This article is the Governor's foreword to the Bank of Japan's "Annual Review 1998" published on September 11, 1998.

August 1998
Bank of Japan

It is a pleasure to bring you the Bank of Japan's Annual Review 1998, which summarizes the Bank's policies and various activities in fiscal 1997 and reviews the economic and financial developments in Japan over the course of the fiscal year.

One of the significant changes for the Bank during the fiscal year was the enactment on June 11, 1997 of the new Bank of Japan Law, which became effective on April 1, 1998. The new law establishes a framework for the central bank based on two principles: autonomy in monetary policy and transparency of policy decision-making processes. In accordance with this new law, the Bank commenced Monetary Policy Meetings of the Policy Board and publication of the minutes. Such meetings to discuss monetary policy, held twice a month in principle, were first convened in January 1998, even before the new law took effect, reflecting the Bank's determination to improve its transparency. The Bank's organization has also been altered to improve the efficiency of the Bank's operations.

Looking back on the economic and financial developments, fiscal 1997 was another difficult year for Japan.

In the economy, the positive interaction between production, income, and expenditure weakened, placing increasing downward pressure on economic activity. Economic growth started to decelerate in the spring of 1997 following the rise in the consumption tax rate. In the summer and autumn, turmoil in other Asian economies and financial markets and a series of financial institution failures added to the uncertainty regarding the economic outlook. In these circumstances, household and corporate confidence deteriorated. As a result, private consumption and housing investment remained sluggish, industrial production declined, and business fixed investment slowed. Meanwhile, prices were stable as a whole. To address the stagnant economic situation, the government implemented stimulus measures including a special income tax reduction and additional public investment. At the beginning of fiscal 1998, the government adopted a comprehensive economic package with expenditures totaling over 16 trillion yen. More recently, the new administration is planning to launch new economic stimulus measures, including additional public investment and further income tax reduction. The Bank maintained its easy monetary policy throughout the fiscal year to support the economy.

With regard to the financial system, Japanese financial institutions continued to make steady progress in the disposal of nonperforming loans through active write-offs and provisioning. However, the system also saw a number of financial institution failures during the fiscal year. Failures of large financial institutions in the autumn increased anxiety about the stability of Japan's financial system and heightened market participants' awareness of the credit risk of financial institutions. Meanwhile, financial institutions reinforced their cautious lending attitude. Under these circumstances, the government legislated for the use of public funds to ensure the stability of the financial system and restore the financial intermediary functions. The government has also introduced the Comprehensive Plan for Financial Revitalization (the so-called Total Plan) to promote land transactions and asset securitization as a step toward fundamentally solving the nonperforming-asset problem.

The Bank also took various measures to ensure the sound functioning and stability of the Japanese financial system. To dispel concerns of market participants about the credit and liquidity risks of financial institutions, the Bank provided the money markets with ample liquidity through market operations. In the resolution of the failed financial institutions, the Bank cooperated closely with the parties concerned, making central bank funds available when necessary. To ensure the smooth functioning of the payment and settlement systems, the Bank committed itself to reducing systemic risk through efforts such as the restructuring of its funds transfer system to make real-time gross settlement the only settlement mode by the end of the year 2000. The Bank also supported various private-sector initiatives in reducing settlement risk.

This Annual Review 1998 provides the minutes of the Monetary Policy Meetings, an outline of the Bank's various policy measures and activities, and a detailed analysis of monetary and economic developments in Japan.

I hope that you will find the Annual Review 1998 informative and that it will prove a useful aid to understanding the role and activities of the Bank of Japan as well as the Japanese economy.