This article is the Governor's foreword to the Bank of Japan's "Annual Review 1997" published on August 29, 1997.

August 1997
Bank of Japan

It is a pleasure to be able to bring to you the Bank of Japan Annual Review 1997, which reviews the monetary and economic developments in Japan as well as summarizes the Bank's activities in fiscal 1996.

Fiscal 1996 saw some significant progress with regard to both the Japanese economy and the financial system. It also marked a historic year for the Bank of Japan, with the enactment of the new Bank of Japan Law, which is to come into effect on April 1, 1998.

The Japanese economy, after a pause in early spring 1995, resumed its recovery around the end of 1995, partly due to strong monetary and fiscal support, as well as the depreciation of the yen. The virtuous circle of demand, production, and income has gradually gained strength since the second half of 1996. There remain, however, factors moderating the pace of recovery, such as the effects of fiscal consolidation and the persistent pressures for structural adjustments.

In the financial system, Japanese financial institutions disposed of a significant amount of nonperforming loans through write-offs and provisioning in fiscal 1996. Moreover, in June, a package of financial reform bills, including measures to address the jusen problem and to reform the deposit insurance system, was legislated. Meanwhile, failed financial institutions were resolved without delay, and the Bank of Japan, with full commitment to restoring and ensuring the stability and sound functioning of the financial system, closely cooperated in the resolution schemes, providing central bank funds when such funds were indispensable for avoiding systemic risk.

Financial system reform has also been a subject of heated discussion since the "Big Bang" deregulation package for Japan was proposed by Prime Minister Hashimoto in November 1996. Intensive and concrete discussions have been held on numerous issues including the relaxation and removal of existing regulations and the improvement of the frameworks of the legal and accounting systems. I strongly believe that the reform is indispensable to the establishment of an internationally competitive financial market, to thereby prevent the hollowing out of the market.

An important topic for the Bank was the enactment of the new Bank of Japan Law. The bill submitted by the government to revise the existing Bank of Japan Law was passed by the National Diet on June 11, 1997. The new Bank of Japan Law will become effective on April 1, 1998. The enactment of the new Law was an event of major significance in the 115-year history of the Bank. The revision of central bank law, along with the reform of the government's supervision and regulation of financial institutions, will constitute the basis of a major reform of the financial system of Japan.

The new Bank of Japan Law clearly states that the Bank's goals are to pursue price stability, thereby contributing to the sound development of the national economy, and to ensure smooth settlement of funds among financial institutions, thereby contributing to the maintenance of an orderly financial system. The Law also establishes a framework to the central bank based on the two principles of "independence" and "transparency." These principles represent the ideas that monetary policy should be determined independently by a politically neutral Policy Board of the central bank and that disclosure of policy making processes is essential in order that the central bank be accountable to, and thereby gain the support of, the public and markets. These ideas are commonly shared in the recent reform of central banks in major countries.

Independence of the central bank depends in good part on how the new Law is put into practice. Therefore, we are determined to continue our efforts to ensure the transparency of monetary policy management and the efficiency of the Bank's operational management under the new Law.

In this Annual Review 1997, a detailed analysis of monetary and economic developments in Japan is provided in the "Annual Review of Monetary and Economic Developments." The Bank of Japan's policy measures and activities are explained specifically in "Major Decisions by the Policy Board" and "Developments in Bank of Japan Activities." This issue also includes a preliminary English translation of the new Bank of Japan Law. Articles from this issue are provided on the Bank of Japan Internet Web site, as part of the Bank's efforts to improve its accountability.

I hope that you will find the Annual Review 1997 informative, and that it will prove useful in promoting your understanding of the Japanese economy and the role and activities of the Bank of Japan.