Controlling the Japanese money supply with deregulation
With deregulation the Bank of Japan is finding that it is losing its ability to control the money supply. In the period up to the 1980s the BoJ controlled the money supply because bank lending dominated the nation's finances. Since the BoJ, through reserve requirements and the discount rate, controlled bank lending, the money supply was easy to control. However in the 1980s, with the arrival of largely unregulated Eurofunds, commercial paper, bankers' acceptances and the Japanese offshore banking market, the BoJ's power has been significantly diluted. This power will become even weaker as the commercial paper, corporate bond and offshore banking markets become stronger.
The BoJ's chances of controlling the money supply will become even further diminished because the BoJ has little ability to utilize open market intervention with short-term government debt, as is used in the United States. This is because the MoF wants to fund the government's debt through long-term bonds and not short-term debt. For example in Japan in 1986, short-term obligations of the government totaled only $13 billion while US short-term government debt made up $400 billion.