Masaaki Shirakawa: Japan's economy and the 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 Representatives, Tokyo, 20 April 2010.
* * *
Introduction
Semiannual Report on Currency and Monetary
The Bank of Japan submitted to the Diet its
Control for the second half of fiscal 2008 and the first half of fiscal 2009 in June and
December 2009, respectively. I am pleased to have this opportunity to talk about the recent
developments in Japan's economy and present an overall review of the Bank's conduct of
monetary policy.
I. Developments in Japan's economy
Japan's economy has been picking up mainly due to improvement in overseas economic
conditions and to various policy measures, although there is not yet sufficient momentum to
support a self-sustaining recovery in domestic private demand. The trend of pick-up is
becoming more evident. Exports and production have been increasing mainly against a
backdrop of robust growth in emerging economies. According to the March Tankan
(ShortTerm Economic Survey of Enterprises in Japan) released at the beginning of April, business
sentiment has been improving, with such improvement spreading to the nonmanufacturing
industry and small firms, in addition to large manufacturing firms. Business fixed investment
is leveling out, and private consumption, notably durable goods consumption, is picking up
mainly due to policy measures, despite the continued severe employment and income
situation.
As for the outlook, the Bank projects that the pace of improvement of the economy is likely to
be moderate for the time being, and it judges that the risk of the economy deteriorating
substantially again, the risk of the so-called "double dip", about which market participants had
expressed concern, has diminished considerably. Thereafter, as improvements in the
corporate sector originating from exports are expected to spill over to the household sector,
the growth rate of the economy is likely gradually to rise.
Financial conditions, with some lingering severity, have shown increasing signs of easing.
Firms' borrowing rates from banks have continued to decline due in part to the fact that
financial institutions' lending stance has become active, in addition to monetary easing by the
Bank. Issuing conditions for CP are more favorable than in the period prior to the Lehman
shock. Issuing conditions for corporate bonds have also been favorable, and even those for
low-rated corporate bonds have shown signs of improvement. Meanwhile, although many
small firms still see their financial positions as weak, the overall financial positions of firms,
including small ones, have continued to show signs of easing.
The CPI (excluding fresh food) is declining on a year-on-year basis due to the substantial
slack in the economy as a whole, but the decline leveled out in August 2009 and the
moderating trend of decline has continued. The outlook for the trend change in prices is
determined by the aggregate supply and demand balance and the medium- to long-term
inflation expectations. It should be noted that, statistically, the year-on-year rate of change in
the CPI will decline for a year due to the introduction of subsidies for high school tuition and
other policy measures in fiscal 2010, but in assessing the trend change in prices, it is
necessary to exclude such one-off factors. In terms of the trend change in prices, with
medium- to long-term inflation expectations likely to be stable, the year-on-year rate of
decline in the CPI (excluding fresh food) is expected to continue to moderate as the
aggregate supply and demand balance improves gradually.
While I have thus far explained the baseline scenario for economic activity and prices, the
Bank is also fully aware of the risks concerning such scenario. Upside risks to the scenario
are developments in emerging and commodity-exporting economies. The robust growth of
emerging and commodity-exporting economies has driven the pick-up of Japan's economy. If
the growth in those economies further accelerates, it will pose an upside risk to economic
activity in Japan. Meanwhile, downside risks, although somewhat diminished, include the
possible consequences of balance-sheet adjustments in the United States and Europe as
well as potential changes in firms' medium- to long-term growth expectations. Moreover,
attention should continue to be paid to various recent international financial developments
and their effects. With regard to prices, there is a risk that inflation will rise more than
expected in the event of a rise in commodity prices due to higher growth rates in emerging
and commodity-exporting economies. On the other hand, there is also a risk that the rate of
inflation might decline due, for example, to a decline in medium- to long-term inflation
expectations.
II. Conduct of monetary policy
The Bank recognizes that Japan's economy is faced with a critical challenge of overcoming
deflation and returning to a sustainable growth path with price stability. Therefore, the Bank
has been implementing various measures, taking into account the two factors that determine
the trend change in prices.
As a measure to prompt an improvement in the aggregate supply and demand balance, in
terms of interest rates, the Bank has kept the policy rate at the effectively zero level. To
encourage a further decline in longer-term interest rates in the money market, the Bank
introduced in December 2009 a new funds-supplying operation, through which funds with a
maturity of three months are provided at an extremely low interest rate of 0.1 percent, and
the total amount of loans to be provided through this operation was set at approximately
10 trillion yen. The total amount of loans was increased to 20 trillion yen in March 2010. In
terms of funds provision, the Bank has been providing ample funds through various
fundssupplying operations, including the new operation. Furthermore, the Bank has made its
stance clear that it will consistently maintain the extremely accommodative financial
environment.
As for inflation expectations, the other determinant of prices, the Bank has, to prevent
people's expectations for prices from declining, clearly showed its stance, in the form of the
"understanding of medium- to long-term price stability", that it is critical to achieve a positive
year-on-year rate of changes in the CPI.
To overcome deflation and achieve a sustainable economic growth with price stability, the
Bank will continue to consistently make contributions as central bank.