Skip to main content

Statement by Masaru Hayami, Governor of the Bank of Japan, Concerning the Bank's Semiannual Report on Currency and Monetary Control

before the House of Councilors Committee of Financial Affairs, December 10, 1998

January 14, 1999
Bank of Japan


I. Introduction

Thank you very much for giving us this opportunity to explain our monetary policy management.

Eight months have elapsed since the new Bank of Japan Law (the Bank of Japan Law of 1997) took effect in April 1998. This new law establishes "independence" and "transparency" as the two fundamental principles of the Bank's policy management. We believe that complete public confidence is indispensable to a central bank in conducting monetary policy with independence. Such strong public confidence, in turn, can be earned only through the transparency of policy decision-making processes. Our policy management has been based on strong awareness of these points.

We recently submitted our first semiannual report to the Diet, under the provisions of article 54 of the new Bank of Japan Law, as an integral part of the measures to improve accountability, in addition to the publication of the minutes of our monetary policy meetings. Today, on the basis of the semiannual report, I would like to present our basic thoughts on monetary policy management.

II. Monetary Policy Management in 1998

A. Economic and Financial Developments

In summary of economic developments in 1998, it can be said that economic stagnation and the nonperforming-loan problem have interacted negatively, causing Japan's economy to deteriorate.

Private-sector demand such as business fixed investment and household consumption has remained weak, and in such conditions, firms have continued to reduce production significantly. As a result, corporate profits have deteriorated, and employment and income conditions have worsened further. Prices have been declining since the middle of this year. In short, Japan's economy is experiencing negative interactions in which shrinking private-sector demand causes declines in production and income, resulting in turn in further falls in private-sector demand.

With regard to financial developments, private banks have become increasingly cautious in extending loans since late last year. This has been due to intertwining of various factors including (1) the erosion of capital base due to the nonperforming-loan problem, (2) the severe fund-raising conditions Japanese banks have faced, and (3) the increase in credit risk of firms reflecting deterioration in business performance. The cautious lending attitude of banks has worked as a financial constraint, resulting in adverse effects in such areas as business fixed investment of small and medium-sized firms. This has then further increased the downward pressure on the economy.

In the meantime, the government has taken various countermeasures, including the enforcement of the two laws regarding the stabilization of the financial system, and the adoption of a comprehensive economic stimulus package. Economic deterioration, however, has not been so easily halted with the further weakening in economic activities in the private sector and the renewed concern over the financial system since this summer.

B. Monetary Policy Management

Taking into account the economic situation, the Bank decided at its monetary policy meeting on September 9 to ease monetary conditions further. This measure was intended to prevent the economy from falling into a deflationary spiral, and to put a brake on the economic deterioration. Specifically, the Bank decided to encourage the uncollateralized overnight call rate--a target for market operations--to move on average around 0.25 percent, down from its previous guideline of on average slightly below the official discount rate (0.5 percent).

Interest rates in Japan have remained very low since the reduction of the official discount rate in September 1995. We are fully aware that, in such a low interest rate environment, households relying heavily on interest income are facing hardships. However, the first priority for monetary policy in the current economic situation is to underpin economic activities from the monetary side. Measures that improve net returns on investment financed by debt and support corporate profits and asset prices will curb the economic decline and consequently bring about positive effects on employment and income. Our decision to ease monetary conditions in September was based on this macroeconomic view.

In line with the new guideline for market operations, the Bank has intended to stabilize financial markets through the injection of ample funds. We have especially been aggressive in injecting funds with relatively long maturity, because the upward pressure on interest rates on funds maturing beyond the end of the calendar year and the fiscal year has been strong, amid the persistent concern over the financial system.

Despite the continuation of such drastic monetary easing, however, financing conditions of firms remain severe reflecting the weakened financial intermediation function of private banks. The Bank therefore made another decision on November 13, which was to introduce new measures related to its loans and market operation instruments. First, the Bank decided to use commercial paper (CP) repo operations more actively; it would purchase CP with longer maturities. Second, the Bank decided to establish a temporary lending facility to support firms' financing activities, and to put this measure into effect this month. Third, the Bank has started studying the feasibility of bill operations in which the Bank would purchase bills against pooled collateral solely composed of corporate bonds and loans on deeds, aiming at more effective use of the private corporations' debt obligations in money market operations. We have introduced these tools and made our utmost effort to facilitate firms' financing activities while seeing to it that the soundness of our assets is maintained.

III. The Outlook--Toward a Stronger Financial System and an Economic Recovery

As I have stated, Japan's economy continues to deteriorate with the strong negative interaction between financial and economic developments. The Bank has responded to this situation by providing the financial markets with ample liquidity and doing so in a more effective way.

To restore Japan's economic strength, in addition to providing liquidity, it is also necessary to (1) restructure Japan's financial system as promptly as possible and restore credibility at home and abroad, and (2) create demand that would be realized immediately.

With respect to issues related to the financial system, the Financial Function Early Strengthening Law was put into effect in October. Many major banks have indicated their intention to request an injection of public funds under this law. Such moves by banks as well as the easing of concern about credit contraction in the global financial markets seem to have contributed to the gradual alleviation of anxiety in the financial markets. Moreover, the severity of firms' financing conditions seems to have eased somewhat toward the end of the calendar year thanks to monetary policy measures and the various measures implemented by the government.

There have been conspicuous developments toward the restructuring of financial industry, including alliances involving foreign financial institutions and those across the sectors. I would like to welcome these efforts made by financial institutions themselves to improve their business management. Such developments notwithstanding, unrelenting efforts at all levels continue to be necessary because it is not at all easy to restore the soundness of once severely damaged financial system.

As for economic developments, there has been a marked rise in public investment implemented under the comprehensive economic stimulus package introduced in April. We expect the decline in the economy to moderate gradually as the effects of public investment fully materialize. Economic conditions, however, are likely to remain harsh for some time, given the large domestic output gap. We, therefore, strongly hope for the prompt and effective implementation of demand-boosting measures included in the emergency economic measures.

To realize a full-scale economic recovery, strong confidence in both the corporate and household sectors is indispensable in addition to the aforementioned financial and fiscal measures to underpin economic activities. It is important that renewed vitality emerges in the private sector and that strong commitments for the structural reforms continue. Should these efforts be neglected, Japan's economy would be left with no result beyond a massive fiscal deficit.

Among foreign economies, the United States is enjoying a sustained growth driven by a sequence of technological innovation, while Europe is about to realize its long-awaited goal of monetary union in January 1999. The world economy is changing dramatically. Japan needs to recognize this dynamism and to prepare for a new phase of economic development by implementing its own structural reforms. I am convinced that this is vital not only for Japan but also for Asia and the world.

In this regard, Japan needs to act expeditiously to carry out further restructuring and development of its financial markets, which I believe will make the yen easy to use, domestically and internationally, and thus contribute to bringing about a truly "internationalized" yen.

The Bank will carry on making its utmost effort, as Japan's central bank, to achieve these objectives that I have mentioned.

Furthermore, in conducting operations to maintain the stability of prices and that of the financial system, it is very important for the Bank, as Japan's central bank, to secure its financial soundness. A country's creditworthiness depends heavily on the soundness of its central bank's assets. We believe, therefore, that it is a fundamental principle for the Bank to maintain the soundness of its assets. In addition, the Bank will make every effort to secure the liquidity of its assets in order to carry out its policies and operations with flexibility.

I would like to conclude by reaffirming the Bank's strong commitment. I would truly appreciate the continuing support and understanding of the Japanese people and the members of the Diet.