major funding currency.
Because Japanese interest rates have remained near zero (or even negative) for decades, borrowing in yen is far cheaper compared to most other currencies. This makes the yen an attractive source of funding for global investors, who can borrow yen at low cost and then invest in higher-yielding assets such as foreign stocks, bonds, or currencies. This practice is commonly known as the “yen carry trade.”
Here’s how it works:
- When markets are calm and investors feel confident, money flows out of Japan as investors borrow yen and put it into other assets. This causes the yen to weaken.
- When markets turn risky, investors close those trades and bring money back into yen. This demand for yen makes its value rise.
In simple terms, the Bank of Japan’s low interest rates make the yen cheap to borrow. This is why the yen often weakens when markets are strong but strengthens when markets are fearful.
Because of this, the Bank of Japan’s monetary policy is always a key focus for markets. Traders carefully watch for any signs of a policy shift or changes in forward guidance. Even small hints from the BoJ can create strong moves and volatility in the Japanese yen.
7. Final Thoughts on the Bank of Japan
In 2024, the Bank of Japan finally began moving toward policy tightening as inflation picked up, marking the end of nearly a decade of negative interest rates. However, even with this shift, Japan’s rates remain very low compared to other major economies. This means the yen will likely continue to serve as both a funding currency and a safe-haven asset in times of market stress.
The BoJ’s decisions will remain a major driver of yen movements and global capital flows. For traders and investors, this makes closely following the BoJ’s policy stance and guidance essential—not only for understanding Japan’s economy, but also for navigating global financial markets.