Toshihiko Fukui: Overall review of the Bank of Japan's conduct of monetary
policy
Statement by Mr Toshihiko Fukui, Governor of the Bank of Japan, concerning the Bank's Semiannual
Report on Currency and Monetary Control, before the Committee on Financial Affairs, House of
Councillors, Tokyo, 31 October 2006.
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Introduction
The Bank of Japan submitted its Semiannual Report on Currency and Monetary Control for the second
half of fiscal 2005 to the Diet on June 9, 2006. I am pleased to have this opportunity to present an
overall review of the Bank's conduct of monetary policy.
I. Developments in Japan's economy
Japan's economy is expanding moderately.
Exports have continued to increase due to the expansion of overseas economies. Business fixed
investment has also continued to increase against the background of high corporate profits and
favorable business sentiment. The positive influence of the strength in the corporate sector has been
feeding through into the household sector. While firms have been increasingly feeling a shortage of
labor, the number of employees has been increasing steadily and wages have also been rising
gradually. In this situation, private consumption has been on an increasing trend. With the rise in
demand both at home and abroad, production has been increasing, and inventories have been more
or less in balance with shipments.
Looking forward, Japan's economy is likely to experience a sustained period of expansion with a
virtuous circle of production, income, and spending in operation.
There are various risks concerning future developments in Japan's economy. For example, although
international commodity prices, primarily crude oil prices, have declined since posting record highs this
summer, they still remain at high levels. In this situation, whether the world economy can maintain
sustainable growth while containing inflationary risks continues to warrant attention.
On the price front, domestic corporate goods prices have been increasing recently. However, the pace
of increase is expected to slow in the immediate future, due to the recent drop in international
commodity prices. The year-on-year rate of change in the consumer price index (CPI; excluding fresh
food) has been on a positive trend, although retroactive revisions following the rebasing of the index
caused the figure to be revised downward. The output gap is positive and is likely to widen at a
moderate pace going forward. Under these circumstances, the year-on-year rate of change in the CPI
is projected to continue to follow a positive trend.
As for financial conditions, the environment for corporate finance has been accommodative. In the
corporate bond and CP markets, the issuing environment has been favorable. Private banks have
been maintaining a proactive lending posture. Credit demand in the private sector has been rising and
the amount outstanding of lending by private banks thus has continued to increase.
II. Conduct of monetary policy
The Bank terminated the quantitative easing policy in March and raised the uncollateralized overnight
call rate target from effectively zero percent to around 0.25 percent in July. For the first time in about
five years, interest rates in the money market are again above zero, and the market mechanism has
started to function again. Despite such a significant change in the environment, financial markets have
remained stable. A factor that contributed to the smooth policy shift was that the new framework for
the conduct of monetary policy, which the Bank introduced in March when it terminated the
quantitative easing policy, functioned effectively as a means of communicating with market
participants and the public.
Regarding the future path of monetary policy, the Bank will conduct monetary policy by carefully
assessing economic activity and prices under the new framework. If developments in economic activity
and prices follow the Bank's projection presented in the Outlook Report, the Bank will adjust the level
of the policy interest rate gradually in the light of these developments. Of course, the timing of any
policy change and the level of interest rates will also depend on these developments. The Bank is
determined to conduct monetary policy appropriately in the light of developments in economic activity
and prices, and contribute to sustainable economic growth under price stability.