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 representatives, tokyo, 11 january 2008. * * * introduction the bank of japan submitted its semiannual report on currency and monetary control for the first half of fiscal 2007 to the diet on december 11, 2007. 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 as a trend, although the pace of growth seems to be slowing mainly due to the drop in housing investment. housing investment has dropped substantially, affected by the revised building standard law coming into force. with higher materials prices, business sentiment has become somewhat cautious. exports, however, have continued to increase in a situation where overseas economies continue to expand with momentum being gained across a wide range of economies. business fixed investment has also continued to trend upward against the background of generally high corporate profits. inventories have been more or less in balance with shipments, and there has not been adjustment pressure on production capacity and labor. with regard to the household sector, although nominal wages per worker have been somewhat weak, employee income has been rising moderately with the increase in the number of employees. in this situation, private consumption has been firm. reflecting the rise in domestic and external demand, production has continued to increase. these developments seem to indicate that a virtuous circle of growth in production, income, and spending has basically remained in place. therefore, japan's economy is expected to continue expanding moderately, although for the time being the pace of growth is likely to slow in a situation where housing investment is likely to remain sluggish. global financial markets, meanwhile, have remained unsettled due to the u. s. subprime mortgage problem. the functioning of markets for securitized products has deteriorated significantly in the united states and europe, and stock markets have continued to be unstable worldwide. moreover, uncertainty regarding global economic developments, for example, downside risks to the u. s. economy, has been increasing. the bank considers it necessary to continue to monitor carefully developments in global financial markets and the global economy, as well as the effects from the rise in materials prices, such

in emerging market economies has been inflationary pressures, and in some cases, growth rates and asset prices that are too strong rather than too weak. rather than resorting to tighter macroeconomic policies, these countries may instead be tempted to fight back against currency appreciation. to deal with the ensuing pro - cyclical bias, they might opt for second - best measures designed to limit capital inflows and / or moderate their domestic impact ; the effectiveness of which remains unascertained. 10 see the classic contribution by g. oudiz, and j. sachs ( 1984 ), “ macroeconomic policy coordination among the industrial economies ”, brookings paper on economic activity 15 ( 1 ), pp. 1 – 76. for a survey of this literature, see the book by m. canzoneri and d. henderson ( 1991 ), “ monetary policy in interdependent economies ”, mit press, cambridge ma. w. mckibbin ( 1997 ). “ empirical evidence on international economic policy coordination ”, in m. fratianni, d. salvatore and j. von hagen ( eds. ), handbook of comparative economic policies, greenwood press. the seminal paper studying international monetary cooperation in this new paradigm is the now classic paper by m. obstfeld and k. rogoff ( 2002 ), “ global implications of self - oriented national monetary rules ”, quarterly journal of economics, pp. 503 – 535. this paper found that the welfare gains from monetary cooperation are very small. this term was used by blanchard, o., & gali, j. ( 2007 ) ( “ real wage rigidities and the new keynesian model ” ; journal of money, credit and banking, vol. 39, pp. 35 – 65 ) to refer to closed economy models where all gaps can be easily closed by policy - makers. more generally, it has been used to describe all cases, also in open economy models, where trade - offs are absent or negligible. see, for example, dedola, l., p. karadi & g. lombardo ( 2013 ), “ global implications of self - oriented unconventional policies ”, journal of monetary economics, forthcoming. see b. eichengreen ( op. cit. ). it has been argued however that capital flows to emerging market economies have been driven as much by “ pull ” factors at home as by “ push ” factors originating abroad, see m. fratz