kiyohiko g nishimura : recent economic and financial developments and the conduct of monetary policy speech by mr kiyohiko g nishimura, deputy governor of the bank of japan, at the foreign correspondents'club of japan, tokyo, 29 september 2008. * * * it is a great pleasure to be addressing this community of distinguished journalists at the foreign correspondents'club of japan. today, i first wish to share with you how i see the current state of the japanese economy and the outlook. and then i will touch on the implications of both for the future course of monetary policy. diverse engines of growth and canceling - out of small shocks during economic recovery since 2002 to assess current economic activities in japan, it is worthwhile to look back on the developments since 2002 as a starting point. 1 the japanese economy has recovered continuously since hitting the bottom in early 2002. although an average of around 2 percent real gdp growth during this period does not seem particularly high, it is above the economy's potential, and shows remarkable stability. thestability comes not from a uniform decline of demand fluctuations across sectors, but from a canceling - out of small fluctuations of demand in different sectors. in fact, one salient characteristic of this period is that the timing of peak production varied among industries. in past business cycles, we commonly observed concurrent increases and decreases in production in various industries. a typical example is the so - called it bubble and its collapse : production of not only it - related goods but also other goods increased and decreased in tandem. in contrast, since 2002, various industries have taken the lead in production and have been successively replaced. for example, when the production of it - related goods decreased, production in materials industries increased. i can point out two contributing factors, closely related to globalization. first, on the demand side, the engine of world growth has been diversified. high economic growth continued in countries such as china, india, russia, and some in the middle east, and japan's exports to these countries increased considerably. as a result, the variety of goods exported, previously confined mainly to it - related and durable consumer goods, broadened to include goods such as construction machinery and materials. second, on the supply side, linkages between various industries in japan became weaker as international diversification of production sites continued. when materials necessary to produce a particular good were imported rather than secured domestically, a decrease in domestic demand for this good did not have large direct

one value that strikes me as having been at least as important as any other has been the federal reserve ’ s willingness, during its finest hours, to stand up to political pressure and make tough but necessary decisions. the fight against inflation during paul and alan's times in office was critical for the nation ’ s longer - term prosperity, and it required perseverance in the face of heavy criticism. i keep in my office one of the 2 - by - 4s mailed to the fed during paul ’ s tenure, which communicates some distinctly unfavorable views of high interest rates and their effects. more recently, of course, the federal reserve took controversial but necessary measures to arrest what was arguably the worst financial crisis in american history, helping to avert what likely would have been a much more severe economic downturn than the great recession we did experience. we have been able to respond nimbly to economic emergencies and make difficult choices in part because of our institutional structure – including long terms for members of the board of governors and diverse regional representation in our policymaking committee – and because of the willingness of policymakers, past and present, to do whatever was needed in the longer - run interest of the economy. as an institution, the federal reserve must continue to be willing to make tough decisions, based on objective, empirical analysis and without regard to political pressure. bis central bankers ’ speeches but, finally, we must also recognize that the fed ’ s ability to make and implement such decisions ultimately depends on the public ’ s understanding and acceptance of our actions. for this reason, we must continue to emphasize two other essential values – transparency and accountability. we must do all that we can to explain our actions and to show how they serve the public interest. that ’ s why we must welcome communication, broadly defined. of course, we will continue to talk to economists and market participants, but that is not enough. ultimately, the legitimacy of our policies rests on the understanding and support of the broader american public, whose interests we are working to serve. the ability of this institution to support a healthy economy – an economy with high levels of employment, low inflation, and a stable financial system – will require our continued efforts to engage in twoway communication – explaining our actions and, importantly, listening to what our fellow citizens have to say. let me end by thanking the organizers of this event and, in particular, all of the past and present policymakers in attendance for helping us mark this