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The Bank of Japan – Institutional Issues of Delegation, Central Bank Independence And The Bank of Japan – Institutional Issues of Delegation, Central Bank Independence and Monetary Policy Von der Mercator School of Management, Fakultät für Betriebswirtschaftslehre, der Universität Duisburg-Essen zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaft (Dr. rer. oec.) genehmigte Dissertation von Markus Heckel aus Bremen Erstgutachter: Prof. Dr. Werner Pascha Zweitgutachter: Prof. Dr. Markus Taube Tag der mündlichen Prüfung: 29. Juli 2014 I Table of Contents List of Figures and Tables .................................................................................................. VI List of Abbreviations .......................................................................................................... VIII 1. INTRODUCTION ........................................................................................................... 1 1.1 Research Questions ..................................................................................................... 1 1.2 Organisation of the Dissertation ................................................................................. 4 2. METHODOLOGICAL APPROACH AND THEORETICAL FRAMEWORK ...... 7 2.1 Introduction ................................................................................................................. 7 2.2 Principal-Agent Theory .............................................................................................. 7 2.2.1 Principal-Agent Theory of Central Banks and Monetary Policy ........................ 8 2.2.2 Multiple Principals of a Central Bank ................................................................. 9 2.2.3 A Principal-Agent Framework of the Bank of Japan .......................................... 11 2.3 Historical Institutionalism Approach .......................................................................... 14 3. CENTRAL BANK REFORM IN JAPAN ..................................................................... 17 3.1 Introduction ................................................................................................................. 17 3.2 The Establishment of the BOJ .................................................................................... 17 3.3 The Bank of Japan Law Revision 1942 ...................................................................... 18 3.4 Political Debates over BOJ Independence – Failures of Bank of Japan Law Reform .............................................................................................................................. 19 3.4.1 Bank of Japan Law Reform during the Occupation Era ..................................... 19 3.4.2 The Discussion of the Bank of Japan Law Revision between 1957-1960 and 1965 .............................................................................................................................. 21 3.5 The Bank of Japan Law Reform between 1996 and 1998 ......................................... 23 3.5.1 Analysis of the Process of the Central Bank Reform 1996 ................................. 23 3.5.2 The Ruling Coalition’s Project Team for Financial Reform ............................... 24 3.5.3 The Intention behind Central Bank Reform in Japan ......................................... 24 3.5.4 The Project Team: “The Construction of New Financial Administration and Policies ......................................................................................................................... 28 3.5.5 The Central Bank Study Group (“Torii Committee”) ......................................... 28 3.5.6 The Report of the Central Bank Study Group: Reform of the Central Bank System – In Pursuit of Open Independence ................................................................. 30 3.5.7 The Report to the Minister of Finance and the Promulgation of the New Bank of Japan Law ....................................................................................................... 31 3.5.8 Critique of the Reform Process ........................................................................... 33 3.6 Actors of Central Bank Reform ................................................................................. 35 3.6.1 The Bank of Japan ............................................................................................... 35 3.6.2 State Actors (1) – Bureaucratic Agencies – The Ministry of Finance ................ 38 3.6.3 State Actors (2) – Political Parties ...................................................................... 41 3.6.3.1 The Liberal Democratic Party (LDP) .......................................................... 41 3.6.3.2 The New Party Sakigake ............................................................................. 45 3.6.3.3 The Social Democratic Party ....................................................................... 46 I 3.6.4 Private Actors: Interest Groups ........................................................................... 48 3.6.5 The Role of Mass Media ..................................................................................... 49 3.7 Conclusion .................................................................................................................. 49 4. DELEGATION TO AN INDEPENDENT CENTRAL BANK – EXPLAINING CENTRAL BANK REFORM IN JAPAN ......................................................................... 51 4.1 Introduction ................................................................................................................. 51 4.2 Theories Explaining the Delegation to an Independent Central Bank ........................ 52 4.2.1 Central Bank Independence and the Rules versus Discretion Debate in Monetary Policy ........................................................................................................... 52 4.2.2 The Macroeconomic Theory: Low Inflation and Central Bank Independence... 54 4.2.3 Political Economy (1): Partisan Theory .............................................................. 55 4.2.4 Political Economy (2): The Uncertainty Argument: “Tying the Successor’s Hands” .......................................................................................................................... 57 4.2.5 Political Economy (3): Interest Groups .............................................................. 58 4.2.6 Political Economy (4): The Cabinet Stability Hypothesis .................................. 59 4.2.7 International Political Economy .......................................................................... 60 4.3 Explaining Central Bank Reform in Japan ................................................................. 61 4.3.1 The Macroeconomic Foundation and the ‘Japan-Puzzle’ ................................... 62 4.3.2 Political Economy: Partisan Theory, Interest Groups, and Cabinet Stability ..... 63 4.3.3 The Credibility Argument ................................................................................... 64 4.3.3.1 The Credibility Argument: Domestic .......................................................... 64 4.3.3.2 The Credibility Argument: International Political Economy ..................... 66 4.3.4 The Legislator’s Motivation – Explaining Central Bank Reform in Japan ........ 69 4.3.5 A Bureaucratic Explanation: The Changing Relationship between the LDP and the MOF ................................................................................................................ 70 4.3.6 The Concept of Blame Avoidance ...................................................................... 73 4.3.6.1 The Politics of Blame Avoidance ................................................................ 73 4.3.6.2 The Blame Shifting Hypothesis in Japan .................................................... 75 4.3.6.3 Failures and Scandals in the Ministry of Finance ....................................... 76 4.3.6.4 Blame Avoidance as a Strategy for Politicians ........................................... 78 4.3.6.5 The Role of the Sakigake ............................................................................ 81 4.3.7 The Concept of Ideas .......................................................................................... 83 4.3.8 The Concept of Ideas in Japan ............................................................................ 84 4.3.9 Central Bank Reform in Japan ............................................................................ 86 4.4 Conclusion .................................................................................................................. 87 5. THE BANK OF JAPAN AND CENTRAL BANK INDEPENDENCE (DE IURE ANALYSIS) .......................................................................................................................... 89 5.1 Central Bank Independence ........................................................................................ 89 5.1.1 Introduction ......................................................................................................... 89 5.1.2 Definition of Central Bank Independence .......................................................... 90 5.1.2.1 Goal Independence ...................................................................................... 90 5.1.2.2 Instrument Independence ............................................................................ 92 5.1.3 Central Bank Independence: Another Concept ................................................... 92 5.2 The Bank of Japan Law .............................................................................................
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