Masaru Hayami: Remarks on the Bank's view of Japan's recent economic and
financial developments
Statement by Mr Masaru Hayami, 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, on 19 July 2002), Tokyo, 5 August 2002.
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Introduction1
The Bank of Japan submitted its Semiannual Report on Currency and Monetary Control for the second
half of fiscal 2001 to the Diet in June 2002. I appreciate this opportunity to present an overall review of
the Bank's recent conduct of monetary policy.
Today, I would like to make some remarks on the Bank's view of Japan's recent economic and
financial developments and on the thinking behind our recent conduct of monetary policy.
I. Developments in Japan's Economy
Japan's economy continued to deteriorate throughout 2001 and into early 2002, reflecting the rapid
deceleration of the world economy due to adjustment in IT-related industries. After the spring of 2002,
however, the pace of the deterioration moderated, reflecting the recovery in overseas economies.
Recently, Japan's economy has almost stabilized as a whole with an increasing upward impetus from
exports and production, and an improvement in corporate profits and business sentiment. Employment
conditions continue to improve, albeit marginally, with an increase in overtime hours worked and in
new job offers. In contrast, private demand, a key factor for a sustainable recovery of the economy,
has not displayed any clear movement toward recovery. Business fixed investment continues to
decrease, and private consumption remains weak as a whole.
As for the economic outlook, if overseas economies continue to recover, the stabilization of Japan's
economy will become more secure as the increase in exports and production will underpin domestic
private demand through the improvement in corporate profits. However, considering that forces
restraining the economy, such as excessive employment and debt, are still persistently at work,
momentum for a self-sustaining recovery will be subdued for some time. In addition, uncertainty
regarding external conditions which supported the recent economic recovery is rising somewhat amid
a fall in stock prices in the United States and worldwide as well as depreciation of the U.S. dollar.
Regarding prices in Japan, domestic wholesale prices have been generally leveling off, due partly to
the effects of the increase in import prices in the past and of the completion of inventory adjustment.
The pace of year-on-year decline in domestic wholesale prices has been slowing gradually. On the
other hand, consumer prices continue to decline at a moderate pace. With regard to the outlook, the
slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices
to some extent. However, as I mentioned earlier, momentum for a recovery in domestic private
demand is expected to be weak, and factors such as technological innovation, deregulation, and
streamlining of distribution channels will continue to restrain prices. Given the situation, prices as a
whole are expected to follow a moderate downtrend for the time being.
II. Financial Developments
Financial markets were unstable toward the end of March 2002, reflecting market participants'
nervousness due to growing concern about the stability of the financial system in the period
immediately before the removal of blanket deposit insurance. Regarding corporate financing, the
lending attitude of private banks became more cautious, and the financing conditions of firms with high
credit risks, especially small firms, gradually became more severe.
Financial markets have gradually regained stability on the whole since April 2002, as the economy
improved slightly. In the corporate bonds and CP markets, the issuing environment has been
improving recently. This suggests that investors' stance toward taking credit risk is starting to improve.
Financing conditions of firms with relatively high credit risks, however, remain severe. Hence,
developments in the behavior of financial institutions and corporate financing continue to require close
monitoring.
Japanese stock prices have been somewhat weak since mid-June 2002, reflecting the fall in U.S.
stock prices. The yen has become stronger against the U.S. dollar. If these developments go so far as
to cause financial markets to become significantly unstable, Japan's economy, which is on an
improving trend, will be negatively affected. Thus, developments in financial markets also require close
monitoring.
III. Recent Conduct of Monetary Policy
The Bank adopted a new framework for money market operations at the Monetary Policy Meeting in
March 2001. The main operating target was the "quantity" of liquidity, i.e., the amount of the
outstanding balance of current accounts at the Bank as the uncollateralized overnight call rate had
declined to low levels close to zero percent and there was hardly any room left for further easing using
orthodox monetary policy measures. Under the new framework, the Bank has been conducting drastic
monetary easing, unprecedented in the history of central banking at home and abroad.
The Bank has devised means of funds provision and broadened the range of eligible collateral with a
view to making the effects of monetary easing permeate into corporate financing.
As a result, interest rates have been at extremely low levels. For example, in addition to overnight call
rates, short-term interest rates with relatively longer maturity declined to close to zero percent. The
year-on-year growth rate of the monetary base increased considerably, by 20-30 percent.
The Bank's conduct of monetary policy has played an important role in preventing further deterioration
of the economy by securing stability in financial markets when Japan's economy was under significant
stress due to adjustment in IT-related industries worldwide, the terrorist attacks in the United States,
and increasing concern about the stability of the financial system.
However, it is also true that business fixed investment and household spending have not been fully
revitalized in a situation where Japan's economy is facing various structural problems. In order to
make the monetary easing fully effective and achieve a full-scale economic recovery, it is essential to
accomplish the following. Private demand must be generated by advancing structural reforms on the
economic and industrial fronts through tax reform and implementation of concrete measures to
revitalize the economy. At the same time, it is also vital to strengthen the financial system and ensure
its stability by resolving the nonperforming-loan problem.
Conclusion
Japan's economy is about to undergo its third cyclical recovery since 1990. In the past two recovery
phases, the economy lost its momentum due to the slowdown of overseas economies and concern
about the stability of the financial system. As a result, private demand could not expand autonomously
and sustainably on the whole. Bearing that experience in mind, the Bank strongly hopes that action to
tackle structural reforms will be pursued tenaciously in a variety of fields to establish a basis for the
sustainable growth of Japan's economy.
The Bank is determined to continue to do its utmost from the both of the following viewpoints as a
central bank. First, it will make efforts to stabilize financial markets and ensure permeation of the
effects of monetary easing through provision of ample liquidity so that Japan's economy will exit from
deflation. And second, the Bank will endeavor to prevent systemic risk from materializing as "the
lender of last resort."