toshihiko fukui : economic situation in japan and abroad summary of a speech by mr toshihiko fukui, governor of the bank of japan, at a meeting in osaka, 2 september 2004. * * * today i will discuss the economic situation at home and abroad, and the conduct of monetary policy. amid the continued expansion of the world economy, japan ’ s economy has been on a recovery path since the summer of last year. the recovery has been initially driven in large part by an increase in exports. in addition to the favorable external conditions, the foundation has been laid domestically for a self - sustaining recovery. we should also note that the current recovery has been achieved while prices have been on a declining trend. world economy and japan ’ s economy let me start with the world economy. the economies of numerous countries including japan have become closely interrelated as globalization has progressed. this is evidenced by the growing prevalence of the international division of production processes. for example, it - related investment has been undertaken all over the world, led by the united states. high - value - added components of itrelated goods are being produced in japan, while processing and assembly have been concentrated in other east asian countries. overseas economies, particularly the united states and china, continue to expand. the u. s. economy has been maintaining expansionary momentum with a steady increase in capital spending and a large jump in corporate profits, despite several weak economic indicators. the federal reserve board raised its target federal funds rate by 25 basis points in june and august, respectively. the east asian economies have been growing steadily, with china likely to continue its high growth. in japan, real gdp growth slowed to an annual rate of 1. 7 percent in the second quarter, following high growth in the two preceding quarters. nevertheless, it is our overall judgment that japan ’ s economy has been in a recovery process, leading to a return to a sustainable growth path in light of the background i have just described. a rise in exports has raised industrial production and corporate profits, which in turn generates an expansion in business fixed investment. in the labor market, the number of employees has been increasing. japan ’ s economy is thus expected to continue recovering, gathering stronger momentum. the positive effects of the increases in production and corporate profits on household income are expected to become visible, laying stronger foundations for a gradual recovery in private consumption. corporate sector it is accurate to say that japan ’ s current recovery is due to the better

a fragile state, continuous attention should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. with regard to prices, import prices continue to decline mainly reflecting the softening of international commodity prices. domestic wholesale prices are also declining faster from the effects of the decline in crude oil prices in addition to the continuous decreases in prices of electrical machinery and materials. consumer prices are weakening owing mainly to the decline in prices of imported products and their substitutes. corporate service prices continue to decrease. as for the conditions surrounding price developments, international commodity prices such as of crude oil and nonferrous metals remain weak. also, with the prolonged adjustments in economic activity, the balance between supply and demand in the domestic market will increasingly exert downward pressure on prices. furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation this report is based on data and information available at the time of the bank of japan monetary policy meeting held on november 15 and 16, 2001. the bank ’ s view of recent economic and financial developments, determined by the policy board at the monetary policy meeting held on november 15 and 16 as the basis for monetary policy decisions. and the streamlining of distribution channels will continue to restrain price developments. overall, prices are expected to follow a gradual declining trend for the time being. moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. in the financial market, the overnight call rate is moving around zero percent as the bank of japan provided ample liquidity to the money market by aiming at maintaining the current account balances held at the bank at above 6 trillion yen. interest rates on term instruments basically continue to be level. the japan premium remains negligible. yields on long - term government bonds dipped and are recently moving around 1. 35 percent. as for the yield spreads between private bonds ( bank debentures and corporate bonds ) and government bonds, while spreads between bonds with relatively high credit ratings and government bonds remain mostly unchanged, those between bonds with low credit ratings and government bonds continue to expand slightly. stock prices continued to be weak, but are recently rebounding. in the foreign exchange market, the yen is currently being traded in the range of 121 - 123 yen to the u. s. dollar. with regard to corporate finance