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Window guidance (Japanese: 窓口指導) or informal guidance, is an informal policy instrument used to regulate the supply of credit in an industry or sector. Window guidance typically involves the use of benevolent compulsion in order to regulate the supply of credit as a way to achieve policy targets.[1] Window guidance involves the use of monetary policy instruments including lending quotas as an informal way to subsidize or regulate the volume of credit in an industry or financial sector.[2] Window guidance is often associated with the Bank of Japan's policies during the Japanese economic miracle.[3]

Window guidance is often criticized for causing inefficient capital allocation as well as being a form of central planning.[4]

History

Japan

Window guidance originated as a way for the Japanese government to finance Japanese rebuilding efforts during the early stages of the Japanese economic miracle.[4] Under the Bank of Japan Law of 1958, the Ministry of Finance took control over the Bank of Japan's administration, embedding Japanese government fiscal goals into the Bank of Japan's instruments and allowing for greater flexibility in the regulation of the money supply.[5] During Hayato Ikeda's income doubling plan during the 1960s, the Bank of Japan was given "full control" of the monetary instruments in the economy and was fully responsible for the swings in the business cycle during the 1960s to 1970s period.[6] This, combined with strict capital controls suppressing the private sector's ability to issue corporate bonds,[7] gave the Bank of Japan a substantial amount of influence in the bond market.[8]

This control, however, was eroded during the liberalization of the foreign exchange market as part of the revision of the Foreign Exchange Control Law in 1980, the signing of the Plaza Accord of 1985, and the creation of a bilateral trade agreement with the United States.[7] By the Mid 1980s, foreign direct investment in Japan was completely liberalized,[7] resulting in a dramatic rise in the number of foreign currency bonds issued.[9] During the Japanese Asset Bubble, the Bank of Japan strengthened its window guidance on bank lending in an attempt to tame surging asset inflation.[10] However, as the Bank of Japan notes,

"While window guidance in Japan similarly played a major role in monetary policy in the past, financial liberalization in the 1980s gradually undermined its effectiveness because liberalization led to the expansion of various financial intermediary channels unrestrained by window guidance."[10]

Contrary to this official narrative from the Bank of Japan, research has shown that the tool was instrumental in the creation of the 'bubble economy' of the 1980s. It was implemented by the Bank of Japan's then "Business Department" (営業局), which was headed during the "bubble years" from 1986 to 1989 by Toshihiko Fukui (who became deputy governor in the 1990s and governor in 2003).[11]The subsequent failure to tame asset inflation, and the ensuing Lost Decades, caused the Bank of Japan to transition from window guidance to other less direct expansionary monetary policy instruments including quantitative easing.[12]

China

The People's Bank of China adopted window guidance in the early 1990s to ensure the profitability of the commercial banks within the Chinese financial system.[13] Window guidance has recently been used as a tool to slow the expansion of credit[14] in the Chinese property bubble and the 2015–2016 Chinese stock market bubble. In a similar manner to Japan, liberalization of capital controls has led to a decline in the effectiveness of window guidance,[2][10] resulting in the exponential growth of credit and asset instability.[15] In the recent 2020–2022 Chinese property sector crisis, the People's Bank of China has attempted to use window guidance in order to support lending amidst a credit crunch.[16]

References

  1. ^ "Out of the window? Green monetary policy in China: window guidance and the promotion of sustainable lending and investment". Grantham Research Institute on climate change and the environment. Retrieved 2022-04-18.
  2. ^ a b "From Window Guidance to Interbank Rates: Tracing the Transition of Monetary Policy in Japan and China" (PDF). National Graduate Institute for Policy Studies: 285, 287. June 2020.
  3. ^ Rhodes, James R.; Yoshino, Naoyuki (1999-04-01). "Window guidance by the Bank of Japan: was lending controlled". Contemporary Economic Policy. 17 (2): 166–167. doi:10.1111/j.1465-7287.1999.tb00672.x.
  4. ^ a b Pham, Peter. "How Do Asian Central Banks Distort And Destroy?". Forbes. Retrieved 2022-04-18.
  5. ^ Werner, Richard (2003). Princes of the Yen: Japan's Central Bankers and the Transformation of the Economy. M.E. Sharpe. p. 67. ISBN 9780765610492.
  6. ^ Werner, Richard (2003). Princes of the Yen: Japan's Central Bankers and the Transformation of the Economy. M.E. Sharpe. pp. 68, 69. ISBN 9780765610492.
  7. ^ a b c Lincoln, Edward. "Bubbles in Japan's Stock Market: A Macroeconomic Analysis" (PDF). Brookings Institution: 348.
  8. ^ "The Japanese Banking Crisis: Where Did It Come From and How Will It End?" (PDF). NBER Macroeconomics Annual 1999. 14: 135.
  9. ^ Sato, Hideaki. "The premise of Japan's 'bubble economy' from the 1960s to the 1980s: Why could not regulatory authorities stop financial institutions from collapsing?". Sumitomo Historical Archives: 7.
  10. ^ a b c "Effectiveness of Window Guidance and Financial Environment" (PDF). Bank of Japan Review: 1, 2. 2010.
  11. ^ Werner, Richard (2002). "Monetary Policy Implementation in Japan: What They Say vs. What they Do", Asian Economic Journal, vol. 16, no. 2, Oxford: Blackwell, pp. 111–151 online; Werner, Richard (2001). Princes of the Yen Archived 31 March 2015 at the Wayback Machine, Winchester, England: www.quantumpublishers.com
  12. ^ "Japan's Monetary Policy Transition, 1955-2004" (PDF). Research Papers in Economics.
  13. ^ Geiger, Micheal. "INSTRUMENTS OF MONETARY POLICY IN CHINA AND THEIR EFFECTIVENESS: 1994-2006" (PDF). United Nations Conference on Trade and Development: 12–14.
  14. ^ Naughton, Barry. "An Economic Bubble? Chinese Policy Adapts to Rapidly Changing Conditions" (PDF). China Leadership Monitor.
  15. ^ Netherl, AuthorHugo Erken RaboResearch; s; Economics. "How serious is China's housing market bubble?". RaboResearch - Economic Research. Retrieved 2022-04-18.
  16. ^ News, Bloomberg (21 January 2022). "China Urges Banks to Boost Lending After Slow Start to 2022". BloombergQuint. Retrieved 2022-04-18. {{cite web}}: |last= has generic name (help)

See also

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