Domestic Sources of Monetary Order: Foreign Exchange Rate and the Bank of Japan

• In Event: The Power of Purse: Economic Conditions and Fiscal Policy

Abstract

How is the autonomy and independence of the Central Bank challenged when there is a strong domestic force that demands depreciation or appreciation of one’s currency? How does such domestic control affect regional and global monetary order? Since the collapse of the Bretton Woods fixed exchange rate system in the 1970s and with increased capital flows, major industrialized countries have faced the choice between stabilizing their foreign exchange rate and having monetary policy autonomy. In East Asia, Japan has opted for the latter as the yen floats (with some intervention) against major currencies such as the US Dollar and Euro. Despite de jure independence of the Bank of Japan (BOJ) to conduct monetary policy in Japan, strong preferences towards weak yen have imposed visible political pressure on the country’s central bank. By analyzing legislative pressure on the BOJ through the summonses of central bankers to Diet sessions, this paper identifies the domestic sources of Japan’s foreign exchange rate policies and the implications they have on the global monetary order.

Authors

• Gene Park, Loyola Marymount University

• Saori N. Katada, University of Southern California

• Gabrielle Cheung, University of Southern California