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Statement by Masaru Hayami, 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, on April 17, 2002

May 31, 2002
Bank of Japan



1In December 2001, the Bank of Japan submitted to the Diet its Semiannual Report on Currency and Monetary Control for the first half of fiscal 2001. I appreciate this opportunity to present an overall review of the Bank's recent conduct of monetary policy.

Today, I would like to make some remarks on the Bank's view of Japan's recent economic and financial situation and on the thinking behind our recent conduct of monetary policy mainly for the period since I made remarks before the committeein September 2001.

  • 1  Governor Hayami made almost the same statement before the Committee on Financial Affairs, House of Councillors, on March 28, 2002.

I. Developments in Japan's Economy

Japan's economy continued to deteriorate reflecting adjustment in IT-related industries worldwide since autumn 2000 and the following substantial decrease in exports and production. In the second half of 2001, adjustment in the corporate sector was gradually spreading and affecting private consumption through decreases in employment and income.

In addition, the fact that the terrorist attacks in the United States in September 2001 heightened uncertainty about the economic outlook and strengthened the tendency of worldwide economies to slow down simultaneously was one of the factors increasing the severity of Japan's economic situation.

Regarding prices in Japan, supply-side factors, such as an increase in imported products and the streamlining of distribution channels, continue to exert downward pressures on prices and the domestic supply-demand balance conditions resulting from the deteriorating trend of the economy have also increased the downward pressures on prices. Therefore, prices in Japan remain on a declining trend.

As outlined above, the economy remains on a deteriorating trend. However, there have been some positive developments recently that could suggest this deterioration will come to a halt.

Reflecting the fact that overseas economies, including the U.S. economy, have been clearly gaining momentum for recovery since the turn of the year, Japan's exports are gradually starting to increase. In Japan, inventory adjustment is progressing further, production appears to have stopped declining, and the deterioration in business sentiment of firms, mainly in manufacturing, has almost ceased. Judging from these developments, the economic deterioration in Japan is projected to come to a gradual halt, as production stops declining and then turns up reflecting the improvement in exporting conditions.

II. Developments in Financial Markets

The Bank has recently been paying particular attention to financial market developments, while the economy has started to show some positive signs from the viewpoint of the short-term economic cycle.

Stock prices have shown sensitive movements, declining in early February 2002 to their lowest levels since the bursting of the bubble due partly to a series of failures of large firms since autumn 2001. The fund-raising conditions of firms with high credit risk, especially small firms, are gradually becoming more severe as the stance of investors toward taking credit risk remains severe and the lending attitude of private banks is becoming more cautious. In addition, the view of market participants at home and abroad of Japan's financial institutions remains severe. Prices of bank stocks are still weak, although they have rebounded somewhat recently. The spreads between bonds issued by banks and Japanese government bonds (JGBs) remain at high levels.

If these developments go so far as to cause viable firms' fund-raising conditions to become severe and financial markets to become significantly unstable, further downward pressures might be exerted on the economy and prices. Therefore, financial developments require careful monitoring for some time.

III. Recent Conduct of Monetary Policy

At the Monetary Policy Meeting (MPM) in March 2001, the Bank adopted a new framework for money market operations where its main operating target is the "quantity" of liquidity (the amount of the outstanding balance of current accounts at the Bank), as the uncollateralized overnight call rate had declined to a low level close to zero percent and there was hardly any room left for easing with orthodox monetary policy measures. Under the new framework, the Bank has been conducting drastic monetary easing, unprecedented in the history of central banking at home and abroad.

As a result, the outstanding balance of current accounts at the Bank has recently increased significantly to around 20 trillion yen from around 4 trillion yen a year ago. With a view to providing such a large amount of funds smoothly, the Bank has decided to increase its outright purchase of long-term JGBs to 12 trillion yen per year in March 2002 from the 4.8 trillion yen a year ago.

The Bank has devised means of funds provision and broadened the range of eligible collateral with a view to making the effects of monetary easing permeate into corporate financing. At the MPM in December 2001, the Bank decided to more actively purchase CP under repurchase agreements and to immediately examine operational issues regarding acceptance of asset-backed commercial paper as eligible collateral. At the MPMs in September 2001 and February 2002, the Bank decided to increase the maximum number of days on which the official discount rate could be applied for the use of the Lombard-type lending facility, a standby facility in a flexible manner, in order to ensure financial institutions' confidence in their funding.

These monetary easing measures conducted by the Bank have had a strong effect on financial markets. For example, short-term interest rates have declined to virtually zero percent, and yields on one-year treasury bills have fallen to 0.001 percent. The year-on-year growth rate of the monetary base has increased substantially to over 30 percent, the largest increase since the first oil crisis. Toward the end of March 2002, financial markets showed unstable developments, for example a rise in short-term interest rates maturing beyond the fiscal year-end. However, there was no disruption in the markets at the fiscal year-end, partly due to theeffects of the Bank's determined liquidity provision. Since the beginning of April 2002, financial market conditions seem to be generally stable, judging from developments in stock prices and in short- and long-term interest rates.

It can be seen that the Bank's monetary easing measures have played an important role in preventing further deterioration in the economy by securing stability in financial markets.

However, it is also true that the effects of the monetary easing have not fully revitalized economic activity in the corporate and household sector in a situation where Japan's economy is facing various structural problems. In order to make the monetary easing fully effective and achieve a full-scale economic recovery, it is essential to make progress in structural reforms on the economic and industrial fronts through tax reform and deregulation, and stimulate private demand. At the same time, it is also vital to strengthen the financial system and ensure its stability by resolving the nonperformingloan problem. These processes are accompanied by painful adjustments in the short term. However, from a long-term perspective, they are inevitable if Japan's economy is to realize growth led by privatedemand and to exit from deflation.


The Bank is determined to continue its utmost efforts as a central bank by stabilizing financial markets and ensuring permeation of the effects of monetary easing through provision of ample liquidity so that Japan's economy will exit from deflation and by preventing systemic risk from materializing as "the lender of last resort." At the same time, the Bank strongly hopes that action to tackle structural reforms will be taken and pursued tenaciously in a variety of fields to establish a basis for the sustainable growth of Japan's economy.