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 representatives, tokyo, 23 march 2004. * * * introduction the bank of japan submitted its semiannual report on currency and monetary control for the first half of fiscal 2003 to the diet in december 2003. 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 recovering gradually. exports have recently increased substantially, and business fixed investment continues its path of recovery. reflecting these developments, industrial production has also been increasing. the decline in household income is gradually coming to a halt, and private consumption is currently showing some positive movements. as for the outlook, japan ’ s economy is anticipated to continue recovering moderately, reflecting the projection that overseas economies will continue growing relatively fast and final demand, particularly exports and business fixed investment, will continue recovering. the features of japan ’ s current gradual recovery are as follows. first, reflecting the steady recovery of the world economy led by it - related demand worldwide and the high growth of the chinese economy, japan ’ s exports are increasing substantially. a virtuous cycle is starting to operate in the economy initiated by the increase in exports, leading to an increase in production and corporate profits, and then to a recovery of business fixed investment. second, firms ’ efforts to tackle their structural problems such as excess debt and labor are finally starting to show results. large manufacturers ’ profitability has improved considerably as a result of streamlining of business operations and restructuring of industries, although adjustment pressure remains at nonmanufacturers and small firms. as for the japanese financial system, there are some encouraging signs that, especially at major banks, various efforts to restore banks ’ financial soundness are paying off, although the system is still in a difficult situation as a whole. given this economic situation, domestic corporate goods prices are recently rising due mainly to the strengthening of overseas and domestic commodity prices, and are expected to continue increasing for some time. the year - on - year rate of change in consumer prices ( excluding fresh food ) has been close to zero percent, while temporary factors such as the rise in rice prices have exerted upward pressure, and is likely to

observe right now is divergence or fragmentation, not convergence. the economies of the euro area countries had not converged sufficiently when the euro was introduced, and the gaps among them widened further after the bubble burst in the middle of 2000s. divergence is evident in unit labor cost growth and current account balances. yield differentials in the european bond markets have also widened. such market fragmentation has forced investors to reconsider country risks, which had been considered eliminated with convergence to a single financial market. to accomplish a greater degree of convergence, while taking into consideration strong national identities and the slow process of population movements across borders, three options are often mentioned, ones that are not mutually exclusive. the first is to carry out so - called internal devaluation in the periphery. the second is to boost productivity and create value - added industries in the periphery. and the third is to implement fiscal transfer from the core to the periphery on the grounds of mutual benefits. here i believe that the keys to success are the european people ’ s belief in the euro system and their “ solidarity ” or the common cause of “ european citizenship ”. although achieving any of these options will take a long time and painstaking effort, it is hoped that the euro area nations will continue to do their best on these fronts. v. a new hope : strengthening market infrastructure finally, i would like to touch briefly on the new hope seen in the strengthening of market infrastructure both in europe and japan. for many market participants, strengthening market infrastructure is important for sustained investment in europe and elsewhere. in this regard, the eurosystem has been pushing forward with target2 - securities ( t2s ), a single pan - european it platform for securities settlement. at the same time, the bank of japan is working to revamp the bank of japan financial network system ( boj - net ) to enhance the system ’ s flexibility and accessibility. it is hoped that both of these initiatives will succeed in making global financial markets more resilient and efficient. thank you very much for your kind attention. bis central bankers ’ speeches