Bank of Japan and its independence

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The Bank of Japan and its independence
When I was doing research for the Project on the Japan’s lost decade, I have come across news articles discussing the change in administration of the Bank of Japan. There are discussions on how Abe Shinzo, the newly elected prime minister, has forced the Bank of Japan to adopt a more aggressive monetary policy. When I first read about these news, I can’t help but felt sorry for the current governor Masaaki Shirakawa. By constitution, BOJ is independent from the government. He should be answering to no one except to the Policy Board of the BOJ. But lately, Mr. Abe has forced the BOJ to bend towards what he demands. He even threatened to strip BOJ of its independence if it
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Mr. Shirakawa is stepping down voluntarily from office starting from mid-March 2013 to give way to the new BOJ governor. The Government’s nominee for the next BOJ Governor is Haruhiko Kuroda. It comes in no surprise that he is an advocate of aggressive monetary easing during deflation times and unlike Mr. Shirakawa, he believes the Bank has a strong responsibility in bolstering economic growth. Hence, the market is expecting a series of new monetary policy to be announced soon after his appointment is approved.

There is a strong and legitimate reason to keep the central bank independent from its government. Most of the central banks of the industrialized world adopt the same independence rule. It is to avoid politicians from ramping up government spending and debt whenever they want. If politicians insist on continuing any ineffective government policy and have the central bank to buy up more assets, a decline in the asset price is going to left a hole in the Bank’s balance sheet. Central bank runs the risk of becoming insolvent and people would lose faith in the currency. Inflation would be out of control and it would be a disaster that no one would like to see.

I still believe the independence of BOJ is of upmost important but I also believe the BOJ should willingly formulate its monetary policy
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