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The Non-Linear Process of Institutional Change: The Bank of Japan Reform and Its Aftermath

Published online by Cambridge University Press:  23 June 2006

ARVID J. LUKAUSKAS
Affiliation:
School of International and Public Affairs, Columbia University
YUMIKO SHIMABUKURO
Affiliation:
Massachusetts Institute of Technology

Abstract

In 1997, the Japanese Diet revised the Bank of Japan law thereby granting the central bank greater independence in monetary policy making. The revision was an attempt by Japan's political class to weaken the authority of the powerful Ministry of Finance over the central bank and augment its own influence. The Bank of Japan, however, gained more autonomy than politicians ever intended, leading to frequent confrontations between the government and the central bank over monetary policy. This paper explores the new strategic relationship that emerged between the Bank of Japan and government and the nature of monetary policy implemented in the post-reform period. We demonstrate that several factors contributed to the Bank's unexpected ability to enhance its independence: the astute leadership of the first post-reform governor Hayami Masaru; the Bank's ability to turn politicization of monetary policy to its advantage; and its pursuit of a ‘power through knowledge’ strategy achieved by augmenting its own research capacity. On a theoretical level, our findings show that the passage of a new legal framework only marks the completion of one stage of institutional change and the start of the next; post-enactment politics have as much importance as pre-enactment politics in shaping outcomes. In the post-enactment phase, various factors, including the state of the economy and informal institutions or processes, matter greatly and may shift the direction of institutional change away from the intended path.

Type
Research Article
Copyright
2006 Cambridge University Press

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Footnotes

We thank Gerald Curtis, Lucy Goodhart, Jack Snyder, Keiko Takebayashi and two anonymous reviewers for their comments and suggestions. We are grateful for the valuable research assistance of Moriki Ryota in Tokyo.
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