Masaaki Shirakawa: Overall review of the Bank of Japan's conduct of
monetary policy
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, 22 May 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 economic growth is slowing, mainly due to the effects of high energy and materials
prices.
The deterioration in the terms of trade that results from rises in energy and materials prices
leads to an outflow of real income, as Japan depends heavily on imported resources. This
exerts downward pressure on corporate profits and reduces households' purchasing power.
Although business fixed investment and private consumption remain firm, due attention
should be paid to the possibility that the weakening of the economy's capacity to generate
income will result in weaker domestic private demand.
As for the outlook, Japan's economy is likely to grow at a slower pace for the time being and
follow a moderate growth path thereafter. Exports are expected to continue rising - even
though those to the United States have been falling for some time - as they have been
increasing to a broader range of destinations, particularly emerging economies and countries
that export natural resources. In the corporate sector, firms currently face no excess in
production capacity, inventory, or employment, and corporate profits have been at historically
high levels. As a result, it seems that Japan's economy has become more resilient against
negative shocks than in the past. The accommodative financial conditions are likely to
continue to support private demand. The level of short-term interest rates has been very low
relative to the potential growth rate and inflation. In addition, firms' liquidity positions and
funding conditions have continued to be favorable on the whole. However, the liquidity
positions of small firms and some nonmanufacturing firms are increasingly unfavorable, and
therefore developments need to be closely monitored.
Global financial markets have been unstable due to continued disruptions stemming from the
U.S. subprime mortgage problem. Although overly pessimistic views about global financial
markets have subsided compared with some time ago, the deterioration in the functioning of
the U.S. and European markets for securitized products has remained significant and strains
in money markets have persisted. Moreover, financial institutions have increasingly been
tightening their lending standards. Against this background, the global economy - including
the U.S. economy, which has been decelerating even more clearly - has continued to be
exposed to downside risk. At the same time, the risk of inflation has been increasing globally,
as prices of crude oil and other international commodities have been rising substantially. The
Bank considers it necessary to continue to carefully monitor developments in overseas
economies and global financial markets as well as the effects of the rise in materials prices.
Regarding 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
yearon-year rate of increase in the CPI (excluding fresh food) has been rising since around the
end of last year, and it has been around 1 percent lately. As for the outlook, it is projected to
continue to be positive due to the rise in prices of petroleum products and food products in a
situation where overall supply and demand in the economy are more or less balanced. Given
that the current increase in the CPI is the highest in 15 years - if we disregard fiscal 1997,
when retail prices rose due to the rise in the consumption tax - and that the prices of daily
necessities are rising markedly, close attention should be paid to the effects of price
developments on consumers' inflation expectations and the price-setting behavior of firms.
II. Conduct of monetary policy and disposal of stocks purchased from financial
institutions
As I have explained, the outlook for economic activity and prices is highly uncertain at
present. In this situation, the Bank considers that it is not appropriate to predetermine the
direction of future monetary policy. Based on a thorough examination of the economic and
price situation as well as the market situation both at home and abroad, the Bank will
carefully assess the future outlook for economic activity and prices, closely considering the
likelihood of its projections as well as relevant risk factors, and will implement its policies in a
flexible manner.
The Bank has been appropriately providing liquidity through money market operations. As a
result, despite the continued disruptions in global financial markets, Japan's money market
has been stable, unlike its U.S. and European counterparts. The Bank will continue to
carefully monitor market developments and to ensure, via appropriate money market
operations, the proper functioning of the money market.
With regard to stocks purchased from financial institutions through the stock purchasing
program implemented between November 2002 and September 2004, the Bank has been
disposing of them in the market since October 2007. The book value of the remaining stocks
held by the Bank was approximately 1.4 trillion yen as of the end of April 2008.