Proposals to rewrite the law governing the BOJ first came from a number of junior Democratic Party lawmakers who formed an “Anti-Deflation League” in 2010. Initially seen as a fringe initiative without real chance of succeeding, their ideas gradually drew allies from other parties and has become a cross-party movement, winning endorsements from party heavyweights such as Mr. Abe.
As a 130-year-old institution, the BOJ is proud of its traditions and of having been on the right side of Japan’s modern history. Visitors to the bank’s hulking Meiji-era headquarters are told how the central bank had the foresight to buy one of Japan’s first elevators - and a vault that withstood the bombing of Tokyo by the U.S. military.
They are sometimes shown a portrait of Korekiyo Takahashi, a former BOJ governor and later prime minister, who stands as something of a martyr for economic policy. Known as Japan’s Keynes, Takahashi advocated fiscal expansion and an abandonment of the gold standard and is credited with pulling the economy out of the Great Depression. He was assassinated in 1936 by military officers who blamed him for cuts in arms spending.
The BOJ’s legal independence came only in 1998 after officials had argued for decades for more autonomy. The bank’s previous charter, based on the Reichsbank of Nazi Germany, was enacted as part of Japan’s Second World War-era mobilization.
Its independence was granted in part because of a string of financial scandals and the fallout from the collapse of Japan’s asset bubble in 1991. The charter states the BOJ’s objective is to pursue “price stability.” But Japan’s long bout of falling prices, which began back in mid-1998, has actually destabilized the economy, undermining the central bank’s ability to claim the intellectual high ground. Somewhat like Germany’s central bankers, whose collective memory is seared by hyper-inflation nearly a century ago, Bank of Japan officials were shaped by past bouts of asset bubbles and price inflation - an impulse they found hard to abandon.
In December 2011, a group of the most senior bureaucrats from the Monetary Affairs Department decided it was time for bold action that would impress both lawmakers and markets alike, with an objective of fighting deflation more forcefully. They were worried that the old approach - doling out monetary stimulus in measured doses at times of heightened market stress, usually coinciding with yen rallies - was no longer working.
Although final policy decisions are made by the BOJ’s nine-member board, the bank’s Monetary Affairs Department hammers out policy options. Nearly all of the 50 or so members of the predominately male group were recruited from the University of Tokyo with degrees in law or economics. All have done stints with other departments at the BOJ before being called in to serve in the inner sanctum of policy.
“It’s a very close-knit society. Most of us have known each other for a long time,” one member said.
Many officials in the current team had their first stint at the bank in the late 1990s when Japan was struggling with a banking crisis that forced the BOJ to cut interest rates to zero.
“Dealing with inflation isn’t really on the minds of the younger generation. They seem to doubt whether Japan may ever see inflation driven by economic strength,” said a person in regular contact with central bank officials.
Some inside this circle advocate a shock to the system with a “big-bang” increase in government bond buying to the tune of ¥100-trillion ($1.22-trillion) in one go, instead of the much-criticized baby-step approach of incremental increases, people familiar with the discussions say.
Another idea being floated would have the BOJ buy foreign bonds, a step intended in part to drive down the value of the yen and ease pressure on exporters such as Toyota Motor and beleaguered consumer electronic giants like Sony and Panasonic. Carrying out the latter step would require creating a new fund to give the BOJ legal cover, those familiar with the discussions say.
The emerging shift in central bank strategy carries risks: the BOJ would be expanding its balance sheet at a time when Japan’s public debt is already off the charts because of the ballooning costs of providing healthcare and pensions to its rapidly ageing population.