toshihiko fukui : a 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, 31 march 2005. * * * introduction the bank of japan submitted its semiannual report on currency and monetary control for the first half of fiscal 2004 to the diet in december 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 japan ’ s economy is still at a pause due to such factors as the ongoing adjustment in the production and inventory of it - related goods. the underlying mechanism for economic recovery, however, continues to operate steadily and production, which was somewhat weak some time ago, has been more or less flat recently. the economy is therefore expected to emerge from this pause before long and to continue recovering and move to a sustainable growth path. in more detail, overseas economies, particularly those of the united states and china, are expected to continue to be on an expanding trend. adjustment in it - related goods is likely to be completed before long, partly because manufacturers started adjustments at an early stage while demand was increasing. in light of this, exports and production are expected to increase. corporate profits and business fixed investment are expected to remain on an increasing trend, as structural adjustment pressure stemming from firms ’ excess capacity and debt has been easing. in addition, household income has clearly stopped declining while the employment situation continues to be on an improving trend. private consumption, therefore, is expected to show signs of a gradual increase. attention should, however, continue to be paid to developments in it - related demand and crude oil prices, which have been at high levels recently, and their impact on the domestic as well as overseas economies. on the price front, domestic corporate goods prices had been rising since the beginning of 2004, but they have been somewhat weak recently. as for the outlook, they are likely to become relatively strong again, due to the rise in the prices of crude oil and other commodities at home and abroad. consumer prices ( excluding fresh food, on a nationwide basis ) continue to fall slightly on a year - on - year basis in a situation where they have been less responsive to the economic recovery, reflecting the increase in productivity and the restraint on labor costs by

not face the need to adjust production capacity and employment. as for prices, the bank is focusing on the upside risks to inflation. as i mentioned earlier, energy and materials prices have been rising for a long time and this rise should not be regarded as " temporary. " moreover, given that japan's economy has not faced such a high level of inflation in recent years, the bank should pay attention to the risk that possible changes in the inflation expectations of households and firms'price - setting behavior may generate second - round effects. as i have explained, the current situation requires the bank to carefully monitor both downside risks to economic growth and upside risks to inflation. furthermore, it should be mindful of the risk that if the downside risks to the economy turn out to decrease, prolonging the period of accommodative financial conditions may lead to swings in economic activity and prices, as the recent experience of the world economy suggests. the bank continues to carefully assess the future outlook for economic activity and prices, closely considering the likelihood of its projections as well as factors posing upside or downside risks, and will implement its policies in a flexible manner. moreover, since global financial markets are expected to remain unstable and there are various uncertainties in the outlook for economic activity and prices, it is essential for the bank to ensure the stability of the japanese financial markets. closing remarks thus far, i have spoken about the issues facing japan's economy and the bank's thinking regarding the conduct of monetary policy. it takes about one and a half to two years for the effects of monetary policy to permeate throughout the economy. it is therefore extremely important to make macroeconomic projections for the period covering this lag. you may be able to imagine the difficulty in making an accurate projection. however, speaking from my own experience as a policymaker, it is not easy even to grasp the current state of the economy. to succeed in doing so, a close analysis of both macroeconomic indicators and microeconomic information is essential. the indicators and information have both advantages and disadvantages. macroeconomic indicators are important, but do not show the most recent developments due to the lag between the relevant period and the time of release. on the other hand, microeconomic information that is gathered through interviews with firms has an advantage of a minimal lag. the latter also includes information that cannot be expressed numerically, such as business sentiment. however, it also has drawbacks : there often is a