Masaaki Shirakawa: Recent economic and financial developments in
Japan
Statement by Mr Masaaki Shirakawa, 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, 16 December 2008.
* * *
Introduction
Semiannual Report on Currency and Monetary
The Bank of Japan submitted to the Diet its
Control for the second half of fiscal 2007 on June 10, 2008 and that for the first half of fiscal
2008 on December 12, 2008. 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 exports have decreased due to the slowdown in overseas economies. With the
deterioration in corporate profits and households' employment and income situation,
domestic private demand, particularly business fixed investment and private consumption,
has weakened. In sum, Japan's economic activity has been increasingly sluggish.
Indicators of production, employment, and private consumption have all been weak. The
results of the Bank's December Tankan (Short-Term Economic Survey of Enterprises in
Japan), which were released yesterday, also clearly indicated the severity of economic
conditions in terms of business sentiment and fixed investment plans.
On the price front, the three-month rate of decrease in domestic corporate goods prices has
been large, mainly due to the drop in international commodity prices. The year-on-year rate
of increase in the CPI (excluding fresh food) is around 2 percent against the background of
the increase in prices of energy and food. CPI inflation is expected to moderate reflecting the
declines in the prices of petroleum products and the stabilization of food prices.
Regarding the financial side, investors have become increasingly risk averse reflecting
disruptions in global financial markets. As a result, funding conditions in the CP and
corporate bond markets have tightened, as indicated by the wider credit spreads on CP and
corporate bonds and the difficulty faced by firms in issuing either. Moreover, an increasing
number of firms, not only small but also large ones, have reported that their financial
positions are tight and lending attitudes of financial institutions are severe. Thus, financial
conditions in Japan are rapidly becoming less accommodative on the whole.
There are risks to the outlook for economic activity and prices. Global financial markets
remain under intense strain, although there has been some improvement in money markets
in response to the various measures taken so far by governments and central banks. In this
situation, due attention should be paid to the fact that there are downside risks to economic
activity depending on developments in global financial markets and overseas economies. In
addition, if financial conditions in Japan, as reflected in lending attitudes of financial
institutions and issuing conditions in the CP and corporate bond markets, should increase in
severity, pressures acting to depress economic activity from the financial side might become
more marked. Turning to prices, there is a possibility that the inflation rate will decline further
if downside risks to economic activity materialize or commodity prices fall further.
II. Conduct of monetary policy
As I have explained, the outlook for economic activity and prices is uncertain at present. In
this situation, the Bank will carefully assess the future outlook for economic activity and
prices, closely considering the likelihood of its projections as well as factors posing upside or
downside risks, and will implement monetary policy appropriately. For the time being, it is
particularly important to pay attention to downside risks to economic activity, such as those
that may arise from developments in the U.S. and European financial systems and in global
financial markets and the consequent downward pressure.
Since early autumn, when the turmoil in global financial markets and in the U.S. and
European financial systems increased in severity, the Bank has continued to make efforts, by
employing various measures, to ensure market stability and maintain accommodative
financial conditions. Specifically, against the background of the worldwide decline in U.S.
dollar liquidity, the Bank introduced U.S. dollar funds-supplying operations as part of the
coordinated measures of central banks in September and thereafter expanded such
operations. As for yen funds, the Bank has introduced a complementary deposit facility to
further facilitate the provision of sufficient liquidity, and has been providing funds for over the
year-end with more frequency and in larger amounts than last year. In addition, the Bank has
been actively purchasing CP and Japanese government securities under repurchase
agreements, thereby ensuring market stability. Furthermore, with a view to facilitating
corporate financing, the Bank has expanded the range of corporate bonds and loans on
deeds it accepts as eligible collateral and has decided to introduce a new operation through
which financial institutions can borrow low-interest funds from the Bank against corporate
debt. Under this new operation, there will be no explicit ceiling on the total funds available,
although the maximum loans available will not exceed the value of the corporate debt
pledged as collateral.
The Bank will continue to make efforts to ensure market stability by conducting appropriate
money market operations such as the provision of sufficient funds during the run-up to the
calendar and fiscal year-ends.