Explaining Central Bank Reform in Japan

In 1997, the Japanese government revised the Bank of Japan Law, joining a cross-national trend towards increased central bank independence and transparency. This paper argues that the new law was significantly informed by political incentives created by an impending electoral crisis and policy constraints imposed by international financial market developments. After reviewing several alternative explanations for central bank reform, the paper proposes that the governing parties' strategic efforts to use central bank reform as a means to re-establish their domestic and international credibility best explains both the timing and the content of the new law. Given the domestic political and economic circumstances since revision, however, it is not surprising that, while the new law immediately increased the Bank of Japan's formal independence and transparency, it did not simultaneously increase the central bank's policy effectiveness or credibility.