Toshihiko Fukui: Semiannual Report on Currency and Monetary Control (Bank
of Japan's overall review)
Statement of a speech 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, 10 May 2007.
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Introduction
The Bank of Japan submitted its Semiannual Report on Currency and Monetary Control for the first
half of fiscal 2006 to the Diet on December 12, 2006. 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 increase against the background of high corporate profits and
generally favorable business sentiment. The positive influence of the strength in the corporate sector
has been feeding through into the household sector. As firms have been increasingly feeling a
shortage of labor, the number of employees has continued to increase steadily and household income
has continued to rise moderately. In this situation, private consumption has been firm. With the rise in
demand both at home and abroad, production has been on an increasing trend and inventories as a
whole have been more or less in balance with shipments.
Looking forward, Japan's economy is likely to experience a sustained period of expansion with a
virtuous circle of production, income, and spending in operation. The Bank will, however, continue to
pay close attention to developments in overseas economies, including the United States, as well as
crude oil prices.
On the price front, domestic corporate goods prices have recently been more or less at
three-monthearlier levels. They are expected to increase in the immediate future mainly due to the rebound in
international commodity prices. The year-on-year rate of change in the consumer price index (CPI;
excluding fresh food) has been around zero percent due to the drop in crude oil prices, but from a
longer-term perspective 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
corporate bond and CP markets, the issuing environment has been favorable. The lending attitudes of
private banks have continued to be accommodative. Credit demand in the private sector has been
rising. Under these circumstances, the amount outstanding of lending by private banks has been
increasing.
II. Conduct of monetary policy
The Bank changed the guideline for money market operations at the Monetary Policy Meeting (MPM)
in February, raising the uncollateralized overnight call rate target to around 0.5 percent. This policy
adjustment was made in line with the framework for the conduct of monetary policy introduced in
March 2006.
The Bank reviewed the outlook for Japan's economy based on data and information on domestic and
overseas economies available at the time of the MPM in February. Its assessment at that meeting was
as follows: the CPI is likely to increase as a trend as the economy continues to expand moderately;
and with the prospects of the economic and price situation improving, the stimulative effect of
monetary policy, if the policy interest rate were kept unchanged, could gradually increase, and if the
expectation takes hold, in such a situation, that interest rates will remain low for a long time regardless
of developments in economic activity and prices, there is a medium- to long-term risk of larger swings
and of inefficient allocation of resources as firms and financial institutions over-extend themselves.
The Bank judged at the MPM in February that it was appropriate to adjust the level of the policy
interest rate in order to maintain a desirable course of economic activity and prices. This policy action
will still keep the monetary environment very accommodative, and the Bank believes that it will
contribute to ensuring price stability and achieving sustainable growth in the medium to long term.
The Bank presented its basic thinking on the future course of monetary policy in the April 2007
Outlook for Economic Activity and
Prices, along with the outlook for economic activity and prices. In
sum, while confirming that Japan's economy remains likely to follow a path of sustainable growth
under price stability and assessing relevant 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 in the light of developments in economic activity
and prices, and contribute to sustainable economic growth under price stability.