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 Representatives, Tokyo, 11 January 2008.
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Introduction
Semiannual Report on Currency and Monetary Control
The Bank of Japan submitted its for
the first half of fiscal 2007 to the Diet on December 11, 2007. 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 as a trend, although the pace of growth seems to
be slowing mainly due to the drop in housing investment.
Housing investment has dropped substantially, affected by the revised Building Standard
Law coming into force. With higher materials prices, business sentiment has become
somewhat cautious. Exports, however, have continued to increase in a situation where
overseas economies continue to expand with momentum being gained across a wide range
of economies. Business fixed investment has also continued to trend upward against the
background of generally high corporate profits. Inventories have been more or less in
balance with shipments, and there has not been adjustment pressure on production capacity
and labor. With regard to the household sector, although nominal wages per worker have
been somewhat weak, employee income has been rising moderately with the increase in the
number of employees. In this situation, private consumption has been firm. Reflecting the
rise in domestic and external demand, production has continued to increase.
These developments seem to indicate that a virtuous circle of growth in production, income,
and spending has basically remained in place. Therefore, Japan's economy is expected to
continue expanding moderately, although for the time being the pace of growth is likely to
slow in a situation where housing investment is likely to remain sluggish.
Global financial markets, meanwhile, have remained unsettled due to the U.S. subprime
mortgage problem. The functioning of markets for securitized products has deteriorated
significantly in the United States and Europe, and stock markets have continued to be
unstable worldwide. Moreover, uncertainty regarding global economic developments, for
example, downside risks to the U.S. economy, has been increasing. The Bank considers it
necessary to continue to monitor carefully developments in global financial markets and the
global economy, as well as the effects from the rise in materials prices, such as the surge in
crude oil prices.
The three-month rate of change in the domestic corporate goods price index has been
positive, mainly due to the rise in international commodity prices. The year-on-year rate of
change in the consumer price index (excluding fresh food) became positive in October 2007,
registering 0.1 percent in that month and 0.4 percent in November. As for the outlook, it is
projected to follow a positive trend due to the rise in prices of petroleum products and food
products in the short run and the positive output gap in the longer run.
As for financial conditions, the environment for corporate finance has been accommodative.
In the CP and corporate bond markets, the issuing environment has been favorable as a
whole, although issuance spreads on those issued by firms with low credit ratings have
expanded slightly. The lending attitudes of private banks have continued to be
accommodative. Under these circumstances, the amount outstanding of lending by private
banks has been increasing moderately, and the amount outstanding of CP and corporate
bonds issued has been above the previous year's level.
II. Conduct of monetary policy
Regarding the conduct of monetary policy, the Bank's basic thinking has been that (1) given
the extremely accommodative financial conditions, the level of interest rates is to be raised if
Japan's economy is to follow a path of sustainable growth under price stability, and (2) the
pace of increase in interest rates should be determined in accordance with improvements in
the economic and price situation without any predetermined view.
The Bank will continue to conduct appropriate monetary policy while confirming that Japan's
economy remains likely to follow a path of sustainable growth under price stability by
monitoring economic activity and prices as well as the situation of financial markets at home
and abroad and thoroughly assessing relevant upside and downside risk factors.
III. Disposal of stocks purchased from financial institutions
Although it was not a monetary policy measure, the Bank implemented a stock purchasing
program between November 2002 and September 2004. Through this program, the Bank
purchased stocks held by financial institutions in order to encourage them to reduce their
market risks associated with stockholdings. The Bank has started to dispose of these stocks
in the market from October 2007, and the book value of the remaining stocks held by the
Bank was approximately 1.5 trillion yen as of the end of December 2007. In disposing of
them, the Bank has been extremely careful to avoid any financial losses and also to minimize
the impact on the stock market by carefully spreading its sales out over time.