toshihiko fukui : an overall review of the bank of japan ’ 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, 24 july 2003. * introduction * * the bank of japan ( hereafter, the bank ) submitted its semiannual report on currency and monetary control for the second half of fiscal 2002 to the diet in june 2003. i am pleased to have this opportunity to present an overall review of the bank ’ s conduct of monetary policy. today, i would like to make some remarks on the bank ’ s view of recent economic and financial developments and on the thinking behind our recent conduct of monetary policy. i. developments in japan ’ s economy economic activity remains virtually flat. private consumption continues to be weak due to the severe employment and income situation. on the other hand, business fixed investment is on a gradual recovery trend, albeit showing some fluctuations, reflecting the improvement in corporate profits. net exports are virtually flat. looking at the economic outlook, it is expected that the uptrend in exports and production will gradually resume, and this in turn will initiate the momentum for an economic recovery. this reflected expectations that growth rates in overseas economies will accelerate in the second half of 2003 partly due to diminishing uncertainty over the situation in iraq and severe acute respiratory syndrome ( sars ). the june tankan ( short - term economic survey of enterprises in japan ) released by the bank at the beginning of july 2003 showed that corporate profits were projected to continue their uptrend and also confirmed that business fixed investment was on a recovery trend. however, the recovery in domestic demand is likely to remain modest for some time, since excessive labor input and debts continue to exert downward pressure. as for the environment for exports, there continues to be substantial uncertainty about the recovery of the u. s. economy, while on the domestic front, developments in the financial system and the financial and capital markets continue to require close monitoring. regarding prices, consumer prices are projected to continue falling at the current moderate pace for the time being due to the following factors. first, the weakness in demand, technological innovation, and the streamlining of distribution channels continue to exert downward pressure on prices. second, imports of low - priced consumer goods are still increasing, although only very gradually. developments in financial

funding problems have been observed at resona bank. subsequent developments seem to suggest that uncertainty about the outlook for the japanese economy has become somewhat less pronounced. regarding developments in overseas economies, which have a considerable effect on japan ’ s exports, the uncertainty about the u. s. economy has subsided to some degree, and the sars problem in east asian economies has been coming to an end. against this background, in japan ’ s capital markets, participants ’ pessimism with regard to the economy and prices has decreased slightly, and stock prices have risen considerably. bank stock prices in particular have rebounded significantly. in this situation, long - term interest rates rose after falling to their historic lows of 0. 4 - 0. 5 percent. as mentioned, some positive developments were observed, but there remained various structural problems in the japanese economy. the bank will continue its efforts to conduct monetary policy in a timely manner, monitoring carefully the strength of the recovery in overseas economies, the state of the financial system, and developments in financial and capital markets. the bank is working to strengthen the transmission mechanism to ensure that the effects of monetary easing permeate throughout the economy. as part of its efforts in this regard, the bank has been preparing to commence purchases of asset - backed securities ( abss ) from july 29, 2003. although it is unusual for a central bank to directly take on the credit risk of private debt obligations, the bank considers that, with the weakness of banks ’ financial intermediary function, it is important to encourage the development of the abs market. in formulating the specific details of abs purchases, the bank has paid due attention to contributing to the smooth financing of small and medium - sized firms. with regard to underlying assets, a broad range of assets will be deemed eligible, including receivables, loans, and lease claims. furthermore, the bank has decided to purchase securities with a bb rating or higher. this decision is based on the fact that there have been only a few investors purchasing securities with lower credit ratings, and this has been impeding development of the abs market. the ceiling on the bank ’ s purchases is to be set at 1 trillion yen for the time being. the abs market is expected to become one of the most important financial markets in japan in the future. the bank hopes that the bank ’ s purchase of securities will contribute to the autonomous development of the market. iii. purchases of stocks held by commercial banks the bank started to purchase stocks