KAMIKAWA – Bubble Economy and the Bank of Japan –
•It is thought that the main reason for the inflation of the bubble
economy is late 1980s in Japan was the BoJ’s extremely low level of
independence. Kamikawa explores this popular opinion and gives an
Kamikawa argues that the BoJ ultimately decided to loosen monetary policy on
its own volition, for the Bank worried excessively about a possible recession
caused by the appreciation of the yen and was concerned about a sudden
depreciation of the dollar. Moreover, there were no signs of an increase in
inflationary pressures, though the value of assets continued to rise
extraordinarily. Therefore, the Bank of Japan had no positive reasons to tighten
The popular theory:
•The US administration demanded that the Japanese government expand
domestic demand to reduce its huge current account surplus with the US.
However, the Ministry of Finance resisted increases in fiscal expenditures,
instead prioritizing fiscal reconstruction.
•Thus, the Ministry demanded that the Bank of Japan loosen monetary
policy. The Bank of Japan complied, unable to reject the Finance
Ministry’s demand due to its lack of independence from the Ministry.
•Thus, the Bank of Japan lowered official discount rate to 2.5%. This
excessively loose monetary policy drastically increased financial liquidity,
stimulating a rapid increase in the price of land and stocks.
•In general, the central bank’s independence is judged by reference to the
legal provisions concerning the relationship between the government and
the central bank. According to the former Bank of Japan law, the Bank of
Jpaan was palced under the supervision of the Finance Minister who had
the power to order the Bank to undertake any necessary business.
•Therefore, the BoJ had been regarded as a less independence central
bank from the government and the Ministry of finance before the Bank of
Japan law was revised to grant legal independence from the government
•Argues that the BoJ was independent from the prime minister and the
Ministry of Finance to an extent that was important and that the Bank
ultimately decided to loosen monetary policy on its own volition.