As the Sanae Takaichi administration prepares its annual ‘Basic Policy on Economic and Fiscal Management and Reform’, Japan’s policy-makers should reconsider whether the institutional framework governing relations between the government and the Bank of Japan still fits the country’s economic priorities.
The January 2013 Joint Statement of the government and the BoJ was a groundbreaking moment in the country’s macroeconomic governance. But it was also a product of its time, forged for an economy confronted with persistent deflation and for an administration seeking to anchor expectations during the launch of a new policy strategy.
Thirteen years on, the institutional framework governing macroeconomic coordination between the government and the BoJ still reflects the assumptions of the deflation era. That mismatch is increasingly becoming a policy problem.
Structural transformations
Japan’s challenge is no longer overcoming deflation. Consumer prices have exceeded the Bank’s price stability target of 2% for the past four years. Although the government has not yet recognised the end of deflation, the BoJ has been dismantling its unorthodox policy framework since April 2023, and restored the overnight interest rate as its main policy tool.
Japan is grappling with structural transformations – from demographics and energy security to technological competition and the digitalisation of finance. The Takaichi administration has made economic revitalisation the centrepiece of its agenda, establishing the Council for Japan’s Growth Strategy to mobilise capital towards these and other strategic priorities.
Achieving these objectives will require not only fiscal resources but also a financial system that channels Japan’s vast household savings into productive investment. This will require closer co-operation across monetary, regulatory and fiscal authorities, and illustrates why the framework needs updating after 13 years.
A new framework is needed
The 1998 BoJ Act established the Bank as independent, while also requiring the central bank to ‘always maintain close contact with the government’ so that monetary control and the government’s basic economic policy stance are ‘mutually compatible’. Government representatives can attend monetary policy meetings and even request that a vote be postponed to the next meeting. In other words, the Bank’s task is to operate independently with structured, transparent communication, giving the policy framework credibility even when policy choices are politically contentious.
The recent transition away from the ultra-easy monetary regime is now exposing tensions between fiscal, industrial and monetary policy – illustrating the overlap between macroeconomic management, the government’s growth strategy, the BoJ’s mandate and political considerations.
A revised joint statement should place this nexus on a clearer and more credible institutional footing. By defining how structural economic policy and monetary policy interact, a new framework can support the government’s growth agenda while preserving the operational independence of the BoJ.
Three objectives for an updated statement
With that in mind, an updated joint statement should do three things.
First, it should amend the objective from ‘overcoming deflation’ to ‘achieving sustainable prosperity under price stability and financial stability’. The 2% inflation target can remain a medium‑term anchor, but the statement should recognise symmetry: persistent undershooting is harmful, but so is persistent overshooting driven by increasingly frequent supply shocks that erode real incomes. Recent inflation episodes – shaped by energy and agricultural policy, geopolitics and wage negotiations – are not the singular battle against the deflation of 2013.
Second, the statement should incorporate the goal of ‘governing finance amid structural transformation’ – ensuring that financial markets and monetary policy support capital allocation towards Japan’s long-term economic priorities. Japan’s growth agenda is also a financing agenda, spanning semiconductors and artificial intelligence supply chains, secure and decarbonised energy, and productivity upgrades. This requires leveraging finance through capital mobilisation, risk‑pricing and supervision.
Third, the revised statement should upgrade communication by publishing regular joint assessments of macro‑financial conditions, including evolving vulnerabilities that could threaten sustainable growth. Crucially, this process should make explicit where the government and the BoJ differ in their assessments – particularly on inflation dynamics, growth and the appropriate pace of interest rate normalisation – while affirming that monetary policy decisions remain the responsibility of the BoJ. By structuring, rather than suppressing, such differences through regular, transparent exchanges, the framework would reduce uncertainty, anchor expectations and limit the risk that coordination is perceived as political pressure.
Not without risks
Japan has the institutional capacity to do this, but updating the statement requires caution. It could open the door to political opportunism or to attempts to postpone difficult policy choices. However, the real risk is that keeping a deflation‑era document as the anchor for Japan’s post‑deflation economy encourages ambiguity and inconsistency, and, ultimately, ineffective policy.
Amending the 2013 Joint Statement would not weaken the BoJ’s independence. Properly designed, it would strengthen it by clarifying how monetary policy interacts with fiscal policy, financial supervision and Japan’s broader economic strategy. The original accord helped Japan escape deflation by aligning expectations between the government and the central bank. Today’s challenge is different: governing finance in an economy undergoing profound structural change.
Japan once rewrote its monetary playbook to escape deflation. It may now be time to rewrite the rulebook for its new economic reality.
Matthew Poggi is a Visiting Senior Fellow at the London School for Economics’ Centre for Economic Transition Expertise and affiliated with the Council on Economic Policies. He is a former economist at the Bank of Japan and served as the US Treasury Attaché in Tokyo.Â
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