FACTBOX-Japan's government and the Bank of Japan

Tue Oct 13, 2009 9:20pm EDT

Oct 14 (Reuters) - The Bank of Japan may decide to start withdrawing support from corporate finance markets on Wednesday despite government misgivings, at a policy meeting that may set the tone for its relationship with the new government.

Following are key facts on the relationship between the Japanese government and the Bank of Japan.

-- The BOJ was granted more independence from the government when the BOJ law was revised in 1998, but politicians still wield some influence over monetary policy.

-- Under the revised BOJ law, representatives of the Ministry of Finance and the Cabinet Office can sit in on policy-setting meetings and express their opinions.

-- The government representatives cannot vote but they can put in requests to delay policy decisions until subsequent meetings, although the central bank can disregard such requests.

-- The framework is meant to give the government an opportunity to present its stance on BOJ policy proposals when its view differs from that of the central bank, in the interest of making the process more transparent to the public.

It is also meant to give government officials sufficient time to coordinate their positions on proposals.

-- The last time government representatives took that step was in August 2000, when the BOJ ended its zero interest rate policy. The nine-member BOJ board decided by a majority vote to reject the request for a delay, and the central bank raised rates to 0.25 percent from zero.

-- The Japanese economy worsened after the credit tightening in August 2000, and the BOJ ended up cutting rates and adopting a super-loose policy called quantitative easing in March 2001.

-- Some ruling party lawmakers and government officials warned against hasty action when the BOJ scrapped quantitative easing in March 2006 and ended its zero-rate policy in July that year. But in those cases, the officials did not threaten to seek a postponement in voting by the BOJ.

-- Liberal Democratic Party officials called on the government to propose postponing the vote when expectations of a rate hike rose in January 2007.

-- But government reaction was muted. Hiroko Ota, economics minister at the time, said she could not comment on the need for such a request before knowing whether the BOJ would actually vote on raising rates, while then-Finance Minister Koji Omi said he did not see the need for the government to ask for a delay.

-- The BOJ eventually stood pat on policy in January and instead raised rates in February. No vote delay proposal was presented by the government in February.

-- The Democratic Party, which took control of the government on Sept. 16 after winning a national election, is thought to respect the central bank's independence more than the ousted LDP. [ID:nT354752]

But members of the new government have sent conflicting signals, raising questions over whether the government will interfere in monetary policy.

-- Finance Minister Hirohisa Fujii and Financial Services Minister Shizuka Kamei made comments on Oct. 6 suggesting it was too early for the BOJ to end emergency funding for companies even though the central bank has been flagging such a move for some time. [ID:nSP451222]

Fujii backtracked later in the week, saying the issue was for the BOJ to decide, but outspoken banking minister Shizuka Kamei, who heads a small coalition party in the government, has spoken out against any winding back of funding support. (Reporting by Stanley White; Editing by Hugh Lawson)