sakuya fujiwara : recent financial and economic developments in japan and the euro area keynote speech by mr sakuya fujiwara, deputy governor of the bank of japan, at the fourth paris europlace financial forum, held in paris on 27 november 2000. * * * introduction ladies and gentlemen, it is my great honor to be given this opportunity to speak again at this paris europlace financial forum. i also understand that this is a forum, where exchange of views among distinguished participants of different experiences is of special importance. therefore i reserve the right to ask for your opinions on such interesting topics as recent developments in capital markets and the impact of information technology in the euro area. now, with respect to my duty today, i have three topics in my mind. first, i will discuss japan ’ s economy and the challenges it faces. then, i will turn to recent developments in the euro area, a subject which is of particular interest to myself. here, i dare to introduce my observation on the economic structural reform recently underway in the euro area. and last, i will briefly touch on enhanced interrelations between the euro area and japan. 1. japan ’ s economy and the challenges it faces compared with a year ago, when i gave a speech at this forum last year, japan ’ s economy has shown notable improvement. the recent economic recovery is mainly driven by the corporate sector, where we witness the increases in production and corporate profits. against such background, business fixed investment has been increasing, especially in the it and telecommunications fields. although the pace of recovery remains sluggish in the household sector, positive developments are observed in employment and income, reflecting the recovery of business activity. in sum, japan ’ s economy is recovering gradually, with business fixed investment continuing to increase. at the same time, however, we cannot ignore the fact that japan has yet to solve structural problems in the economy. in this context, japanese firms and banks continue to suffer from balance sheet problems, the aftereffects of the bursting of the bubble in the 1990s. and, while the world economy, especially the united states, has registered high growth by exploiting the benefits of new technology supported by salient entrepreneurship as well as the vibrant capital market, japan has somewhat lagged behind in its ability to adjust itself to such new environment. with a nascent recovery now underway in japan, constant efforts are necessary to continue to tackle the remaining structural problems head on, which in turn should be the

i would like to give my view on interrelationships between the euro area and japan, focusing on capital flows. as i have mentioned, in the euro area, monetary union has triggered various kinds of structural change, bolstering the development of the overall economy. the impact is so large that it has affected not only the euro area itself, but also japan. an example of the effect is direct investment. direct investment from western europe to japan soared more than tenfold in a year, from about 100 billion yen in 1998 to over 1 trillion yen in 1999. investment from france was especially large, which reflects the capital collaboration that was seen in the automobile industry. direct investment from japan to the euro area is also on the rise. the increase in direct investment will promote the reallocation of management resources, technology transfer, and competition, resulting in boosting both economies. the increase in capital flows between the two economies is well evidenced in portfolio investment. in 1999, japan ’ s portfolio investment in the euro area exceeded that in the united states. japan ’ s foreign portfolio investment in france, germany, the netherlands, and luxembourg, the four euro area countries for which individual data are available, totaled almost 5. 6 trillion yen in 1999. on the other hand, japan ’ s portfolio investment in the united states was 1. 4 trillion yen. this is rather noteworthy, because, in international capital markets, the united states, with its huge current account deficit, absorbs a lot of funds provided by the euro area and japan. despite such a situation, capital flows between the euro area and japan are surging, and both economies are growing more interdependent in international capital markets. in the increasingly integrated global market, the euro area and japan are becoming more and more dependent. i hope today ’ s forum will contribute to bringing the two economies closer, and serve as an opportunity to enhance communication between the private sector of the euro area and that of japan. i know this forum will be a success.