masaaki shirakawa : japan ’ s economy and monetary policy speech by mr masaaki shirakawa, governor of the bank of japan, at the kisaragi - kai meeting, tokyo, 25 july 2011. * * * introduction i am privileged to have this opportunity to speak before such a large audience today. four and a half months have passed since the great east japan earthquake, an unprecedented tragic event. immediately after the earthquake, production plunged mainly due to the destruction of capital equipment, supply - chain disruptions, and electric power shortages. after passing through the worst period, however, production activity has been recovering at a faster - than - expected pace with a gradual easing of various supply - side constraints. at the same time, there is also the harsh reality that many still bear hardships that cause them restless days. the conduct of monetary policy is by nature mainly based on a macroeconomic analysis. however, we recognize that the damage from the earthquake disaster varies by area and industry. i myself visited the disaster areas and now have a greater recognition that macroeconomic perspectives are not enough to fully describe the true state of our economy. even from a macroeconomic perspective, although downside risk has been receding with respect to the supply - side constraints that emerged immediately after the earthquake, japan ’ s economy is starting to confront another new problem of uncertainty regarding electric power supply in the long run. even before the earthquake, our economy had faced various pressing structural problems, including the rapid aging of the population. so, this brings us to the end of a somewhat lengthy introduction. today i will first describe the current state of japan ’ s economy and its outlook. after illustrating the challenges confronting our economy, i will explain the bank of japan ’ s conduct of monetary policy. in my remarks, i would like to pay due attention to the time horizon by clearly delineating short - term and medium - to long - term periods. i. developments in overseas economies i will begin with developments in overseas economies, which form the basis for analyzing those in japan ’ s economy. the impact of the recent earthquake has been enormous, and recent economic debate tends to focus on the effects of the disaster. needless to say, the global economy and financial markets keep changing while we deal with the aftermath of the disaster. after all, when the supply - side constraints are resolved, developments in overseas economies will be the most significant driver of japan ’ s economic activity in the short run. the u.

for this reason, the relative value of the currencies greatly affects the competitiveness of each country ’ s exports. on the other hand, looking at the trade relationship between japan and china, the two countries play much more complementary roles in the international supply chain, meaning that exchange rate effects differ. these issues are also highlighted in the reports from the bank ’ s branches across japan and the bank, taking them into account, in detail examines foreign exchange rate developments and their effects with great interest. it should also be noted that, the appreciation of the yen, from a longer - term perspective, has the positive effect of bringing about an improvement of the terms of trade through a decline in import prices, that is, it leads to an increase in japan ’ s overall real income. the bank also pays attention to how developments in the foreign exchange market affect japan ’ s economy from such a long - term perspective and how firms respond. iii. developments in japan ’ s economy let me now turn to developments in economic conditions in japan. what i mean by economic conditions here are short - term developments in economic activity measured by indicators such as those related to gdp, corporate profits, and employment. on the other hand, i assume that business leaders such as yourselves probably associate with the term economic conditions developments that reflect more structural or longer - term factors in your region or industry. keeping this subtle difference in mind, let me first talk about economic conditions in terms of short - term developments in economic activity. japan ’ s economy has been improving on the back of the increase in exports and production brought about by the recovery in overseas economies and due to the effects of policy measures targeting durable consumer goods, but it seems that the recovery has been pausing since early autumn. exports have recently been more or less flat mainly due to inventory adjustments in it - related goods and the slowdown in overseas economies. as for private consumption, demand for cars has suffered a reverse following the last - minute increase in demand for energy - efficient cars ahead of the expiration of subsidies. in these circumstances, the increase in production has come to a pause. as for the outlook, it is projected that the pace of economic improvement will continue to be slow for the time being, mainly due to the slowdown in overseas economies and the waning effects of various policy measures, as well as the effects of the earlier appreciation of the yen. however, once we enter fiscal 2011, japan ’ s economy is expected to return to a moderate recovery path,