Bank of Japan

The Bank of Japan is the central bank of Japan, which was established with the Bank of Japan Act in June 1882, and started functioning in October the same year. The Bank of Japan headquarters are located in Nihonbashi, Tokyo. The Bank of Japan main objectives are to issue the official Japanese banknotes (the bank is the exclusive issuer of Japanese banknotes and coins), to achieve price stability, through monetary control and to maintain stable financial system by facilitating smooth funds settlements between the Japanese financial institutions.

Monetary Policy

The main goal of the Bank of Japan monetary policy is to ensure price stability. The Bank of Japan manipulates the money supply in the economy and also influences the interest rates, to achieve price stability. The bank changes the money volume in the Japanese economy by performing money market operations (buying and selling of Japanese government securities).

Financial System Stability

The main idea behind the financial system stability policy of the Bank of Japan is to ensure that different Japanese financial markets, banks and other financial institutions function smoothly. The bank continuously monitors the financial system and if it deems that the financial system has been threatened it provides liquidity effectively acting as a last-resort lender.

Banknotes and Coins

The Bank of Japan is the only issuer of Japanese banknotes and coins. The bank is responsible of the Japanese banknote supply and the banknotes circulation throughout the Japanese economy. The Bank of Japan strives to maintain confidence in the yen.

Yen Carry Trade

The yen carry trade is the act of borrowing at very low interest rates in yen and using the proceeds of the loan to acquire assets with higher yield. The yen carry trade has become very popular during the last 10 years. The yen carry trade is possible due to the ultra-low interest rates policy pursued by the Bank of Japan. The simplest example of carry trade from the last few years is borrowing cheap yen and investing in higher yielding US government bonds).

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