Toshihiko Fukui: Review of Japan's economy
Statement by Mr Toshihiko Fukui, Governor of the Bank of Japan, concerning the Bank's seminannual
report on currency and monetary control, before the Committee on Financial Affairs, House of
Representatives, Tokyo, 2 August 2005.
* * *
Introduction
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 continues to recover, albeit with adjustments in IT-related sectors.
In more detail, although the momentum of growth in exports, particularly to China, has been weak
recently after the significant increases through the middle of 2004, industrial production is on a gradual
uptrend as inventory adjustments in the IT-related sectors are progressing. Business fixed investment
has continued to increase, as corporate profits have remained high and business sentiment has
shown improvement again. Household income has been rising, albeit moderately, as the employment
situation has been improving and wages have stopped declining. In this situation, private consumption
has been steady.
Based on these developments, it can be said that the economy is emerging from its temporary pause.
As for the outlook, growth in exports is expected to accelerate gradually as overseas economies
continue to expand, and domestic private demand is likely to continue increasing against the
background of high corporate profits and the moderate rise in household income. The economy is
therefore expected to follow a sustainable growth path, albeit at a moderate pace.
On the price front, as the output gap continues to narrow, domestic corporate goods prices have been
increasing, mainly reflecting the effects of the rise in crude oil prices. They are likely to continue on an
increasing trend, but the rate of growth is expected to slow for the time being. Consumer prices
(excluding fresh food) have basically been declining slightly on a year-on-year basis, partly due to the
reduction in electricity and telephone charges against the background of such factors as deregulation,
and they are projected to continue falling slightly for the time being. However, they are expected to
start increasing on a year-on-year basis at some point in late 2005 or early 2006, as the effects of
temporary factors, such as the decline in rice prices and the reduction in electricity and telephone
charges, fall off.
In the capital markets, stock prices have been firm on the whole and long-term interest rates have
been stable. The environment for corporate finance is becoming more accommodative on the whole.
That is to say, in a situation where the lending attitude of financial institutions is becoming more active,
the rate of decline in lending by private banks has been diminishing at a moderate pace. Moreover,
the environment in the capital markets for firms raising funds through CP and corporate bonds is
favorable.
II. Conduct of Monetary Policy
The Bank has been providing ample liquidity through its conduct of the quantitative easing policy. The
framework of the quantitative easing policy is based on two key elements. The first element is the
Bank's provision of ample liquidity to the money market so that the outstanding balance of current
accounts at the Bank substantially exceeds the amount of required reserves. The second is the Bank's
commitment to firmly maintain this ample provision of liquidity until the year-on-year rate of change in
the consumer price index (CPI; excluding fresh food, on a nationwide basis) registers zero percent or
higher on a sustainable basis. At the Monetary Policy Meeting (MPM) on July 27, 2005, the Policy
Board decided to maintain the target range for the outstanding balance of current accounts held at the
Bank at "around 30 to 35 trillion yen."
In the money market, reflecting the dissipating concern about financial system stability, liquidity
demand among financial institutions has been declining and they are feeling more strongly that there
is an abundance of liquidity. Given this situation, since the MPM held on May 19 and 20, 2005, the
Bank has been allowing a temporary fall of the outstanding balance below the target range when it is
judged, in the situation where the Bank is doing its utmost to provide funds while at the same time
giving due consideration to the effects on the functioning of the market, that financial institutions'
liquidity demand is exceptionally weak. The Bank's decision is intended to enable the quantitative
easing policy to be conducted more smoothly, not to change its basic policy stance.
III. The Bank's Measures regarding the Financial System after the Full Removal of the
Blanket Guarantee of Deposits
As I mentioned earlier, the financial system in Japan has been regaining stability, and the full removal
of the blanket guarantee of deposits was carried out smoothly on April 1, 2005. Financial institutions
are expected to amplify their efforts to develop innovative services tailored to customer needs, thus
supporting economic activity. The Bank's basic stance regarding financial system policy is shifting its
focus in response to this changing environment: from crisis management to, while maintaining overall
system stability, supporting private-sector initiatives to provide more efficient and advanced financial
services through, for example, improved management of risks and business activities.
In order to contribute to enhancing the functioning and robustness of the financial system, the Bank
will actively encourage financial institutions' efforts to improve their business activities, and devise
various ways to enhance its own business operations.
Conclusion
Japan's economy continues to recover in a situation where overseas economies continue to expand.
As for the outlook, it is expected to move onto a path of sustainable, albeit moderately paced, growth.
The Bank will continue to carefully watch changes in the economic environment and will conduct
monetary policy in an appropriate manner. In the current situation where the CPI remains on a slight
downtrend, the Bank is determined to support Japan's economy from the financial side to achieve
sustainable economic growth with price stability, by maintaining monetary easing in accordance with
the commitment based on the CPI.
In addition to its efforts in conducting monetary policy, it has become increasingly important for the
Bank to pursue more advanced services in a wide range of areas as well as ensure well-disciplined
management to properly carry out the duties entrusted to it as the nation's central bank. In light of this,
the Bank has formulated a Medium-Term Strategic Framework (MTSF) for fiscal 2005-2009, which
sets out the Bank's management policy for the next five years. The Bank is committed to continuing its
efforts, through the steady implementation of this MTSF, to retain public confidence and fulfill its
mission of contributing to the sound development of the economy.