Central Bank Independence in Times of High Fiscal Risk – the Case of Japan
The Bank of Japan Act of 1997/1998 grants the Bank of Japan (BoJ) operational in-dependence regarding the conduct of monetary policy. This independence is legally constrained and has also been questioned politically by the Abe administration’s re-cent usurpation of monetary policy as part of its overall economic policy. Given the deflationary environment fiscal and monetary policy goals have so far not run into conflict. The real test for central bank independence in Japan will come once defla-tion has been overcome and the harmonious relation between price stability and fis-cal as well as financial system stability comes to an end. Price stability may still be maintained as long as fiscal consolidation is synchronized with the reduction in the non-public sector’s saving-investment surplus.