Toshihiko Fukui: A 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, 18 April 2003.
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Introduction1
The Bank of Japan (hereafter, the Bank) submitted its Semiannual Report on Currency and Monetary
Control for the first half of fiscal 2002 to the Diet in December 2002. I am pleased to have this
opportunity to present an overall review of the Bank's conduct of monetary policy.
It has been almost a month since I assumed the governorship of the Bank on March 20, 2003. The
Bank is determined to utilize all of its intellectual resources and expertise and do its utmost as a
central bank, in order to put Japan's economy back on a sustainable growth path and overcome
deflation.
I. Developments in Japan's economy
Economic activity in Japan remains flat as a whole. This is because, while business fixed investment
has started to recover, there has been greater uncertainty about the economic outlook mainly
reflecting developments overseas, especially the effects of the situation in Iraq.
Looking at the economic outlook in more detail, with overseas economies following a gradual recovery
path, exports and production are expected to resume their upward trend, which in turn will initiate the
momentum for a recovery.
However, there is uncertainty regarding the outlook for the United States and other overseas
economies. Japan's economy is very likely to lack the momentum for a self-sustained recovery for
some time, taking into account persistent downward pressure on the economy stemming from the
excessive labor input and debts.
Regarding prices in Japan, with the rise in import prices and an improved supply-demand balance in
materials industries, the decline in domestic corporate goods prices has, on the whole, almost come to
a halt. Consumer prices have been declining gradually, but looking forward, the pace of decline is
expected to become somewhat slower due to the effects of (1) the rise in crude oil prices, and (2) the
changes in the system of social security and indirect taxes.
II. Financial developments
Financial markets have been generally stable, including through the fiscal year-end at the end of
March 2003, reflecting ample liquidity provision by the Bank.
However, stock prices continue to be volatile, against the background of uncertainty about the
economic outlook both at home and abroad. In particular, the weakness in banks' stock prices is
becoming conspicuous, mainly reflecting market participants' severe view of the profitability of
Japanese financial institutions.
In corporate finance, the financing conditions of firms are accommodative on the whole, but the
environment continues to be severe for firms of relatively low creditworthiness.
III. Conduct of monetary policy
For almost a month now, I have taken the initiative to address the following two problems: first, to
prevent any immediate crisis taking into account the developments in Iraq; second, to strengthen the
effectiveness of monetary easing for the longer term.
The Bank has been closely monitoring how the development of the situation in Iraq would affect the
economy, especially through the stock and foreign exchange markets, and provided a large amount of
additional liquidity to ensure financial market stability with the approach of the fiscal year-end. In
addition, the Bank has decided for the time being to apply the official discount rate to the
Lombard-type lending facility on any business day, suspending the restriction on the maximum
number of days for such use. Use of this lending facility enables financial institutions that hold current
accounts with the Bank to borrow funds from the Bank at need within the value of collateral submitted.
Reflecting the above measures, liquidity concern in the money market has been dispelled, and there
was no significant disruption at the turn of the fiscal year.
In its future conduct of monetary policy, the Bank considers it an important task to ensure that the
provision of ample liquidity leads to a revitalization of economic activity and the overcoming of
deflation. Based on this understanding, the Bank is examining the basic framework for the conduct of
monetary policy, with a view to enhancing the transparency of monetary policy and strengthening the
transmission mechanism of monetary easing.
The Bank's current quantitative easing policy has contributed significantly to ensuring financial market
stability and to preventing the economy from falling into a deflationary spiral. However, the financial
intermediary function of banks has been weak and economic activity has yet to be sufficiently
stimulated.
It is apparent that the nonperforming-loan (NPL) problem is the largest impediment to the
effectiveness of the financial intermediary function in the financial system. Thus, it is essential for the
private sector and policymakers to coordinate their efforts to resolve the NPL problem.
At the same time, it is very important for the Bank to improve its promotion of smooth corporate
financing and its implementation of money market operations to strengthen the transmission
mechanism of monetary easing, against the background of the banks' weak financial intermediary
function, which is an important route for the transmission of the effects of monetary policy.
In light of this, the Bank has decided, as a temporary measure, to examine the possible purchase of
asset-backed securities (ABSs), including asset-backed commercial paper, mainly backed by those
assets related to small and medium-sized firms.
ABSs are marketable securities into which pools of specific assets such as accounts receivable held
by firms are converted. The ABS market in Japan is still in the process of development. However,
nurturing the development of the ABS market is expected to provide various merits in corporate
finance, in particular enabling small and medium-sized firms to exploit an alternative route of raising
funds to bank borrowing.
The Bank hopes that the transmission mechanism of monetary easing will be strengthened through
the Bank's support for the establishment and development of financial markets that will be able to
provide new financing channels.
The Bank is currently working on a specific design for the ABS purchasing scheme which would
contribute to the development of the ABS market, gathering opinions from market participants.
Financial markets are basically expected to be initiated by the private sector and to evolve
autonomously. For this reason, the Bank's outright purchases of private debts such as ABSs are
unprecedented measures for a central bank.
Therefore, the Bank will determine the specific design of the purchasing scheme, considering the
following: to what extent the purchase will strengthen the transmission mechanism; whether or not the
purchase will distort market mechanisms; and how to maintain the financial soundness of the Bank
and ensure its ability to conduct monetary policy in the future.
IV. Purchase of stocks held by commercial banks
Although the measure does not fall directly within the province of monetary policy, the Bank started to
purchase stocks held by private banks in November 2002, with a view to further reducing the market
risk pertaining to these stocks. The total amount of stocks purchased as of April 10, 2003 was
1,209.0 billion yen.
The purchasing of stocks is one of the actions taken by the Bank aimed at the early restoration of the
soundness of the financial system. Such restoration of the soundness of the financial system is
considered indispensable in strengthening the transmission mechanism of monetary policy.
Conclusion
Japan's economy is undoubtedly confronting important challenges.
The environment surrounding Japan's economy faces significant changes such as progress in
information and communication technology and the rapid rise of emerging economies as well as
economic maturation and globalization.
Faced with such drastic changes, the Bank believes that the existing economic model, which
supported Japan's postwar economic growth, needs to be replaced, and that the driving force of the
new model should be innovations, both in technology and knowledge. The Bank considers it essential
for the private sector, the government, and the Bank to coordinate their efforts toward the same goal in
order for Japan's economy to adapt itself boldly to the new environment.
The Bank will continue to do its utmost to carry out its mission of achieving price stability and
maintaining an orderly financial system.