Explaining the Politicization of Monetary Policy in Japan

Japan adopted central bank independence (CBI) over a decade ago, but politicians have tried to influence monetary policy through the power of appointments, threats of legal reform, and public suasion virtually ever since. This article examines the escalation of these efforts over the past several years, paying particular attention to the activities of the Democratic Party of Japan’s (DPJ) ‘Anti-Deflation League’ and party leaders. It outlines how emerging fiscal, regulatory, electoral, and administrative conditions created incentives for backbenchers in particular to actively challenge the Bank of Japan’s (BOJ) monetary policy authority, even though their proposals for reform were largely ignored by party leaders until very recently. This increased politicization and the central bank’s response to it have created in Japan a politics of central banking that currently sustains the BOJ’s de jure independence, but also demands greater central bank accommodation. These challenges to monetary policy authority in Japan serve as a cautionary tale for governments facing similar fiscal and political constraints and suggest that the domestic conditions that facilitated the cross-national adoption of CBI just a decade ago may be less robust than previously recognized.