haruhiko kuroda : the bank of japan ’ s semiannual report on currency and monetary control statement by mr haruhiko kuroda, governor of the bank of japan, before the committee on financial affairs, house of representatives, tokyo, 26 march 2013. * * * introduction the bank of japan submits to the diet its semiannual report on currency and monetary control in june and december. most recently, the bank submitted the report for the first half of fiscal 2012 on december 7, 2012. i am pleased to have this opportunity to talk about recent developments in japan ’ s economy and present an overall review of the bank ’ s conduct of monetary policy. i. economic and financial developments in japan first, i will explain economic and financial developments in japan. japan ’ s economy has remained relatively weak since summer 2012 mainly against the background of the deceleration in overseas economies, but some positive signs have recently been observed. the bank currently assesses that the economy has stopped weakening. three factors can be pointed out as underlying developments behind this change in the economic situation. first, overseas economies – the u. s. and chinese economies in particular – have begun to show signs of emerging from their deceleration phase. the u. s. economy has been on a moderate recovery trend with increasing firmness, while the balance - sheet repair weighing on the economy has gradually been mitigated. private consumption has been increasing moderately and housing investment has been showing clear signs of picking up, as the employment situation follows an improving trend. business fixed investment, which had been constrained, shows signs of picking up. the chinese economy, albeit with some fluctuations in exports, appears to be emerging from its deceleration phase supported by firm domestic demand, with firmness in private consumption and rises in infrastructure investment. meanwhile, economic activity in europe continues to recede slowly as business fixed investment and private consumption have been declining partly due to the effects of fiscal austerity and the tightening of financial conditions, although further deterioration in business and household sentiment is coming to a halt. second, business and household sentiment has been improving mainly on the back of the recent depreciation of the yen and the rise in stock prices. in global financial markets, investors ’ risk aversion remains abated, partly due to progress made in policy responses regarding the european debt problem since last summer and to the fact that the u. s. “ fiscal cliff ” at the beginning of this year was avoided.

and competition are the driving forces that propel standards of living progressively higher. the bold, if unintended, experiment in economic and social systems, which began after world war ii in europe, did not come to a full resting place with the fall of the berlin wall in 1989. despite the ebb and flow of governments of differing persuasions, the face of the world economy continues to edge evermore toward free market - oriented societies. it is true in eastern europe, latin america, and asia. even many of the socialistic economies of africa are embracing free market capitalism. the current crisis in east asia is likely to hasten that trend as hard - learned lessons of economic structure lead to significant reform. the economies in crisis did not use central planning of the pervasive soviet union style. they relied on markets in most respects, but they also used elements of central planning in the form of credit allocation, and those elements, in my view, turned out to be their achilles heel. the crises have their roots in the endeavor of some east asian countries to open up their economies to world competition, while still mandating a significant proportion of their output through government directives. it is, of course, possible for a time to clear a market through central planning, albeit at a lower standard of living, by restricting alternatives available to a population as [UNK] the soviet system demonstrated. it is also possible to clear the market through the free play of competitive forces with consumers ’ choices governing what is produced. a market will not readily clear and achieve stability, except by chance, however, if consumers are largely free to choose, but production is set significantly by government directives. for it is only by chance that governments, meaning planning agencies, can successfully gauge the rapidly changing tastes of consumers and evolving technologies of production. it is much too difficult a task. only sophisticated market mechanisms can do that. partial planning of the sort practiced by some east asian countries can look very successful for a time because they started from a low technological base and had sufficient flexibility to allow business units to borrow the more advanced technology of the fully market economies. but there are limits to this process as economies mature. many asian policymakers are learning that government - directed investments, backed by government inducements to banks to finance them, can lead to substantial gains in output for a number of years in economies with low real wages and low productivity ( as it did in the soviet union ). eventually and inevitably, however, such a regime leads to