Bank of Japan versus Eurosystem: A Comparison of Monetary Policy Institutions and Conduct in Japan and in the Euro Area

Measured by the size of their respective currency areas, the Bank of Japan and Eurosystem both belong to the most important central banks in the world. Though they have many institutional features in common and conduct monetary policy almost in similar ways, there are still important differences. These common features and differences are discussed in this paper. Due to its hybrid character as a joint supranational and national institution the Eurosystem decision making board is much bigger than the Bank of Japan's Policy Board. Both central banks enjoy a high degree of independence from their governments but Eurosystem's personnel and functional independence seem to be higher; on the other hand, members of BOJ's supreme decision making body can be held individually accountable for their decisions while the Eurosystem only applies collective accountability. Similar differences between the Bank of Japan and Eurosystem can be found with respect to monetary policy strategies and policy instruments. Under its "quantitative easing policy" the Bank of Japan conducted a policy of zero interest rate targeting until March 2006; since then it changed to a policy of flexible inflation targeting and therefore to a monetary policy strategy which is similar to the one used by the Eurosystem since 1999. Eurosystem, however, pays more attention to the growth rate of money supply than the Bank of Japan. Both central banks operate actively on the money market through open market operations. The Bank of Japan uses this instrument more frequently and applies longer maturity than Eurosystem.