The Bank of Japan (BoJ) as is the case with all other central banks is responsible for the monetary policy of Japan. It works in the same way as the Federal Reserve in the USA or the European Central Bank in Europe, in general, it is responsible for the management of the Japanese economy. BoJ comes to decisions on monetary circulation, interest rates, and financial system in the Country and affects Japan’s economy, as well as global financial streams.

History of the Bank of Japan

The Bank of Japan was established in the year 1882 and is thus considered to be one of the oldest Central banks in the world. Before that, various money banks operating within Japan had their money and this had tremendously complicated the situation. The government proposed this measure to maintain better control of the system; therefore, the formation of the BoJ to oversee the country’s money and funds. Subsequently, the Bank of Japan evolved as a central banking institution and responded to important occurrences including Japan’s post-war reconstruction and economic growth of the late twentieth century.

Recently the Bank of Japan has been facing different issues, such as deflation – a state when the prices are falling and people spend less the BOJ has been implementing new tools to fight for stability of the Japan’s economy.

Main Functions of the Bank of Japan

The government of Japan makes sure there’s just the right amount of money in the country, which is managed by the Bank of Japan. They adjust interest rates to control how much money people and businesses borrow and spend. If there’s too much inflation (prices going up), they may raise interest rates. If the economy is slowing down, they might lower interest rates to encourage spending.

Besides provider of funds for fiscal spending another important role of the Bank of Japan is ensuring the stability of the financial systems. This also engages tracking on the part of banks and all other financial entities just to ensure that they run their business responsibly. The BoJ’s other functions include the responsibility of providing adequate cash to people and issuing the Japanese currency, the yen.

Monetary Policy and Tools

Monetary policy is the means through which the Bank of Japan can control with the help of money supply and interest rates the economy of the country. A low interest rate indicates the amount that it will cost to borrow money and one of the most important tools it uses is the ability to set this particular rate. Easy credit is there when interest rates are low whereas the pace slows down when the interest rates are high.

Recently, the BoJ has used a special plan called ‘quantitative easing’ (QE) to help with the crisis. This means the BoJ buys a lot of things like government bonds to put more money into the system. The goal is to make it easier for businesses to get money and grow the economy.

BoJ’s Role in the Forex Market

The Bank of Japan plays a big role in the forex market, where people buy and sell different currencies. The yen is important not just for Japan but for other countries too. The Bank can change the value of the yen by changing interest rates or directly buying or selling yen. If the yen’s value goes up and down too much, the Bank might step in to help stabilize it. This may impact on the forex market as other currencies are traded based on movements of yen.

Challenges and Future Outlook

Currently, there are a number of significant problems which confront the Bank of Japan. Japan has had low GDP and inflation for a long time. This means prices stay the same or go down, so people spend less and save more, which isn’t good for the economy.

The BoJ kept interest rates low and printed more money to encourage people to spend and invest more. Nevertheless, the results have been relatively unimpressive and the BoJ still has been looking for more solutions.