Home > Announcements > Speeches and Statements > Speeches 1997 > Speech given by Yasuo Matsushita, Governor of the Bank of Japan, to the Keizai (Economic) Culb in Tokyo on February 4,1997 (Recent Monetary and Economic Conditions in Japan)

Recent Monetary and Economic Conditions in Japan

This article is excerpted and translated from a speech given by Yasuo Matsushita, Governor of the Bank of Japan, to the Keizai (Economic) Culb in Tokyo on February 4,1997.

I. Introduction

I truly appreciate this opportunity to address this distinguished audience atthe invitation of the Keizai Club.

Over the past several years, the Japanese economy has had to overcomethe aftereffects of the bursting of the economic "bubble" while facing the weightychallenge of establishing an economic structure suitable for the new era. Although therewere concerns about a deflationary spiral at one time, the economy has been recoveringmoderately since the beginning of 1996 partly due to strong monetary and fiscalsupport. Recently, this economic recovery has gradually firmed, offering signs thatprogress has been made toward establishing this suitable economic structure.

However, since the beginning of the year, stock prices have fallensignificantly, suggesting that market participants remain cautious about the economicoutlook. With this in mind, I would like to discuss the Bank of Japan's thinking on therecent economic developments and monetary policy management, together with theBank's views on the uncertain factors regarding the economic outlook.

II. Domestic Economic Condition

With regard to the domestic economic condition, the Bank of Japan'sjudgment is that a moderate economic recovery continues, and that the economicrecovery is gradually becoming firmer.

When considering the strength of an economic recovery, the Bank paysattention to the positive interactions between production and private demand. Specifically, attention is given to whether the increase in production is leading to anexpansion of business fixed investment through improved corporate profits, and whetherthis increased production is followed by a recovery in personal consumption throughincreased income.

Looking back on the economic developments in Japan over the past yearfrom a viewpoint of determining the strength of the recovery, the growth of aggregatedemand, including public and housing investments, accelerated in the first half of 1996,and accordingly, market expectations of an economic recovery strengthened and long-term interest rates showed a temporary rise. However, no significant improvement wasseen in production, as the increase in final demand was partly offset by inventoryadjustment and by an increase in imports. As a result, a virtuous circle of demand,production, and income was not confirmed.

This situation, however, appears to have changed somewhat in the latter halfof 1996. Firstly, the decline in external demand, which had been a constraining factorof the economic recovery, halted in autumn 1996, mainly due to the increase in exportsthat followed a depreciation of the yen. Recently, there has been an upward trend inexternal demand. In addition, inventory adjustment in some raw materials andsemiconductor industries was almost completed. As a result, production, which hadremained sluggish in the first half of 1996, started to grow at an accelerating pace,reflecting fully the increase in final demand.

Notably, the firm recovery in production is now generating a recovery inprivate demand, including business fixed investment and personal consumption. Reflecting improvements in corporate sales and profits, recovery in business fixedinvestment is spreading to a wider range of industries and to smaller firms thanpreviously observed. Indeed, according to the results of the November 1996"TANKAN -- Short-Term Economic Survey of Enterprises in Japan," business fixedinvestment for the smaller firms, which had been slow to improve, is expected to showa year-to-year increase in fiscal 1996 for the first time in five years.

Growth of personal consumption, the other mainstay of private demand,leveled off at one time in summer 1996, but resumed later in autumn, especially inconsumer durables such as automobiles. The contributing factor to the moderate butsteady recovery in personal consumption has been the improved income reflecting thefavorable changes in employment conditions and wages that followed the increase inproduction.

It must be borne in mind that increase in demand ahead of the rise in theconsumption tax rate scheduled for fiscal 1997 is contributing to the improvement ineconomic indicators, as in housing investment, and therefore, these improvements needto be seen in this light. There has, however, recently been a notable change ineconomic developments compared to the first half of 1996. Despite a gradual decreasein public-sector investment from the latter half of 1996, the virtuous circle -- in whichincreased production leads to increased private demand through improved corporateprofits and employment income -- has clearly begun to operate.

III. Uncertain Factors Regarding the Economic Outlook

A. Views of Financial Market Participants

Turning from the Bank of Japan's views on the current domestic economy,the issue of concern now is the future development of the economy. Revitalization ofeconomic activity usually brings about increases in corporate profits and employmentincome, which lead to improvement in business fixed investment and personalconsumption. These improvements in turn lead to further expansion in economic activity.

However, developments in financial markets, such as stock prices and long-term interest rates, suggest that despite the increasing strength of the economicrecovery, market participants remain cautious about the economic outlook. Variouscauses are cited for the significant fall in stock prices since the beginning of the year:renewed concern about the nonperforming-loan problem; uncertainty over the social andeconomic systems in Japan as a whole; and pressures to decrease the differentialbetween domestic and international stock prices in terms of various measures ofevaluation, such as the price earnings ratio. It is extremely difficult to assess eachfactor and to specify the cause of the uncertainty. Still, the overall trend in the financialmarkets over the past several months clearly indicates that market participants have acautious outlook on the economy, as shown by the slowdown in growth or even adecline in stock prices since autumn 1996, and by the concurrent decline in long-terminterest rates.

Cautiousness on the part of the market participants reflects the fact that theyare strongly aware of the following three issues: (1) effects of the anticipated fiscaltightening in the next fiscal year; (2) structural adjustment pressures facing theJapanese industries; and (3) balance-sheet adjustment of firms and the nonperforming-loan problem of financial institutions, both of which are burdens created by the economic"bubble" and its burst.

Before explaining the Bank of Japan's views on these issues, I would like toemphasize that my talk today is not intended to draw specific conclusions or to assessthe levels of stock prices and interest rates. This requires careful analysis and is anissue on which a central bank governor should refrain from comment. Rather, I wouldlike to give you an idea of how the Bank examines these issues.

B. Effects of Fiscal Tightening

The first issue that I would like to discuss is the influence of fiscaltightening -- such as reduction in public-sector investment, rise in the consumption taxrate, and termination of special tax reduction -- on the economy for the next fiscal year.

Public-sector investment began to decline in autumn 1996, after havingcontinued to expand until mid-1996 as a result of the economic measures introducedin autumn 1995. Although there may be a slight temporary increase in public-sectorinvestment reflecting the implementation of the supplementary budget for the currentfiscal year, the declining trend is expected to continue for some time. In addition, anincrease in the consumption tax rate and the termination of special tax reduction isscheduled for fiscal 1997.

It is important to mention here that the influence of fiscal tightening on theeconomy may vary significantly depending on the prevailing economic conditions, suchas corporate profits and employment income development, as well as on the confidencethat the corporate and household sectors have in the economy. Furthermore, thisinfluence can differ substantially depending on how the public's expectations of thefuture economy change in response to reduced fiscal expenditures and tax increases,and how market interest rates respond to any reduction in the budget deficit.

The effects on the economy of a reduction of public-sector investment or abudget deficit have been debated by academics. The simplest Keynesian view is thatreduced public-sector investment cumulatively acts to restrain private demand throughmultiplier effects. Some argue that a decrease in the budget deficit will lower interestrates and the yen's foreign exchange value, thus offsetting the negative effects on theeconomy. Some even hold that because the public behave rationally with anticipationof future tax increases or reductions, neither a decrease nor an increase in the budgetdeficit will have any effect on the economy.

The influence of a reduced budget deficit on the economy may thus becomplex and diverse, once the movement of market interest rates, foreign exchangerates, and the public's expectations are taken into account. It is natural to assume thatin reality, the impact of reduced fiscal expenditures on the economy cannot be denied,although the influence is unlikely to reach the extent estimated by simply multiplying thenominal value of the reduction by a multiplier.

To underline the argument I just made, the economic mechanism does notwork on the basis of simple addition and subtraction, but rather involves dynamicinteractions of many factors which incorporates the public's expectations. After all, theeffects of fiscal tightening are an empirical issue for which conclusions cannot bereached in advance, and therefore, it is very difficult to accurately predict futuredevelopments at this stage. Bearing this in mind, it is necessary to view carefully theeffects of fiscal tightening on the economy as a whole.

C. Progress in Structural Adjustment of Industries

Let me now turn to the next issue of structural adjustment of industries, whichis a medium- to long-term issue for the Japanese economy.

One of the changes in the environment surrounding the Japanese economyin the past several years has been that a wider range of industries have come to facesevere international competition due to the increasing supply capacity of other EastAsian countries. Weakening of international competitiveness made it difficult for someindustries and firms to continue domestic production of some of their conventionalproducts. This forced them to relocate their production bases overseas while shiftingtheir domestic production to new products for which they have a comparative advantage.

This is not the first time that the Japanese economy has faced structuraladjustment pressures. In fact, it successfully confronted the challenge several times inthe past. However, the adjustment this time has inevitably involved greater pains thanin the past, due to the aftereffects of the bursting of the economic "bubble."

Furthermore, as relocation overseas took place prior to a shift to newproducts, structural adjustment significantly constrained domestic production and, asa result, investment and employment were also limited. The negative impact wasparticularly substantial for the smaller firms, as many of them manufactured labor-intensive products and were subcontractors to the large firms which relocated theirproduction bases overseas.

The key factors we should keep in mind in projecting future developments inthe Japanese economy are therefore the progress in structural adjustment of industries,that is, the emergence of new products or industries that will promote future economicgrowth.

A careful look at individual industries reveals some positive signs. Inproduction, for example, an increasing number of firms and industries are shifting togoods with international competitiveness. More specifically, production of producergoods and capital goods that are capital-intensive and technology-intensive has beenincreasing while production of labor-intensive consumer goods has been declining. These changes are also reflected in imports and exports of goods. Recently, exportsof consumer goods, mainly household electric appliances such as television sets andradios, have been decreasing while their imports have been increasing, and exports ofcapital goods and parts such as electronic machinery and automobile parts have beenincreasing significantly.

Notable as these changes may be, one cannot simply add up thesemicroeconomic developments to obtain a comprehensive evaluation of how successfullythe Japanese economy as a whole is undergoing structural adjustment of industries. Rather, the progress in structural adjustment should be reflected most evidently in therevitalization of forward-looking business activity. If this were the case, the stance takenby firms toward fixed investment and employment should provide a measure of theprogress in macroeconomic structural adjustment.

In this respect, business fixed investment by large firms began to recover infiscal 1995 well ahead of small and medium-sized firms. Investment by smaller firms,which had been more susceptible to the structural adjustment pressures, has also finallybegun to show recovery. Although the recovery is extremely moderate, this resumptionof investment by smaller firms, an activity that lays the foundation for the future, may beconsidered as evidence of progress in structural adjustment as it indicates that thesefirms are starting to have a clear idea about the new direction of their business.

Progress is also reflected in business fixed investment of various industries. Namely, investment has been increasing in capital- and production-goods relatedsectors, where high growth in production has been recorded. There has also been arapid expansion of investment in a new industry of mobile telecommunications. Business fixed investment for development of new products and new businesses alsoseems to be increasing gradually.

With regard to employment, structural adjustment pressures are persistentin some indicators such as the high unemployment rate. However, based on the mostrecent changes in employment indicators and the microeconomic information on firms,labor market conditions are seen to be improving gradually, indicating steady progressin industrial restructuring.

For example, recent numbers of new job offers are significantly higher thanthose in the previous year. Business surveys indicate that an increasing number offirms plan, for the first time in many years, to increase the number of new graduateshired in the next fiscal year. Results of the November TANKAN also indicate that morethan half of the smaller firms surveyed feel that they are shorthanded. Furthermore,labor market conditions in each sector indicate that employment has decreasedsignificantly in sectors where imports have been making inroads -- such as theelectrical machinery and textiles industries -- while employment has increased in newsectors such as telecommunications. These changes indicate a gradual shift of laborbetween sectors.

In sum, although pressures for structural adjustment of industries remain, itcan be said that structural adjustment has progressed significantly as reflected in therecent recovery in business fixed investment and employment.

D. Balance-Sheet Adjustment

The third issue to be discussed is that of balance-sheet adjustment. Thereare two aspects to this issue: the improvement of the financial condition of firms and thedisposal of nonperforming loans of financial institutions.

With regard to balance-sheet adjustment of Japanese firms, there have beenserious efforts by firms to reduce their liabilities since the bursting of the economic"bubble." Despite these efforts, the mismatch between assets and liabilities expandedin many sectors until 1994 or 1995 due to the continued decline in real estate prices. While the decline in asset prices has slowed since 1995, liabilities have decreasedowing to the recovery in corporate profits which followed firms' restructuring efforts andlower interest rates.

Several indicators, such as the ratio of long-term debts to assets at marketvalue, reveal that balance-sheet adjustment pressures are persistent. In particular,small and medium-sized firms still need to make substantial efforts to complete theiradjustment. As I have just mentioned, however, the improvement of firms' balancesheets has doubtlessly been making moderate but steady progress in general, and thus,constraints imposed by the adjustment pressures on economic recovery should continueto be gradually alleviated.

Regarding the nonperforming-loan problem of financial institutions, the totalamount of nonperforming loans of the financial institutions was approximately 29 trillion yenas of the end of September 1996, according to the data published by the Ministry ofFinance. Of this total, the estimated amount of problem loans to be disposed of, notincluding those already covered by collateral and provisions, is estimated atapproximately 7 trillion yen. Both of these figures have decreased by approximately 10 trillion yen from the previous year, and thus, in general, it can be said that steady progresshas been made in solving this particular problem.

The amount of nonperforming loans that need to be disposed of, however,remains large. The Bank of Japan will continue to strongly encourage financialinstitutions to dispose of the remaining nonperforming loans expeditiously and to exertthemselves to the utmost to (1) restore their capital bases which have been impairedin the process of disposing of nonperforming loans; (2) strengthen their profitabilitythrough restructuring; and (3) enhance their internal risk management.

In relation to the economy, an issue of concern is whether the decline in theintermediary functions of those financial institutions burdened with nonperforming loansis constraining the economic recovery. While it may certainly be true that financialinstitutions have imposed stricter screening criteria for lending following the experiencesof the economic "bubble" period, most financial institutions now maintain a policy ofactively increasing loans of reliable quality while, or rather for the purpose of, disposingof nonperforming loans. In fact, the lending attitude of financial institutions, as seenfrom the point of view of the firms, has become less severe and lending rates havestayed at a historically low level. It is, therefore, difficult to assume that the severerlending attitude of the financial institutions is hampering the recovery in business fixedinvestment.

IV. Economic Outlook and Monetary Policy Management

A. Economic Outlook

I have so far discussed such issues as the effects of fiscal tightening and thecurrent situation of structural adjustment, both considered to be the major factorscontributing to the cautious economic outlook in financial markets. Among these,developments of structural adjustment may be summarized as follows: (1) bothstructural adjustment of industries and balance-sheet adjustment are still in progressand therefore the pace of economic recovery is likely to remain moderate for some time;(2) however, as industrial restructuring and balance-sheet adjustment are making steadyprogress, albeit moderate, its constraining effects on economic recovery are likely togradually ease.

Therefore, the most important issue in considering the economic outlook iswhether the increase in private demand can overcome the downward pressures fromfiscal tightening and whether it is possible, as a result, to lead the economy on to a pathof self-sustained recovery.

As I mentioned earlier, the economic recovery has been recently gainingstrength. If this recovery is analyzed in terms of the level of economic activity, namelythe output gap, it can be noted that capacity utilization has been rising steadily reflectingthe recent recovery in production, and has recovered to the same level as that of fouryears ago. Furthermore, the results of the November TANKAN indicated that theexcessive production capacity and employment perceived by surveyed firms havegradually reduced to the same level as in 1987, at which time the economy wasrecovering from the recession caused by the appreciation of the yen. While the profit-to-sales ratio of smaller firms has not yet recovered to the average level of the past, theratio of large firms has already reached a relatively high level. Judging overall, it canbe said that the current level of economic activity in Japan is approaching the samepoint where the strength of the recovery began to firm in past business cycles.

This level of economic activity will provide a basis for the virtuous circle of theeconomy, one that is led by expanded private demand, to gain further strength. In otherwords, if the recent economic recovery continues for some time, increased productionwill further improve corporate profits and employment income, which in turn are likelyto lead to increases in business fixed investment and personal consumption. If thisvirtuous circle gains stronger momentum, there will be a higher possibility of thestrengthened virtuous circle absorbing the downward pressures from prospective fiscaltightening.

A temporary slowdown in economic recovery seems inevitable as downwardpressures from fiscal tightening will be strong during the first half of fiscal 1997 and asreaction to the increase in demand ahead of the rise in the consumption tax ratescheduled for April 1997 is expected. However, the recovery trend of the economy islikely to be sustained on account of the strengthening recovery in private demand.

I indicated earlier, however, that it is necessary to consider the effects offiscal tightening carefully. Business sentiment and consumer confidence also becomeimportant factors for a further increase in private demand. The corporate and householdsectors will plan their activities and put them into action in the form of production,investment, and consumption, taking into account the fiscal 1997 budget and the actualplacement of public work orders. Therefore, in predicting future economicdevelopments, it is important to closely examine various macro- and micro-economicdata: not only the economic indicators that will be released in the future, but also firms'business plans and signals sent by financial markets.

Meanwhile, it is expected that prices will cease to decline due firstly to therise in import prices reflecting the yen's depreciation and higher crude oil prices, andsecondly to the improvement in domestic supply and demand conditions. However,when considering the fact that improvement in supply and demand conditions isexpected to be moderate for now and that the pressures of global competition persist,there is only a limited possibility that domestic prices will follow a clear upward trend. Yet, as foreign exchange rates have recently shown rather rapid movements, it isnecessary to cautiously monitor the effects of such a development on the domesticeconomy.

While refraining from making any comments on the recent foreign exchangerate levels and movements, the Bank's fundamental thinking is that it is desirable forexchange rates to be stable and determined in accordance with the real economicconditions of each country. Based on this thinking, the Bank of Japan will continue tocarefully monitor foreign exchange rate developments and their effects on the Japaneseeconomy.

B. Monetary Policy Management

In the management of current monetary policy, the Bank of Japan willcontinue to monitor economic developments closely, placing emphasis on furtherstrengthening the foundation of an economic recovery.

In April 1997, the consumption tax rate will be raised from 3 percent to 5percent. Therefore, I would also like to discuss how the Bank of Japan views thepossible effects of this tax rate rise on prices, in the context of managing monetarypolicy. Specifically, the issue here is what monetary policy measures should be takenin light of the price hikes due to the rise in the tax rate.

I would first like to point out that the price hikes caused by the rise in theconsumption tax rate is different in nature from the ordinary rise in prices, that isinflation. Generally, inflation is generated in the mechanism of economic cycles as aresult of, for example, tightening of supply and demand conditions for labor or products,or excessive supply of money. In turn, inflation affects economic activity in various ways.

In contrast, price hikes due to a rise in the consumption tax rate areequivalent to a once only rewriting of all the old price tags on April 1. There are norelevant changes in economic activity, such as tightening of supply and demandconditions, increase in wages, or excessive money supply. Therefore, it would not beappropriate to formulate monetary policy against such superficial changes in prices.

Although this represents the fundamental thinking of the Bank, it does notmean that the central bank is indifferent to the rise in the consumption tax rate. If therise triggers price hikes taking advantage of the tax rate rise, or if the overall inflationaryexpectations are heightened, then the risk of a genuine inflation will arise. In particular,this risk cannot be disregarded when the supply and demand conditions for productsare fairly tight. Therefore, it is necessary to pay attention to the inflationary expectationsand possible over-reactions caused by the rise in the consumption tax rate rather thanpaying attention to the previously-mentioned superficial hikes in prices.

In summary, in order to promote smooth structural adjustment, to bring abouta strengthening of the economic recovery, and to encourage renewed development ofthe Japanese economy, the implementation of a drastic structural reform, includingeffective deregulation, is indispensable. In this respect, I hope that the government willcontinue to exercise strong leadership and earnest efforts will continue to be made byvarious parties.

V. Financial System Reform and Revision of the Bank of Japan Law

A. Financial System Reform

I would like to use the remaining time to discuss financial system reform andthe revision of the Bank of Japan Law.

The important challenge for Japan today is to vigorously promote structuralreform as discussed above, and this also applies to the reform of the financial marketsand of the financial system.

Financial markets worldwide have experienced significant changes in recentyears amid rapid financial and economic globalization and technological innovation. New financial instruments such as derivatives and securitized products have beendeveloped in succession to provide firms and households with diverse means of risk-hedging, investment, and financing. At the same time, profit opportunities for financialinstitutions have expanded in various fields.

It seems that it is now time for the market participants to select the market,rather than the markets selecting the participants. Countries are vying with each otherto reform their financial markets, based on a growing worldwide perception that thefinancial services sector will show rapid growth and create numerous employmentopportunities into the twenty-first century. Each country is thus striving to make theirown markets attractive to participants.

Japan, too, has engaged in the review of regulations and systems to promotefinancial deregulation. However, reform has been gradual and financial institutions havetended to deal with it cautiously due to the severe challenge they have had to face afterthe bursting of the economic "bubble." As a result, the Tokyo market has fallen farbehind the New York and London markets in terms of its ability to develop financialinstruments that incorporate new techniques.

In recognition of this, Prime Minister Hashimoto proposed the "Big Bang"deregulation package for Japan. I understand that the purpose of this financial reformpackage is to revitalize the Tokyo market as a free and active global market. The Bankbelieves that the aims of this reform package are most appropriate and as a centralbank, intends to contribute to the achievement of its goals.

In carrying out the reform, it is especially important that the three basicprinciples of freedom, fairness, and globalization are strictly followed, and that the paceof the reform is not relaxed. The "Big Bang" package aims to realize and complete allreforms by the year 2001, immediately implementing any measures on which study hasbeen concluded. However, this should not mean that the process of market reformbecome unduly gradual or slow, as this may jeopardize the consistency of the reform,or result in only an easier part of the reform being implemented.

For example, one deregulation measure included in the "Big Bang" packageand highly valued by the Bank is the fundamental revision of the Foreign ExchangeControl Law. If deregulation in other areas proceeds too slowly, the effects of the newForeign Exchange Control Law might encourage financial transactions to shift tooverseas markets and might then lead to the hollowing-out of the Tokyo market. Inorder to avoid such a turn of events, it is most important to bring about concretemeasures within the shortest possible time to maintain the coherence of thederegulation as a whole.

B. Revision of the Bank of Japan Law

Lastly, I would like to discuss the revision of the Bank of Japan Law.

Revision of the Bank of Japan Law is now in the final stage of deliberation bythe Financial System Research Council, an advisory committee to the Minister ofFinance, following discussions last year by the Central Bank Study Group, an advisorypanel to the Prime Minister.

The Bank has made public its views on the Bank of Japan Law revision at apress conference held at the end of 1996 and on other occasions. To summarize, (1)the Bank holds that the basic views stated by the Central Bank Study Group -- that is,ensuring central bank independence and enhancing transparency -- should be clearlystated in the law; and (2) the Bank believes that further deliberations should beconducted on several issues regarding the relationship between the government andthe central bank, on which the Central Bank Study Group was unable to reachconclusions, so as to duly reflect the two concepts of independence and transparency.

Fortunately, the Bank's views appear to be adequately shared by themembers of the Financial System Research Council. I would therefore like to discusstoday the significance of the revision of the Bank of Japan Law to the Japaneseeconomy as a whole.

First, this revision of the central bank system is a response to the global trendof changes, including financial and economic globalization and marketization, whichhave been driven by progress in financial innovation.

On various occasions in the past, I have discussed how in the new financialenvironment, markets around the world respond instantaneously to various informationand they also respond to changes in the expectations of market participants as theparticipants process such information. The "Big Bang" package is likely to promote thistendency through increased efficiency and globalization of the markets. Under suchcircumstances, if the role and responsibility of the central bank in charge of monetarypolicy management are not made clear, or if both domestic and overseas understandingof the central bank's monetary policy management is insufficient, a country's monetarypolicy intentions may not permeate sufficiently throughout the market. In addition,irrelevant information may disrupt the markets.

The idea of entrusting the responsibility of ensuring price stability with thecentral bank, an establishment detached from short-term interests, is a wisdom acquiredfrom the history of battles against inflation. The recent strengthening of central bankindependence and the growing demand for transparency of monetary policymanagement around the world reflect the stronger emphasis on the status andresponsibility of central banks to meet the new challenges presented by the globalchanges in the financial markets.

Second, in order for the financial markets or the financial system of a countryto function efficiently and stably, appropriate policy and operational management by thecentral bank, which rests at the core of the financial system, is indispensable.

The Japanese financial system is a mechanism for intermediating savingsand investments by efficient allocation of funds by means of a currency called "yen." In order for this mechanism to function properly, (1) the value of money -- in other words,domestic prices -- must be stable; (2) the mechanism for settling transactions by meansof money must be efficient and convenient; and (3) private financial institutions, as themembers of the financial system, as well as the central bank must be sound and reliable.

The maintenance of these three conditions -- that is, price stability, stableoperations of the payment and settlement systems, and the resulting soundness of thefinancial system -- is the important responsibility of the central bank, an institution whichhas a primary role in the issuance and circulation of the "yen." The central bank systemis thus an important component of the financial system infrastructure of Japan.

Therefore, in order to win domestic and overseas confidence in the Japanesefinancial markets and to maintain and improve the international competitiveness of thesemarkets, it is essential that the central bank system is able to win domestic andoverseas confidence, and that the market environment is improved through such effortsas the "Big Bang" reform package.

Third, many of the issues raised regarding the revision of the Bank of JapanLaw can also be applied to the economic structural reform and to administrative reformin Japan.

The Bank of Japan has urged that (1) its organizational objectives and rolesbe clarified; and (2) the management of policy and operations be founded on amechanism which allows the market participants and other third parties to monitor expost facto whether the Bank is discharging its responsibility appropriately, rather thanbe part of a mechanism that attaches importance to advance coordination with thegovernment.

This argument applies not only to the central bank. In fact, it may be appliedgenerally to the question of what the economic and financial systems should be or whatthe role of government administration should take to meet the challenges of a new era.

The Japanese economy today is required to function within a mechanismunder which any institution is responsible for its own course of action and then themarket and the public examine and evaluate the actions taken, instead of within asystem governed by advance examination based on administrative supervision andregulations.

Such reforms will fundamentally change the economic and social structuresof Japan, making them more consistent with global standards. The old methodologyof carrying out reforms within the conventional framework and ways of thinking must bechanged. It is necessary to consider how the distinctive systems and ways of thinkingin Japan could be changed from a perspective of global standards.

The issue of the revision of the Bank of Japan Law has drawn attentionoverseas along with the "Big Bang" package of financial reforms. This is because therevision of the Law is regarded as a test case of whether or not Japan can change itself.

To repeat my earlier point, the Bank of Japan strongly hopes that the twoconcepts put forward by the Central Bank Study Group -- that is, ensuring central bankindependence and enhancing transparency -- will be clearly reflected in the revisedBank of Japan Law. I wish to make clear that the revision of the Law is not an issue thatsolely concerns the Bank of Japan, the monetary authorities, and the financialcommunity, but is an issue closely related to the future course of the Japanese economyas a whole.

It is very important for the Bank of Japan to prove its ability to reform itselfand to win domestic and overseas confidence through constant efforts towardappropriate policy and operational management. As part of such efforts, the Bank lastyear announced plans for the revision of policy and operational management, includingthe holding of regular meetings of the Policy Board for monetary policy decisions andthe disclosure of the summary of those meetings. We at the Bank are determined tofurther promote vigorously institutional and operational reform.

I would like to conclude by asking for your continued understanding andsupport. I am most grateful for the kind attention you have given me today.