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Home > Announcements > Speeches and Statements > Speeches 1996 > Speech given by Yasuo Matsushita, Governor of the Bank of Japan, to the Keizai (Economic) Club in Tokyo on April 3, 1996 (Recent Monetary and Economic Conditions and Issues Facing the Japanese Financial System)

Recent Monetary and Economic Conditions and Issues Facing the Japanese Financial System

This article is excerpted and translated from a speech given by Yasuo Matsushita, Governor of the Bank of Japan, to the Keizai (Economic) Club in Tokyo on April 3, 1996.

Introduction

Thank you for the kind invitation to the Keizai Club. It is a great honorto have this opportunity to speak to such distinguished guests from variousfields.

Since becoming Governor of the Bank of Japan in December 1994, I have madeit my rule to focus on a specific theme when speaking on this kind of occasion.Today, however, I will take up the various questions and concerns oftenraised by people in economic circles and by the public, and present mythoughts on these issues.

As you know, the Japanese economy today is faced with two tasks: to ensureeconomic recovery and to restore the credibility of the financial system.The nation is presently in a very delicate and therefore crucial phaseon both fronts, with still many uncertainties, but slightly brighter prospectsopening up.

Given this situation, the questions and concerns about Japan that the Bankencounters are quite varied. In my speech today, I will group these issuesinto three broad categories: (1) those related to the current economiccondition of Japan and monetary policy management; (2) those concerningimmediate problems facing the financial system; and (3) those related tofuture financial institution supervision.

I will be covering a broad canvas today. However, I would like you to understand,through my talk, in what sense the Bank of Japan attaches importance tothe market, and how the Bank intends to utilize the intrinsic functionsof the market in this age of a worldwide transition to market economies.These will, in fact, be the common thread that will run through my entiretalk today.

Let me start with the recent economic and financial conditions and monetarypolicy management.

Recent Economic and Financial Conditions and Monetary Policy Management

Current Economic Conditions and Prospects

I believe that a moderate economic recovery is beginning in Japan. In termsof demand, public and housing investments continue to grow significantly,and personal consumption and business fixed investment are on a moderaterecovery trend. Reflecting such developments in demand, production is alsotrending upward in general, although with fluctuations. Inventory adjustmentalso seems to be progressing on the whole, while excess inventory remainsin some segments of the materials industry.

However, I am often asked, both in and outside Japan, whether continuedrecovery is assured, and how much possibility there is of the recoveryrunning out of steam, especially since the Japanese economy stalled in1995 after barely starting a long-awaited recovery.

In fact, recovery this time has, up until now, been dependent mainly onpublic investment and interest rate-sensitive housing investment; namely,it has been supported by the effects of monetary and fiscal policies. Thus,the important question now is whether the current momentum of recoverywill gather further strength and stimulate private demand such as businessfixed investment and personal consumption. In light of the following factors,we at the Bank believe that compared to 1995, there is a far smaller riskthat the recovery will be disrupted.

First, corporate profits are gradually increasing and, in addition, firms'profitability has been strengthened due to restructuring efforts.

The key to a full-scale, self-sustained recovery is more vigorous businessactivity in terms of production, employment, and investment, and corporateprofits provide the foundation for such activity.

The current profits-to-sales ratio of large manufacturers is slowly recoveringafter declining to the 2 percent level in fiscal 1993, the lowest levelsince the first oil crisis in 1973-75. In the second half of fiscal 1995,the ratio appears to have risen to almost 4 percent. In past economic recoveries,this ratio reached 4 percent approximately one year after the recoverybegan, when the forces of recovery became fairly robust. This time, ithas taken almost three years since hitting bottom to reach that level.This in itself is symbolic of the depth of the recession triggered by thebursting of the bubble as well as of the size of the structural adjustmentpressures during those three years.

Low corporate profits inevitably make business activities vulnerable toexternal shocks, and thus, firms tend to become cautious about investment.It is true that the economic recovery in 1995 was affected by excessiveyen appreciation. But the economy stalled essentially because the appreciationoccurred when the recovery was premature in terms of the level of corporateprofits.

Recent profit trends of the non-manufacturing sector and small and medium-sizedmanufacturers have also been showing improvement. This may be taken asan encouraging sign of the sustainability of the current recovery.

Second, there now is much less risk of a deflationary spiral--a viciouscircle in which price declines put downward pressures on income and inturn on economic activity, thus leading to further price declines--whichhas been a concern for the past two years.

Looking at price indices, the annual rate of change in the consumer priceindex fell below zero in mid-1995, but has been positive since autumn 1995,although only slightly. The rate in terms of the wholesale price indexis still negative, but it has stopped declining further. Above all, therecovery in corporate profits as mentioned earlier and an improvement inwage conditions, as seen in the results of the 1996 spring labor offensive,are clear evidence that a deflationary spiral has been prevented.

As significant price discrepancies still exist between Japan and overseas,it is likely that downward pressures on prices will persist. However, pricedeclines resulting from improved productivity brought about by increasedcompetition and new technologies may benefit the public and may lead torenewed economic growth. The recent recovery in consumer demand, centeringon personal computers, and the launch of new types of distribution businessesare cases in point.

Third, the excessive yen appreciation has been corrected. Although theexchange rate may still fluctuate from time to time due to speculation,weakening of inflationary pressures in the United States and a decreasein Japan's current account surplus have reduced the upward pressure onthe yen's exchange rate.

Causes of Concern and Monetary Policy Management

It thus seems that compared to last year, a greater number of the preconditionsnecessary for leading the Japanese economy onto a sustainable recoverypath are in place.

Having said that, there remains some cause for concern regarding economicprospects. What should be borne in mind include the developments of theworld economy, which has been slowing somewhat, and consequences of thison the Japanese economy, the meager growth of monetary aggregates, andland prices which do not yet seem to have hit bottom. Most important ofall, however, is the pace and scope of recovery of business fixed investment.

The results of the Bank of Japan's Tankan--Short-Term Economic Survey ofEnterprises in Japan in February and of other surveys show that while largefirms plan to increase their fixed investment somewhat in fiscal 1996 forthe second consecutive year, small and medium-sized companies are planninga further cutback from the reduced fixed investment of 1995. The prospectfor fiscal 1996 business fixed investment may later become brighter, consideringthat the figures in the above surveys were likely understated since manyfirms had not finalized their investment plans by the survey deadlines.Furthermore, if corporate profits continue to improve, then this will encouragefirms to add to their business fixed investment. Given these and otheruncertainties, I feel it is still too early to draw any conclusion as tothe strength and scope of the recovery of business fixed investment.

As companies will soon be finalizing their business plans for the new fiscalyear, the present period is crucial in determining whether the economycan attain a self-sustained recovery led by private demand. Therefore,in managing monetary policy, we at the Bank believe that we should watchvarious economic developments carefully, especially the investment behaviorof the private sector, with a view to laying a solid foundation for economicrecovery.

The Bank of Japan's Interpretation of Market Interest Rate Movements

Looking at recent developments in the financial markets, long-term interestrates have risen gradually since late 1995, and short-term rates underwenta relatively large swing from February of this year to early March. I wouldlike to explain the Bank's interpretation of these market rate movementsand respond to the several questions I have received.

First, let me briefly review the market rate developments in recent months.The long-term interest rate on benchmark Japanese government bonds stayedat around 2.7 percent for some time after the monetary easing measure inSeptember 1995, but the rate began to rise slowly at the end of the year,and more recently has been at around 3.1 percent. In the case of short-termmarket rates, upward pressures began to build in mid-February, pushingthe three-month Euro-yen rate, for example, up by 0.3 percentage point.However, with the results of the February Tankan survey published in earlyMarch, which pointed to a more gradual recovery than had been expectedby market participants, the short-term rates once again declined to thelevel seen before the rise in mid-February.

When interest rate changes as large as these occur, people tend to viewsuch movements as disruptive to the market and anticipate market instability.

On this score, my view is totally different: I think that the market isskillfully seeking a level consistent with economic developments, basedon the information it has absorbed.

My interpretation of the market rate developments of the past several monthsis that the slow rise of long-term rates since late 1995 reflects the steadilyimproving economic situation. And the fairly large shifts in the short-termrates in February indicate that the market, after fully digesting the implicationsof official statements and of newly released economic indicators, arrivedat the conclusion that although the economy is recovering, the pace isstill moderate and will likely remain so for some time.

I have been asked in connection with these market rate developments whethera rise in market rates anticipating a firm economic recovery will adverselyaffect economic developments in the immediate future.

It is indeed true that, when expectations of economic recovery grow inthe market, this alone often triggers a rise in market interest rates.However, higher expectations of recovery also mean an expectation of improvedprofitability, or a rise in the expected rate of return on projects. Whenconsidering entry into new business areas or whether to make new fixedinvestment, entrepreneurs essentially base their decisions on whether theexpected rate of return on projects is sufficiently high compared to theprevailing market interest rates. In other words, it is only natural thathigher expectations of economic recovery should accompany a rise in interestrates. Such a rise should not immediately constrain business activity tothe extent that it is consistent with the improvement in the expected rateof return, allowing a rise in the market rates and an economic recoveryto proceed concurrently. This is often observed in normal recovery phases.

I also hear concern these days that a rise in interest rates in Japan mightlead to higher rates internationally, with a negative effect on the worldeconomy. It is true that with growing international linkage between financialmarkets, a rise in interest rates in one country, especially in real interestrates, may extend to other countries. However, if the higher rates in Japanreflect Japan's economic expansion, this should increase global demandby boosting the nation's imports. A rise in interest rates in Japan dueto economic recovery, therefore, may push up interest rates internationally,but it is too simplistic to think that such a rise would immediately dampenthe world economy. To illustrate this point more clearly, consider twocountries with close economic relationships, and suppose economic recoverytakes place in one country. If the interest rate linkage were the dominantchannel through which the two countries influenced each other, this wouldmean that one country's recovery would necessarily have a negative impacton the other's economic activity. But this is intuitively not so and isnot borne out by experience.

What is important is whether interest rates are determined in line withthe developments of the real economy and with the expectations of peoplebased on those developments. There certainly are times when market ratesovershoot for various reasons. However, as demonstrated by the recent interestrate movements in February and March, market rates may swing up and down,but sooner or later will settle down to a reasonable level. Based on suchunderstanding, we at the Bank carefully examine the outlook for corporateprofits and growth expectations to judge whether the interest rate levelis consistent with the expectations of people at that time.

As I mentioned earlier, the Bank of Japan's stance in managing monetarypolicy is to consolidate the foundation for economic recovery. We at theBank will continue to monitor market trends carefully on the basis of thispolicy stance to see what kind of response we receive from the market rates.

The Japanese Financial System

Immediate Issues

Let me now turn to issues related to the Japanese financial system.

With regard to the jusen (housing loan company) issue, which is at presentof utmost importance, the Diet has resumed deliberations on the budgetproposal for fiscal 1996, which includes an outlay of government fundsfor the resolution of this issue, and on jusen-related bills.

The going has been difficult in Diet deliberations, above all because thepublic's doubts on utilizing government funds for the resolution of thejusen problem have not been dispelled. There have been many twists andturns to the jusen issue, and the interests of the parties concerned arealso extremely complicated. It therefore seems inevitable that time willbe needed to gain a sufficient understanding from the public of the solutionto this problem.

However, the current resolution proposal was devised following thoroughdiscussions among the parties concerned. Furthermore, as I have statedon other occasions, use of government funds is essential if we are to solvethe nonperforming-asset problem promptly and restore the strength of theJapanese financial system, while protecting the valuable deposits of thepublic.

In addition, bills to organize a comprehensive framework for resolvingnot only the jusen issue but the nonperforming-asset problem as a wholeare to be submitted to the Diet. These bills include important legislativemeasures needed (1) to carry out a revision of the Deposit Insurance System;(2) to expedite the disposal of failing financial institutions; and (3)to take prompt corrective action in relation to troubled institutions.

Therefore, although it may take time, I strongly hope that serious deliberationwill continue in the Diet, and that the fiscal 1996 budget and the jusen-relatedbills will be passed smoothly with the public's support for the measures for resolvingnot only the jusen issue but also the nonperforming-asset problem as awhole.

However, resolution of this issue will still mean there is much to be doneto solve the nonperforming-asset problem and to restore the domestic andinternational credibility of the Japanese financial system. In this regard,it is most important to actually put into practice as soon as possiblethe comprehensive resolution framework introduced by the new laws to bringabout the resolution of the problems of failing financial institutions.

At the same time, it is essential that individual financial institutionsaccelerate their write-offs of nonperforming loans. In this respect, significantprogress can be expected in view of the policies adopted by the major banksin closing their books for the half-year term which ended in March 1996.As the solution to the jusen issue is yet to be determined, it will besomewhat difficult to settle the accounts at the end of this term. Nevertheless,the major banks seem resolved to make lump-sum write-offs of nonperformingloans including those other than jusen loans. Quite a few banks projectsignificant losses for the term due to these write-offs. This stance offinancial institutions should be held in high regard, and it is hoped thatcreditors and investors both in Japan and overseas will not be confoundedby the resultant financial reports.

In addition to solving the nonperforming-asset problem, financial institutionsmust also make positive efforts to perform their financial functions ina way that will adequately support Japan's economic recovery and furtherdevelopment. This will require them to set forth their management strategies,including decisive restructuring, such as scaling down of nonprofitableoperations, cost reductions, and a shifting of emphasis to areas with comparativeadvantage. This setting out of management strategies is also importantfor procuring external funds to improve their capital adequacy. In thisconnection, let me briefly discuss the issue of capital increase, whichis one of the means available to financial institutions to improve theircapital adequacy.

Issues Involved in Capital Increase

Since last year, I have stated from time to time that it is essential toutilize the functions of the capital markets in restoring the capital adequacyof financial institutions which has deteriorated due to nonperforming assets.

One recent advance in this respect is that the guidelines which, in considerationof the sluggish stock market, had placed constraints on capital increasethrough equity financing at market price are to be abolished. This de factoliberalization of capital increase through market-price equity financingwill mean expanding management opportunities for financial institutions,which urgently need to rebuild capital adequacy, and for ordinary businessfirms as well. I very much appreciate the efforts of those who have contributedto this process.

What I often hear regarding the Bank of Japan's argument for the utilizationof the capital market is the concern that liberalized market-price equityfinancing might trigger a rush of capital increases, loosen equity marketconditions, and thereby amplify downward pressures on stock prices. Thiscould unfavorably affect both economic recovery and the solution of thenonperforming-asset problem.

However, I believe that such a situation would occur only if the stockmarket were not functioning properly.

Rises and falls in stock prices essentially hinge on the outlook for afirm's business performance. The reaction of stock prices to equity financingdepends on how the funds raised will be used, or whether the profit outlookafter equity financing is satisfying to investors. In other words, stockprices are not affected by the equity financing itself, but by the firm'smanagement plan. In this respect, the critical factors are how an institutiondevises and discloses its management strategy, including restructuringmeasures. If the management plan announced ahead of the capital increaseis satisfactory to the investors, stock prices will not decline; if itis unsatisfactory, stock prices will quickly respond and force a reviewof the equity financing program itself. In that case, the restructuringplan or the disclosure method may have to be reviewed, and it might alsobe necessary to consider financing through other means, for example, throughsubordinated debt.

I recognize that, in reality, stock markets do not always operate in sucha manner. However, restricting the behavior of stock issuers and investorswill not provide fundamental solutions. If the problem lies in the functioningof the market, then measures should be taken which would improve it, suchas promoting further disclosure and developing the market infrastructure.

Discussions by market participants in this regard are, I hear, in factproceeding very much in the direction I have just described. With regardto financial institutions, I hope that they will present clear-cut managementplans that incorporate drastic restructuring in order to reestablish theircredibility with both domestic and overseas investors and depositors.

Financial Institution Supervision and the Role of the Bank of Japan

The Significance of Financial System Oversight

I mentioned that heated discussions have occurred among various partiesregarding the ways and means of restructuring and strengthening the Japanesefinancial system while addressing the immediate problem of nonperformingassets. Other issues which have attracted much attention are financialinstitution supervision and financial administration, which I would liketo take up in the remaining time.

The administrative supervision of financial institutions in Japan is undertakenby the Ministry of Finance, the Ministry of Agriculture, Forestry and Fisheries,and other relevant ministries and agencies, as well as by local governments.The Bank of Japan also conducts regular on-site examinations and dailymonitoring of financial institutions in order to stay informed on theirmarket behavior and on their financial and management conditions.

I had an occasion recently to discuss the Bank's basic thoughts on thisissue. In brief, I said that the functions of examination and monitoringare indispensable in allowing the Bank of Japan to fulfill its missionsof maintaining the stability of the currency and ensuring the stabilityof the financial system, and that these functions are performed in closecoordination with the policy and operational management of the Bank.

Today, I would like to go back to the basics and take a somewhat broaderapproach, sharing with you my thoughts on what is demanded of financialinstitution supervision and what the role of the Bank of Japan is in thisregard.

The first thing I would like to point out is that the basic philosophyunderlying the design of the institutional framework and the conduct ofeconomic policy management in the years to come should be to fully utilize,in all aspects of the Japanese economy, the inherent strength of the marketeconomy--the forces of innovation induced by competition. Structural policiessuch as deregulation, which is currently being promoted, are also basedon the same philosophy.

This philosophy also applies to the financial industry. As typically shownby the development of financial services in Europe and the United States,the innovative strength generated by competition is indispensable to encouraginga further development of the financial industry itself, and also to increasingthe efficiency of the financial functions which support the country's economicactivities.

While that is the case, we must note that the financial system--the networklinking financial institutions--has a unique feature not seen in nonfinancialindustries. That is the existence of systemic risk--the risk that a problemin one part of the system might quickly spread through the entire system.

The risk arises due to the fact that (1) a large part of the payment offunds resulting from all kinds of economic activity is made through interbanksettlements, and therefore, financial institutions are linked in an intricatenetwork of lending and borrowing of funds as well as of daily settlementof financial transactions; and (2) both the network itself and the individualfinancial institutions which constitute the network are underpinned bycredit, or credibility, which is in large measure a psychological factor.

The financial system is an important infrastructure supporting a country'seconomic activity, not simply in terms of intermediating funds betweenborrowers and lenders, but also because it provides a settlement system.Any malfunctioning of the settlement system will undermine confidence indeposits and daily fund settlements, seriously affecting every aspect ofpeople's daily lives.

Therefore, in the financial system an appropriate balance must at all timesbe struck between the need to draw out the dynamism of the financial marketand the need to secure the stability of the system. This is an extremelydifficult task, as the most desirable balance between the two requirements will naturally differ dependingon the country's prevailing economic situation as well as on past developments.

For example, from the days of turmoil immediately after World War II throughthe reconstruction period, the most urgent task for Japan was to rehabilitatethe intermediation functions of financial institutions and utilize thosefunctions for the policy objective of economic reconstruction. In the nextstage, when the Deposit Insurance System was as yet underdeveloped, andthe operations of financial institutions and financial instruments werenot as complex as they are today, it was necessary and indeed effectiveto give priority to ensuring sound financial institution management byrestricting the behavior of institutions through regulations and individualguidance.

Things have changed drastically since then, however. Interest rates havebeen liberalized, and the walls between different kinds of financial businessare being lowered. Japanese financial markets are becoming sufficientlymature in terms of diversity of market participants, market size, transactionvolume, as well as the establishment of the interest rate mechanism. Growinginternational competition in the financial industry, diversifying needsfor financial services, and the development of high-tech financial instrumentshave significantly changed the environment. Thanks to these developments,business opportunities of financial institutions are expanding, but atthe same time, the risks involved in their business are increasing.

If the past practice of restricting the behavior of financial institutionswere to be continued, the following problems would likely emerge.

First, the innovative forces induced by competition would not work fully,preventing the Japanese financial sector from developing into an internationallycompetitive, strong, and efficient industry. As a result, financial institutionswould not be able to respond adequately to the diversifying financial needsof firms and individuals. In fact, most of the technological innovationsin the financial industry to date have originated in the United Statesor Europe, and it is undeniable that Japan's achievements in this areahave been less impressive than the numerous technological innovations presentedto the world by the nation's nonfinancial industries.

Second, as it is impossible to regulate every aspect of financial institutions'increasingly complex and diverse behavior, regulations and constraintsimposed with the aim of securing stability could only lead to increasedrisks in financial institution management. For example, regulations couldinduce excessive behavior in unregulated areas or hamper overall allocationand hedging of risks.

Incidentally, excessive lending by financial institutions during the bubbleperiod is often perceived to have been a manifestation of the problemsinherent in a deregulation process, which relates to the problem I justmentioned. It was also from this very perspective that the Bank of Japanabolished its so-called "window guidance," the system of providing directguidance to influence the lending activities of financial institutions.

In view of this, I conclude that the basic philosophy behind financialinstitution supervision in the days ahead should be, first of all, to essentiallytrust the market mechanism and encourage financial institutions to basetheir behavior on the principle of self-responsibility, instead of attemptingto correct their behavior through individual regulations and guidance.Second, in order to ensure financial system stability, what is needed isto carefully monitor the operation of the system as a whole together withthe behavior of individual institutions and, should a problem occur, totake the necessary measures to prevent its impact from spreading. In otherwords, it is now more essential to oversee the functioning of the entirefinancial system rather than to regulate and supervise individual institutions.

I have often stated my basic thinking on the expected future role of financialadministration--that is, (1) to establish the minimum of highly transparentrules needed to ensure sound financial institution management; (2) to overseecompliance with these rules; and (3) to devise, if necessary, prompt correctivemeasures for individual financial institutions. All these, again, are basedon the same basic philosophy outlined earlier.

The Role of the Central Bank

What role then should the central bank play within the revised system offinancial institution supervision?

As you are aware, the Bank of Japan has two missions: maintaining the stabilityof the currency and ensuring the stability of the financial system. Withregard to the latter, the Bank is expected to fulfill its duties by (1)securing smooth operation of the payment and settlement systems, whichconstitute the core of the financial system; and (2) preventing erosionof market confidence in the system by exercising its lender-of-last-resortfunction in the case of an emergency.

The basic thinking behind these roles is to ensure the stability of thefinancial system by utilizing the market mechanism and avoiding excessivereliance on individual regulations and guidance. This thinking is in linewith the view I have expressed on financial system oversight.

Central banks in other countries also play important roles, one way oranother, in overseeing the financial system. This is precisely becausethe objectives and operations of the central bank are inseparably linkedto the functions of financial system oversight.

In the United States, for example, the Federal Reserve plays an importantpart in bank supervision and examination alongside the Office of the Comptrollerof the Currency, the Federal Deposit Insurance Corporation, and state authorities.In the United Kingdom, the Bank of England exclusively undertakes thistask.

In Germany and France, independent administrative bodies undertake banksupervision; the Federal Banking Supervisory Office (FBSO) in Germany andthe Banking Commission (CB) in France. In the case of Germany, however,a statutory requirement mandates the submission of audit documentationto the Bundesbank in addition to the FBSO, and thus the central bank ineffect plays a major role. In France, the CB is chaired by the centralbank governor, and its secretariat is established within the Bank of France.

Accordingly, the central bank in many countries plays a major role in monitoringand supervising the operation of the entire financial system and in securingfinancial system stability. Central banks are therefore required to makeunyielding efforts to improve their functions of financial system oversight.

I would like to discuss more specifically the points the Bank of Japanhas emphasized in recent years.

First, to have an accurate grasp of the market behavior and risks of financialinstitutions, it has become increasingly important to upgrade the Bank'son-site examination and daily monitoring skills so that they adequatelycover derivatives and other new financial transactions in addition to conventional lending operations.The Bank has recently organized a financial engineering team--a group studyingnew financial technologies, particularly the accompanying risks--which willsupport the development of new methods of on-site examination and monitoringand will assist risk analysis by the Bank. The Bank has already begun cooperationwith overseas central banks in this regard.

Second, it will be important in the future to check and monitor financialinstitutions' internal risk management systems. A greater sophisticationof on-site examination and daily monitoring methods is an absolute requirementin overseeing the risks in the financial system, but that alone is notsufficient. As financial transactions expand and grow increasingly complex,a more effective way to strengthen risk management is to encourage financialinstitutions to improve their internal risk management systems, ratherthan for authorities themselves to try to assess the risks involved inindividual financial transactions.

Third, with financial institutions engaging in an increasing number ofcross-border financial transactions as they become internationally active,it has become indispensable to monitor financial systems at the internationallevel. One good example was the response by the monetary authorities ofvarious countries to the Mexican currency crisis in 1994. Internationalcoordination of risk management--for instance, at the meetings of the Bankfor International Settlements--is becoming increasingly significant in securingthe stability of a country's financial system.

Conclusion

I have so far explained the concept of financial system oversight and discussedthe roles of the central bank, citing some examples from overseas. In connectionwith this question of the future supervision of financial institutions,I am frequently asked for my views concerning revision of the Bank of JapanLaw. Let me share with you some of my thoughts on this issue, althoughI may be repeating myself since I have discussed the issue on certain occasionsin the past.

As you may be aware, the existing Bank of Japan Law was enacted in 1942,during World War II. That being the case, some aspects of the law, includingthe expressions used, no longer suit the present circumstances. The extensivesupervisory authority over the Bank granted to the government reflectsan era of strong government control.

Interest rate policy, however, was placed under the exclusive purview ofthe Bank of Japan in the 1949 revision of the law, whereby the Policy Board,the Bank's decision-making body, was established to take charge of monetarypolicy decisions, including interest rate changes. In addition, the variousroles undertaken by the Bank of Japan in running the settlement systemand in ensuring the stability of the financial system--for example, throughthe conduct of on-site examinations and daily monitoring--have been construedas conforming to the Bank's duty of maintaining and fostering a safe andsound financial system as stated by the law, although the roles themselveshave not been specifically stipulated.

Thus, while it has some problems, the existing Bank of Japan Law has beenadministered very carefully, with the understanding of all concerned, soas not to hinder the Bank in fulfilling its missions. With regard to theindependence of monetary policy, I wish to state unequivocally in the lightof my own experience during the past 16 months since becoming Governor,that the Bank of Japan has managed policy based on its own responsibilityand judgment.

Due to the nature of the existing law, however, the Bank may not be ableto secure appropriate management of monetary policy while maintaining thecredibility of a central bank, in view of the continuing trend toward marketeconomies and globalization of financial markets.

I therefore consider it necessary to review the existing Bank of JapanLaw to accommodate economic and financial changes and to make it comparablewith the central bank laws of other countries.

The Bank of Japan Law is one of the basic laws governing the monetary andfinancial activities of Japan. Its revision will have a major influenceon the Japanese economy over a long period of time, and therefore willneed to be discussed in depth and from a broad perspective by the public.If this view wins public support and if the question of central bankingis to be discussed, we at the Bank are prepared to contribute activelyto that discussion.

I would like to conclude by expressing the Bank of Japan's hope that constructivediscussions in the future will indeed bear fruit.