Toshihiko Fukui: Developments in Japan's economy and an overall
review of the central bank'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 and House of Representatives, 1-2 November 2007.
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Introduction
Semiannual Report on Currency and Monetary Control
The Bank of Japan submitted its for
the second half of fiscal 2006 to the Diet on June 8, 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.
Exports have continued to increase due to the expansion of overseas economies. Business
fixed investment has also continued to trend upward against the background of high
corporate profits. The positive effects of the strength in the corporate sector have been
feeding through moderately into 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. The positive effects of the strength in the corporate sector have
also continued to be passed on via various other channels, for example, increased dividends.
In this situation private consumption has been firm. With the rise in demand both at home
and abroad, production has continued to be on an increasing trend.
Looking forward, Japan's economy is likely to continue its sustained expansion with a
virtuous circle of growth in production, income, and spending in place. However, instability in
global financial markets stemming from the U.S. subprime mortgage problem continues, and
there is uncertainty regarding global economic developments, for example downside risks to
the U.S. economy. Although overseas economies, taken as a whole, are likely to keep
expanding as growth in economies other than the United States is likely to remain high,
developments in global financial markets and the global economy continue to warrant
attention.
On the price front, the three-month rate of change in domestic corporate goods prices 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) has been around 0 percent.
From a longer-term perspective, however, it is projected to continue to follow a positive trend
as the output gap continues to be positive.
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. 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. Weak inflationary
pressures have given the Bank latitude in conducting monetary policy. The actual interest
rate adjustments have therefore been slow based on a thorough assessment of the future
path of the economy and prices and its likelihood, as well as both upside and downside risks.
The Bank's basic thinking in this regard will remain the same in the conduct of future
monetary policy. In other words, while confirming that Japan's economy remains likely to
follow a path of sustainable growth under price stability and assessing relevant upside and
downside risk factors, the Bank will adjust the level of interest rates gradually in accordance
with improvements in the economic and price situation. The Bank is determined to conduct
monetary policy appropriately based on careful assessment of economic activity and prices
as well as the situation of financial markets at home and abroad, thereby contributing to
sustainable economic growth under price stability.
III. Disposal of stocks purchased from financial institutions
The Bank implemented a stock purchasing program, which was not a monetary policy
measure, 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 total book value of the stocks held by the
Bank under this program was approximately 1.6 trillion yen as of the end of September 2007,
and the Bank has started to dispose of these stocks in the market from October 2007 as
scheduled. In disposing of them, the Bank will strive to avoid any financial losses and also to
minimize the impact on the stock market by carefully spreading its sales out over a period.
Conclusion
Let me close my remarks by noting that in the latest issue of the Outlook for Economic
Activity and Prices, which was decided and released on October 31, the Bank presented its
assessment of economic activity and prices and its basic thinking on the future course of
monetary policy that I have explained today.