toshihiko fukui : review of japan ’ s economy statement by mr toshihiko fukui, governor of the bank of japan, concerning the bank ’ s seminannual report on currency and monetary control, before the committee on financial affairs, house of representatives, tokyo, 2 august 2005. * * * introduction 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 continues to recover, albeit with adjustments in it - related sectors. in more detail, although the momentum of growth in exports, particularly to china, has been weak recently after the significant increases through the middle of 2004, industrial production is on a gradual uptrend as inventory adjustments in the it - related sectors are progressing. business fixed investment has continued to increase, as corporate profits have remained high and business sentiment has shown improvement again. household income has been rising, albeit moderately, as the employment situation has been improving and wages have stopped declining. in this situation, private consumption has been steady. based on these developments, it can be said that the economy is emerging from its temporary pause. as for the outlook, growth in exports is expected to accelerate gradually as overseas economies continue to expand, and domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income. the economy is therefore expected to follow a sustainable growth path, albeit at a moderate pace. on the price front, as the output gap continues to narrow, domestic corporate goods prices have been increasing, mainly reflecting the effects of the rise in crude oil prices. they are likely to continue on an increasing trend, but the rate of growth is expected to slow for the time being. consumer prices ( excluding fresh food ) have basically been declining slightly on a year - on - year basis, partly due to the reduction in electricity and telephone charges against the background of such factors as deregulation, and they are projected to continue falling slightly for the time being. however, they are expected to start increasing on a year - on - year basis at some point in late 2005 or early 2006, as the effects of temporary factors, such as the decline in rice prices and the reduction in electricity and telephone charges, fall off. in the capital markets, stock prices have been firm on the whole and long - term interest rates have been stable. the environment for corporate finance is becoming more accommodative

, such changes in inflation expectations are contained by the central bank's commitment to aggressive tightening to control inflation. indeed, since the 1980s, many countries have developed monetary policy frameworks with a view to stabilizing inflation expectations. inflation targeting, of course, is a typical example. however, there are many issues that need to be better understood regarding inflation expectations. for example, market participants, firms, and households all have different expectations formation, given different perceptions of current inflation. in addition, these expectations are susceptible to the influence of their experience or psychological conditions, as well as to the central bank's communication. moreover, there is no guarantee that the way they are formed will remain stable over time. there is still much room for further research in this area, including in relation to central bank communication. new challenges next, i would like to mention two new challenges. the first is about the changing inflation and economic environment. from a long - term perspective, many countries, 2 / 4 bis - central bankers'speeches including japan, typically went through a period of great inflation and the subsequent great moderation, followed by the global financial crisis, and then faced a period of " low for long " before the pandemic. there is a view that the current ongoing global inflationary pressure will eventually subside and that a period of " low for long " will resume. on the other hand, there is also a view that the current period of high inflation will change people's views on prices, leading to a departure from " low for long. " we have seen higher levels of public and private debt as a result of the pandemic and the policy responses. in addition, people have once again been concerned about geopolitical risks since 2022, leading to a partial reversal of globalization. therefore, it may be difficult to deny the possibility that we are already in a new normal that is different from the period of " low for long. " the second challenge is about the changes in central banks themselves. in the period of " low for long, " many central banks faced the effective lower bound of policy rates, which is the traditional policy instrument, and have created various unconventional policy toolkits, including large - scale asset purchases and forward guidance. while a number of empirical studies support some effectiveness of these instruments in stimulating demand, it seems that the mechanisms at play are not fully understood even today. compared to conventional instruments, which have a long history, unconventional instruments have issues such