toshihiko fukui : bank of japan ’ s conduct of monetary policy - an overall review statement 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 representatives, tokyo, 9 june 2004. * * * introduction the bank of japan submitted its semiannual report on currency and monetary control for the second half of fiscal 2003 to the diet on june 4, 2004. 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 when i spoke to this committee in march 2004, i presented the assessment that japan ’ s economy was recovering gradually. since then, industrial production and corporate profits have continued to increase due to a substantial rise in exports, and against this background business fixed investment has continued to recover. the decline in household income is gradually coming to a halt, and private consumption is showing some positive movements. with a virtuous cycle in operation, the economy continues to recover gradually and domestic demand is becoming firmer. as for the outlook, japan ’ s economy is expected to continue its recovery as momentum increases gradually. overseas economies are likely to continue growing relatively fast, despite some negative factors such as geopolitical risks and the rise in crude oil prices. the u. s. economy continues to show balanced growth. private consumption and business fixed investment remain firm, and in the employment situation a recovery which had been delayed is becoming clearer. east asian economies, particularly china, are likely to continue high growth. reflecting such developments in overseas economies, japan ’ s exports and production are expected to continue on an increasing trend. furthermore, corporate profits are likely to remain on an uptrend as exports and production increase, given the progress in dealing with problems, such as excessive labor and debt, which were part of the background to the delay in japan ’ s economic recovery. business fixed investment is therefore likely to continue on an uptrend, particularly in the manufacturing sector. the increase in production and corporate profits is expected to exert positive effects gradually on the household sector through changes in employment and income as well as in asset prices. against this background, private consumption is expected to recover at a moderate pace. on the price front, domestic corporate goods prices have been rising recently, due to the strengthening of commodity prices at home and abroad and to the improvement in

next week. the distribution to market participants will be principally through the fxcs but also through other industry associations as well. again, we are endeavouring to ensure all perspectives are appropriately reflected in the code. the aim is for the full code to be published in may and we are on track to achieve that. adherence to the code alongside drafting the code, we have also been devoting considerable time and effort to thinking about how to ensure widespread adoption of the code by market participants. clearly, that has been an issue with the various existing codes that have been in place in a number of markets over many years. it is evident that they were ignored on occasion, wilfully or otherwise. one of our central aims in drafting the code is for it to be principles - based rather than rulesbased. there are a number of reasons why this is so, but for me, an important reason is that the more prescriptive the code is, the easier it is to get around. rules are easier to arbitrage than principles. if it's not expressly prohibited or explicitly discouraged, then it must be okay seems to be the historical experience. moreover, the more prescriptive and the more precise the code is, the less people will think about what they are doing. if it's principles - based and less prescriptive then, as i just said, market participants will have to think about whether their actions are consistent with the principles of the code. so, we are working with the industry to produce a principles - based code of conduct rather than a set of prescriptive regulatory standards. it will not impose legal or regulatory obligations on market participants, nor will it supplant existing regulatory standards or expectations. but we do expect the principles in the code to be understood and adopted across the entire fx market. our approach to adherence has a number of dimensions. we laid out our overall approach to adherence to the code in new york in may last year. 3 one dimension is market - based adherence mechanisms. an important element of discipline should come from the market itself and we are working closely with market participants on this. the adherence to a voluntary code will only come about if firms judge it to be in their interest and take the practical steps to ensure the code is embedded in their practices. firms will need to take practical steps such as training their staff and putting in appropriate policies and procedures. we have provided a draft statement of commitment for firms to 2 / 3 bis central bankers