analysis by a central bank form the basis for the policy decision. the economy is constantly undergoing change, even at this moment, in a situation where economic globalization and development in information and communications technology are in progress. this is why i respect central bank culture, which attaches importance to being humble and always learning. in addition, it is indispensable for a central bank to explain clearly the reasons for its policy decisions – that is to say, it should ensure transparency. after all, a central bank's independence is based on years of experience in making policy decisions based on its accurate analysis, and on transparency with regard to its policy decisions. the second issue relates to the importance of banking operations carried out by central banks. i have spoken today mainly about monetary policy, but a central bank's various banking operations also make an essential contribution to the development of the economy. to cope with the disruptions in global financial markets since last summer, central banks have taken various measures to provide financial markets with ample liquidity, or even acted as an intermediary. their banking functions have played a crucial role in ensuring that those monetary policy actions take effect smoothly. despite the unstable functioning of the markets since the summer, payment and settlement systems have not undergone major disruption. when financial markets experience turmoil, foreign exchange transactions are generally prone to settlement risk because of the time difference, and this can jeopardize the markets further. however, such problems have not occurred, and this is partly due to efforts by central banks over many years to enhance the payment and settlement system for foreign exchange transactions. these efforts of major economies'central banks and private banks brought a new system into effect in 2002 that realized settlement on a payment - versuspayment basis of transactions involving a pair of different currencies – for example, the yen and the u. s. dollar or the euro and the dollar. if this system had not been introduced until some years later, turmoil in the markets would have been more extensive. moreover, preparations for unexpected events are just as important as the banking operations, and central banks have been enhancing business continuity planning for emergencies including earthquakes, terrorist attacks, and system failures. in recent years, monetary policy has been attracting greater attention, and this is indeed welcome. however, it is only one aspect of central banks, and i hope that banking operations performed by central banks as " the bank for banks, " their other aspect, will gain more recognition. through the conduct of the two

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