Finance involves borrowing and lending money and is also called the bloodstream of the economy. Banks and the Bank of Japan (the central bank) play central roles.
Basic Knowledge
There are direct finance (raising funds through shares and corporate bonds) and indirect finance (borrowing through banks).
Banks' functions: ① deposit services, ② lending services, and ③ foreign exchange services (transfers and remittances).
The Bank of Japan (BOJ) is Japan's central bank and has three roles:
・Bank of issue: issuing banknotes (Bank of Japan notes)
・Bankers' bank: lending to ordinary banks and accepting their deposits
・Government's bank: handling government funds
Monetary policy: policies by the BOJ to adjust economic conditions. The main tool is open market operations. During a recession, it buys government bonds and supplies currency (buying operations); during an economic boom, it sells them and absorbs currency (selling operations).
Direct and indirect finance (shares and corporate bonds are direct; bank borrowing is indirect)
Bank of Japan (Japan's central bank: bank of issue, bankers' bank, and government's bank)
Monetary policy (policies conducted by the BOJ to stabilize prices and economic conditions)
Open market operations (adjusting the money supply through the buying and selling of government bonds and other assets)
Exchange rate (the exchange ratio between domestic and foreign currencies; appreciation or depreciation of the yen)
Inflation and deflation (continuous rises/falls in prices)
In Depth (Background and Significance)
Exchange rates have a major influence on the economy. Yen appreciation (for example, 1 dollar = 100 yen → 80 yen) benefits imports and harms exports, while yen depreciation (80 yen → 120 yen) benefits exports and harms imports. Because Japan has many exporting companies, they are likely to profit when the yen weakens; however, higher import prices for fuel and food put pressure on households.
Inflation is a rise in prices that lowers the value of money, while deflation is a fall in prices that tends to cause economic stagnation. The BOJ conducts monetary policy with the goal of price stability and in recent years has also implemented unconventional policies such as quantitative easing.
- Finance = borrowing and lending funds
- Direct finance (shares and corporate bonds) and indirect finance (bank borrowing)
- Three roles of the BOJ = bank of issue, bankers' bank, and government's bank
- Central monetary policy tool = open market operations
- Recession → buying operations (currency supply)
- Economic boom → selling operations (currency absorption)
- Yen appreciation = imports benefit and exports suffer; yen depreciation = the opposite
Points to Note (Easily Confused)
① Do not confuse yen appreciation (1 dollar = 80 yen) with yen depreciation (1 dollar = 120 yen). The smaller number means a stronger yen. ② Direct finance (shares and corporate bonds, funds raised in markets) differs from indirect finance (bank borrowing). ③ Buying operations = supplying currency (a recession measure), while selling operations = absorbing currency (a measure for an economic boom). ④ The BOJ issues banknotes, while coins are issued by the government (Japan Mint).
Practice
- Give all three roles of the Bank of Japan.
- What is it called when the exchange rate changes from 1 dollar = 100 yen to 1 dollar = 80 yen?
- During a recession, which open market operation does the BOJ conduct (buying operations or selling operations)?