Factbox: Bank of Japan's independence under threat

Sun Dec 16, 2012 7:01pm EST

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(Reuters) - Japan's next prime minister Shinzo Abe has put the Bank of Japan at the center of the political debate by calling for bolder monetary easing and threatening to revise a law guaranteeing its independence.

His Liberal Democratic Party (LDP) is not alone in arguing for a revision to the BOJ Law to give the government power to set policy goals for the central bank, or at least give it more say in how monetary policy tools can be used beat deflation.

But they differ over what exactly they want from a revision of the law. Here is what could happen and why:

WHAT DOES THE CURRENT LAW LOOK LIKE?

The BOJ's legal independence came only in 1998 after central bank officials argued for decades for more autonomy. Its previous charter, based on the Reichsbank of Nazi Germany, was enacted as part of Japan's World War Two-era mobilization.

The current law sets the BOJ's objective as achieving "price stability." The BOJ does not have a dual mandate like the U.S. Federal Reserve, which is tasked with keeping inflation in check and pursuing jobs growth.

The BOJ Law also does not have an explicit numerical target for inflation. The bank set a 1 percent inflation target for itself in February but has no legal obligation to achieve this.

The government is prohibited from firing the central bank governor or members of its board, but has the right to appoint them with approval from both houses of parliament.

WHAT DO POLITICIANS WANT?

Several political parties have called for revising the BOJ law but they vary on what they exactly want to change.

The LDP wants the BOJ to boost monetary stimulus to achieve 2 percent inflation, double its current target, and hold it more accountable for the goal. Revising the BOJ law is an option but would not be a necessity if an LDP-led government got assurances from the central bank that it will take bolder steps to beat deflation.

Given strong BOJ opposition to a change of the law, an LDP-led government might settle for issuing a joint statement with the central bank that sets a 2 percent inflation as a shared target and includes a stronger commitment to powerful monetary easing.

Other parties with more extreme views want the law changed so that the government can fire the governor if the BOJ fails to achieve its policy goal. But such demands, mostly from fringe parties, are unlikely to make much headway.

The Democratic Party, which suffered a crushing defeat in a lower house election on Sunday, is against revising the law, arguing that central bank independence must be respected and that it does not take a change in the law to nudge it into expanding stimulus.

LDP's small ally, the New Komeito, is also opposed to a law revision.

That means Abe may merely threaten to revise the BOJ law to persuade the central bank to ease policy further, without really intending to push through a change in the law.

There is a slim chance Abe may stick to his calls for the BOJ to adopt a dual mandate similar to the Fed's, which will require a revision of the law. But the central bank feels this is unnecessary because the current mandate seeking sound economic growth implicitly requires it to pursue jobs growth.

HOW LONG WILL IT TAKE TO REVISE THE LAW?

The government drafted the current BOJ law in response to calls from politicians that the central bank should be granted independence, so it can guide policies to prevent a repeat of Japan's asset price bubble and its collapse in the late 1990s. It took about a year to draft and pass the bill through parliament.

It will probably take around the same time if the government drafts a bill this time. But if politicians, not the government, submit the bill it will not take that long, and some lawmakers already have plans in the works.

Your Party, one of the smaller opposition parties, submitted a bill to revise the BOJ law to parliament three times in the past two years. Parliament never started deliberations on the bill, but that may change given the heightened focus on BOJ policy.

Some junior LDP and Democratic Party lawmakers are also preparing similar legislation. Parliament debate on such a bill will not start until the more important state budget for next fiscal year passes the Diet, which could take until April.

Parliamentary debate of bills proposed by elected politicians tends to be faster than for a bill drafted by government bureaucrats. It can take less than a month for parliament to take amendments proposed by politicians to a vote, according to financial bureaucrats with knowledge of the procedures.

(Reporting by Leika Kihara; Editing by Simon Cameron-Moore and Tomasz Janowski)

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