The Bank of Japan Act directs the Bank to aim at price stability, contributing to the sound development of the national economy, without defining price stability. In January 2013 the Bank set a price stability target of 2 per cent measured on the consumer price index, and committed to achieving it at the earliest possible time. The number is the Bank's own, adopted by announcement alongside a joint statement with the government rather than by amending the law.
Almost every central bank in the developed world now works to a numerical inflation target. Far fewer people can say where those numbers come from, and Japan is an unusually clean case for answering that, because the instruction and the number arrived nearly seventy years apart.
Key Takeaways
- The Bank of Japan Act tells the Bank to aim at price stability without defining it.
- The Bank supplied the definition itself in January 2013: 2 per cent, on the consumer price index.
- It was adopted by announcement, not by amending the law.
- It was published alongside a joint statement with the government on overcoming deflation.
- Decisions are made by a Policy Board at scheduled meetings and announced immediately afterwards.
The law says what to pursue, not how to know you have
The Bank of Japan Act states that the Bank's monetary policy should be "aimed at achieving price stability, thereby contributing to the sound development of the national economy."
Read that carefully and the gap is obvious. It names an objective and a reason for it, and it leaves entirely open how anyone would know the objective had been reached. Price stability could mean prices that never move, prices that move slowly, or prices that move predictably. The statute does not choose.
That is not sloppy drafting. A mandate written in general terms survives changes in circumstance that a number would not, and it leaves the technical judgement with the institution that has the technical staff. But it does mean the operative definition has to come from somewhere.
Where the number came from
It came from the Bank, in January 2013. The Bank set the price stability target at 2 per cent in terms of the year-on-year rate of change in the consumer price index, and made a commitment to achieving it at the earliest possible time.
Two things about that are worth pausing on.
The first is the instrument. No law was amended. A statutory phrase was given an operational meaning by an announcement from the body the statute empowers, and that announcement now governs how the Bank's performance is judged. This is what central bank independence looks like in practice more often than the dramatic version people imagine: not defiance of a government, but the authority to decide the technical content of a mandate written in words.
The second is the direction. Most inflation targets were adopted by countries trying to bring inflation down. Japan's was adopted by a country trying to stop prices falling. The target was released alongside a joint statement with the government titled for overcoming deflation and achieving sustainable economic growth, and the whole exercise reads differently once you know that.
Deflation is not just low inflation
A target of 2 per cent looks modest until you consider what it is aimed against.
When prices fall persistently, waiting is rewarded. A purchase deferred is cheaper next year, so households defer, which reduces demand, which pushes prices down further. Debts behave badly too, because the amount owed is fixed in money terms while the money itself is becoming more valuable, so the real weight of a loan grows without the borrower doing anything. Wages are difficult to cut in nominal terms, so employers adjust through hiring and hours instead.
None of that is symmetric with mild inflation, which is why a central bank facing it can find that its usual tools have less purchase. The target was set in that context, and the phrase "at the earliest possible time" was doing real work.
Who decides, and when
The decisions themselves are made by the Policy Board at Monetary Policy Meetings. The Board discusses the economic and financial situation, decides the guideline for money market operations and the Bank's stance for the immediate future, and announces the decision immediately after the meeting concerned.
The Bank then works inside that guideline, setting the amount of daily money market operations, choosing the types of operational instrument, and providing and absorbing funds in the market.
The separation is easy to miss, and missing it changes what you think a meeting does. A meeting produces a direction, not a set of transactions. What happens on any given morning in the money market is the implementation of a decision that may be weeks old, by staff who are not making policy.
What independence does and does not mean
The example makes the distinction concrete. The Bank chose the number, which is a real and substantial power. It chose it in coordination with the government, publishing a joint statement rather than acting alone, which is a real and substantial constraint. Neither of those facts cancels the other.
The general shape holds well beyond Japan. Statutory mandates are written in general language; the numbers that make them operational are usually chosen by the central bank; and the choosing is done in public, precisely because a target nobody knows about cannot anchor expectations. What is chosen need not be a point at all - Switzerland instead defines price stability as a ceiling with a floor beneath it.
What this means for reading a yen headline
When a report says the Bank of Japan is "missing its target" or "under pressure on inflation", the target in question is the one described above: a 2 per cent year-on-year change in the consumer price index, set by the Bank in 2013, with no legislated deadline attached.
That is a different kind of statement from a claim about where a currency is heading, and the two get run together constantly. This guide is about the framework, not about the rate.
Where to look next
The AUD to JPY page carries the live reference rate and a short block on what kind of money the yen is. For how an exchange rate responds to anything at all, what drives the Australian dollar sets out the forces involved and explains why Tradergy does not forecast them.
Sources
- Bank of Japan, Price Stability Target of 2 Percent - the target set in January 2013, measured on the year-on-year change in the consumer price index, the commitment to achieve it at the earliest possible time, and the joint statement with the government on overcoming deflation and achieving sustainable economic growth
- Bank of Japan, Outline of Monetary Policy - the Bank of Japan Act's statement that monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy, and the Policy Board's Monetary Policy Meetings, guideline for money market operations, immediate announcement of decisions and subsequent daily operations
General information about how Japanese monetary policy is framed and decided. Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
What does the Bank of Japan target?
A price stability target of 2 per cent, measured as the year-on-year rate of change in the consumer price index. The Bank set that target in January 2013 and committed to achieving it at the earliest possible time.
Is the 2 per cent target written into Japanese law?
No. The Bank of Japan Act states that monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy. It does not say what price stability is in numbers. The 2 per cent figure was adopted by the Bank itself, by announcement, without amending the Act.
Who actually makes Bank of Japan decisions?
The Policy Board, at scheduled Monetary Policy Meetings. It discusses the economic and financial situation, decides the guideline for money market operations and the Bank's stance for the immediate future, and announces the decision immediately after the meeting concerned.
Why does Japan target rising prices at all?
Because the problem it was addressing was falling ones. The target was published alongside a joint statement with the government on overcoming deflation and achieving sustainable economic growth. Deflation is the reverse of the difficulty most inflation-targeting frameworks were built to manage.
What does the Bank of Japan do between meetings?
It conducts daily money market operations within the guideline the Policy Board has set, choosing the types of instruments and the amounts, and providing or absorbing funds in the market. The Board sets the direction; the operations desk implements it day by day.