The Bank of Japan put up a fierce struggle to retain its autonomy in 2013, when the government was pushing a radical monetary easing policy, recently disclosed records show.

The central bank did accept the state’s proposal, but the BOJ gained enough concessions to appease members who had feared a loss of independence from the government.

However, the battle for autonomy didn’t actually matter in the end. The government later appointed a like-minded BOJ governor, and the ultra-loose monetary policy has persisted to this day.

Now, the central bank, under a new chief, faces another possible threat to its autonomy that could have serious repercussions for the economy.

INFLATION TARGET SET

In December 2012, the Liberal Democratic Party won a landslide victory in the Lower House election, and Shinzo Abe became prime minister for a second time.

Abe asked the BOJ to adopt an ultra-easy monetary policy while setting a 2-percent inflation target, a pledge he had made during his election campaign.

Masaaki Shirakawa, the central bank governor at the time, was initially reluctant to take either step.

But he eventually accepted the Abe administration’s proposal after it threatened to revise the BOJ law.

Under Article 3 of the law, which came into force in 1998, the BOJ’s “autonomy regarding currency and monetary control must be respected.”

Shirakawa’s decision still had to be finalized at a meeting of the nine BOJ Policy Board members, so they discussed the government’s request at a monetary policy meeting on Jan. 21-22, 2013.

According to records of the discussions, economist Takehiro Sato, a Policy Board member, opened the debate by saying, “The inflation rate of 2 percent is being talked about outside, but the goal is quite far from reflecting reality.”

Sato also used strong language to implicitly criticize the Abe government’s attitude.

“I have a message for government representatives,” he said. “I expect the government’s sincere resolve to cooperate closely with the BOJ to achieve the 2-percent target, rather than unilaterally burdening our bank with this responsibility.”

Other BOJ participants were, by and large, agreeable to the government’s plan.

“The government is determined to reform the economic structure as part of thorough efforts to ramp up our country’s economic competitiveness and growth,” Koji Ishida, a Policy Board member who had formerly worked for a financial institute, said.

“Given these presuppositions, it will be deemed appropriate to set the target or goal at 2 percent since the number is considered the conventional ceiling in the stability range for commodity prices” Ishida said.

A succession of comments backing the 2-percent inflation target followed.

“It is natural to set the inflation target at 2 percent on grounds that the same figure has been adopted by the United States, European nations and other mature countries,” said economist Kiyohiko Nishimura, a BOJ deputy governor at the time.

Taking into account those opinions, Shirakawa concluded discussions.

“I understand most of you are willing to accept the 2-percent inflation goal based on the assumption that approaches will be taken toward stepping up the nation’s growth potential,” he said.

Hideo Hayakawa, a senior fellow at the Tokyo Foundation for Policy Research who attended the session as an executive director of the BOJ, explained the background.

“It had become sort of common sense not only for politicians but also for those in the business community to believe the BOJ’s monetary easing would help improve Japan’s economy,” Hayakawa said. “We felt that the BOJ’s persistent opposition would only make things worse.”

Although the BOJ complied with the government’s 2-percent inflation target, it was determined to clarify the division of roles between the central bank and the government to maintain its autonomy.

For example, the government stated it would share responsibility for economic growth, meaning the BOJ was not forced to accommodate the Abe administration’s request in a one-sided manner.

Before the debate, a draft joint statement worked out by BOJ management, including Shirakawa, and senior officials of the Abe administration did not specify when the inflation target should be accomplished.

The draft only said the goal will be attained “as soon as possible.”

The document described the BOJ as being responsible to implement monetary measures, and said the government was expected to take steps to heighten Japan’s growth potential.

It also affirmed the state should take countermeasures against any potential weakening of financial discipline in connection with the BOJ’s bulk purchases of government bonds.

During the BOJ meeting, Ishida expressed his support for the draft statement as a Policy Board member, but he acknowledged he was not convinced of the validity of the government’s plan.

“My idea is that the BOJ should naturally do everything we can, as long as it (the government) envisions drastic structural reforms and growth strategies,” Ishida said.

“However, when it comes to the question of whether this will really be the case, there may be some hesitation. Despite all that, we still should believe in it and do our best,” he added.

Deputy Governor Hirohide Yamaguchi, a long-time staff member of the BOJ, assessed the draft from the perspective of the bank’s independence.

“The statement underlines the government’s firm intention to essentially delegate the implementation of monetary easing steps to the BOJ,” Yamaguchi was quoted as saying. “The text well embodies both factors: ensuring our autonomy as stipulated in the BOJ law and retaining close and significant communications with the government.”

Article 2 of the BOJ law says the central bank shall conduct “currency and monetary control, aiming to achieve price stability, thereby contributing to the sound development of the national economy.”

Article 4 urges the BOJ “to always maintain close contact with the government and sufficiently exchange views, so that its currency and monetary control and the basic stance of the government’s economic policy are mutually compatible.”

Hearing those opinions, another Policy Board member, economist Takahide Kiuchi, showed a cautious attitude.

“It might be better to take a little more time to continue the dialogue for establishing even stronger coordination,” Kiuchi insisted.

His suggestion did not gain broad support.

The draft of the joint statement was approved by a majority vote of 7 to 2. Those against the draft were Sato and Kiuchi.

Following the meeting, the government and the BOJ released the joint statement together.

Abe told reporters that he succeeded in having the BOJ “specify the 2-percent target for price stability to clarify its responsibility.”

“This is a landmark document,” Abe said. “A regime change in macroeconomic policy will be under way.”

Shirakawa stressed the independence of the central bank.

“The joint statement pays due consideration to the BOJ’s autonomy, too,” Shirakawa told a news conference. “The government and the BOJ explicitly recognized each other’s part to play. This does not represent a unilateral relationship.”

FINANCE DISCIPLINE UNDERMINED

The BOJ extracted concessions from the government to preserve its independence. But the agreement was watered down as soon as Shirakawa resigned as BOJ governor.

The Abe administration tapped Haruhiko Kuroda to replace Shirakawa and lead the monetary easing program.

Following his inauguration, Kuroda voluntarily touched upon the timing of achieving the inflation goal.

“The inflation target of 2 percent should be accomplished within two or so years,” he said at his first BOJ meeting on April 3-4, 2013.

A rule to prevent the BOJ from effectively taking over the government’s debt was suspended. The practice is known as monetization of government bonds.

Concerns about finance expressed in the joint statement were not respected. And the BOJ under Kuroda followed the Abe administration’s course of action.

“The bank is autonomous, but the authority to appoint the BOJ governor and Policy Board members is ultimately in the government’s hands,” Hayakawa said. “It is impossible for the BOJ to address this issue head-on unless the government has a respectful attitude to its autonomy.”

Under Article 23 of the BOJ law, “the governor and the deputy governors are appointed by the Cabinet, subject to the consent” of the Lower and Upper houses.

The article stipulates that other members of the BOJ Policy Board are appointed by the Cabinet, subject to the consent of the Lower and Upper houses, from among “persons with relevant expertise, including experts on the economy or finance.”

Many experts these days agree that the economic growth stimuli provided by the government at the BOJ’s request were not satisfactory.

After the monetary easing policy was put in place, the real GDP growth rate reached 2.7 percent in fiscal 2013.

However, the figure has not exceeded 2 percent since then, except in fiscal 2021, when Japan’s economy was in a recovery phase from the effects of the COVID-19 pandemic.

The average growth rate for the past 10 years is 0.59 percent.

Kuroda himself acknowledged the limits of his monetary policy at a news conference following his last meeting as BOJ governor in March this year.

“The potential growth rate is unlikely to be directly affected by monetary measures,” he said. “Structural problems are more important. It was difficult to push up the long-term potential growth rate.”

With no increases in the growth rate, the BOJ continued buying a considerable amount of bonds for the government’s sake.

Subsequently, the state’s debt has ballooned to an unprecedented level. Long-term bonds owned by the BOJ currently amount to 587 trillion yen ($4.034 trillion), accounting for more than 50 percent of the total outstanding bond value.

The BOJ’s independence could be brought into question again if the central bank moves to “exit” the drastic monetary easing policy.

Interest rate hikes by the BOJ, such as abandoning negative interest rates, will result in higher interest payments for government bonds, thereby restricting the state’s financial policy.

For that reason, the government might try to prevent the BOJ from raising interest rates.

The central bank must carefully consider how it would respond to such a scenario.

According to market players, if the Japanese government excessively controls monetary policy, public trust in the nation’s bonds and currency could be destroyed.

Kazuo Ueda, who just replaced Kuroda as BOJ governor, has repeatedly referred to a “shoot” sprouting to reach the target. He seemingly has in mind an exit strategy from the ultra-loose money policy.

The BOJ’s autonomy will be put to a real test at some point in the future.