masaaki shirakawa : japan ’ s economy and monetary policy keynote speech by mr masaaki shirakawa, governor of the bank of japan, at the 2008 international monetary conference, barcelona, ( via satellite ), 3 june 2008. * * * thank you, mr. chairman. i will give you my thought on japan ’ s economy and monetary policy in the present context. with regard to the global economic conjuncture, i don ’ t have much to add to the views expressed by my colleagues. in light of the persistent tensions in financial markets and slowing growth in the advanced economies, we need to keep a close watch on how the negative feedback loop between financial markets, asset prices and the real economy will play out going forward. uncertainties surrounding this adverse dynamics are still substantial. meanwhile, the global economy is facing greater inflationary pressures with commodity prices hitting all - time highs. since the surge in commodity prices has continued for the past several years, strong demand from emerging market economies probably plays a substantial role in this phenomenon. in these circumstances, both developed and emerging market economies are facing the difficult balancing act between maintaining sustainable economic growth on the one hand and anchoring longer - term inflationary expectations on the other. these global economic forces, both downside and upside, affect japan ’ s economy through a variety of channels, adding to uncertainty for policy - makers. in this situation, japan ’ s economy is slowing because of the deterioration of the terms - of - trade associated with higher import prices. corporate earnings are squeezed by soaring energy and raw material prices, and industrial production and capital investment are losing traction somewhat. business sentiment is increasingly on the cautious side with greater downside risks to the global economic outlook. as these headwinds are likely to stay for some while, japan ’ s economy seems to slow for the time being. with regard to the baseline scenario for the next one to two years, however, i am of the view that japan ’ s economy will grow near potential. to be more specific, japan ’ s growth rate will pick up again after some hiatus to reach one - and - half percent in 2008 and somewhat higher in 2009, both of which are close to japan ’ s potential growth rate. let me elaborate on this from three perspectives. first, japan ’ s exports have been and will continue to be robust. exports to the united states have weakened in tandem with the u. s. economic slowdown, but this is more than offset by strong

extremely difficult situation for the past several years, it appears that overall stability has finally been restored thanks to various measures. for example, in overseas markets, the difficulty that japanese banks faced in raising funds around the beginning of last year and the japan premium, which was the extra cost that they had to pay, have largely subsided against such background as the injection of public funds into major banks in march 1999. at international meetings like the g10 central bank governors meeting at the bis, which in fact i attended a few days ago, we have seldom heard any concern or criticism about financial system stability in japan. in addition, the ratings of japanese banks, mainly those that have announced merger and consolidation plans, have begun to be upgraded. and yet, it is true that there exist a number of agendas that we have to tackle to further strengthen financial stability, as evidenced by the recent collapse of sogo department store. today, i would like to talk about the need to strengthen the capital base, one of the most important agendas over the medium to long term. among many issues regarding the capital base, the first is the capital structure of japanese banks. the risk - based capital adequacy ratio of internationally active japanese banks was 11. 8 % at the end of march 2000, out of which tier 1 capital was 6. 6 %. in the case of us money center banks, the capital adequacy ratio was 13 %, and tier 1 capital 8 to 9 %. it should be noted that in the united states, there has been no injection of public funds and deferred tax assets corresponding only to income for the following year are included in tier 1 capital. if we calculate the tier 1 capital of internationally active japanese banks according to the us standard, it would decline from 6. 6 % to the 4 % level. indeed, there is clearly a big difference in the capital structure between major japanese banks and us money center banks. in other words, there exists a difference, significantly larger than what is observed, between japan and the united states in terms of the strength of banks ’ capital position. under such circumstances, japanese banks need to strengthen capital base by increasing its key element. furthermore, from the viewpoint of achieving multiple targets including not only the strengthening of capital base but also a reduction in capital cost and an increase in return on equity, banks should work toward the redemption of high - cost capital and an increase in internal reserves through higher profits. the second issue is how to