toshihiko fukui : overall review of the bank of japana€™s conduct of monetary policy 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 councillors, tokyo, 31 october 2006. * * * introduction the bank of japan submitted its semiannual report on currency and monetary control for the second half of fiscal 2005 to the diet on june 9, 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 favorable business sentiment. the positive influence of the strength in the corporate sector has been feeding through into the household sector. while firms have been increasingly feeling a shortage of labor, the number of employees has been increasing steadily and wages have also been rising gradually. in this situation, private consumption has been on an increasing trend. with the rise in demand both at home and abroad, production has been increasing, and inventories 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. there are various risks concerning future developments in japan's economy. for example, although international commodity prices, primarily crude oil prices, have declined since posting record highs this summer, they still remain at high levels. in this situation, whether the world economy can maintain sustainable growth while containing inflationary risks continues to warrant attention. on the price front, domestic corporate goods prices have been increasing recently. however, the pace of increase is expected to slow in the immediate future, due to the recent drop in international commodity prices. the year - on - year rate of change in the consumer price index ( cpi ; excluding fresh food ) has been on a positive trend, although retroactive revisions following the rebasing of the index caused the figure to be revised downward. the output gap is positive and is likely to widen at a moderate pace going forward. under these circumstances, the year - on - year rate of change in the cpi is projected to continue to follow a positive trend. as for financial conditions, the environment for corporate

regularly. in the us the dfa has also introduced limits on investment in hedge funds for financial institutions as well other aspects associated with the so - called volcker rule. in the eu, a volcker - rule - type of regulation is not envisaged as experience with the universal bank model, which is predominant in the eu, is generally seen as a success. ii. implications of the regulatory reform for the economy given the comprehensive nature of the regulatory reform, impacting a wide range of institutions, markets and business activities, it is understandable that the reaction of the industry was critical towards the policy measures. while generally supporting the underlying objectives of the regulatory reform by recognizing the responsibilities of the financial services industry in the crisis and acknowledging the serious weaknesses in business practices across a range of financial institutions ( iif, 2008 ), resistance remains substantial with regard to certain elements of the reform package. in particular, criticism was raised against the new capital requirements ( increased minimum capital ratios, introduction of capital conservation and counter - cyclical buffers as well as a capital surcharge for systemically important financial institutions – sifis ), arguing that this will increase costs for banks, reduce profitability, lead to credit supply restrictions, shrink the banking sector and, ultimately, hurt the economy ( iif, 2010 ). theory and historic experience however demonstrate that those claims are partly based on misconceptions that are important to dispel. a series of recent studies ( admati et al., 2011 ; miles et al., 2011 ; angelini et al, bis, 2010 ; kashyap et al., 2010 ) explain clearly the theory behind the fact that changes in capital ratios had historically no such effects or, at least, not in a magnitude claimed by the industry. as admati et al. ( 2011 ) conclude, “ … requiring that banking institutions are funded with significantly more equity entails large social benefits and minimal, if any, social costs ”. furthermore, there does not appear to be a clear empirical relationship between the size of the financial sector and sustainable growth, thus it is not at all evident that a more moderate expansion of the financial system will have adverse impact on the economy as a whole. let me elaborate on these issues in more detail. 1. historically based arguments the interdependencies between finance and economic growth are multifaceted. they should – and will – remain high in the research agenda for the economics profession for a long