description
stringlengths 27
553
| text
stringlengths 0
341k
⌀ | bank
stringclasses 118
values | Year
int64 2k
2.03k
| Month
int64 1
12
|
|---|---|---|---|---|
Speech given by Mr Masaru Hayami, Governor of the Bank of Japan, to the Research Institute of Japan, in Tokyo, on 21 March 2000.
|
Mr Hayami: Price stability and monetary policy Speech given by Mr Masaru Hayami, Governor of the Bank of Japan, to the Research Institute of Japan, in Tokyo, on 21 March 2000. * * * I am honored to be invited to this meeting and given an opportunity to address such distinguished guests. More than a year has passed since the Bank of Japan launched the zero interest rate policy in February 1999. During that time, Japan’s economy has shown significant improvement thanks to aggressive monetary easing, fiscal stimulus measures, and the restoration of financial system stability. Underlying conditions for the recovery of private demand such as business fixed investment and household consumption have also continued to improve. Nevertheless, we still need to carefully monitor the effects of such improvement on the spending behavior of households and firms, particularly since the economy is faced with various structural problems. And, in view of the fact that Japan’s budget deficit is the largest among major industrial countries, it should be noted that further stimulus from the fiscal policy side is not an easy option. Under such circumstances, voices calling for additional measures on the monetary policy front have tended to become louder. And, some have begun to argue for tolerating a little bit of inflation. In fact, we have been receiving an increasing number of questions asking our views on “inflation policy” and inflation targeting. Though there is no single definition of inflation policy, it includes all policies which somehow artificially create inflation or inflationary expectations. Before responding to the questions, we first need to review the significance of price stability. In this regard, the Bank of Japan has recently announced that it will conduct a comprehensive study on price stability, and today’s speech can be regarded as a prelude to such study. 1. Why is price stability important? Significance of price stability The new Bank of Japan Law which came into effect in April 1998 stipulates that the objective of monetary policy is to “contribute to the sound development of the national economy through the pursuit of price stability”. When we emphasize the importance of price stability, we are sometimes criticized that the Bank of Japan is only concerned with inflation regardless of current economic conditions. Let me start by explaining that such criticism is not to the point. Price stability is important because it provides the foundation for all kinds of economic activity and the people’s livelihood. The market economy is a structure within which firms and households make decisions regarding consumption and investment based on prices of individual goods and services. And, the general price level is a concept that consolidates individual prices of various goods and services traded in a country. In other words, the levels of individual prices can be evaluated against the general price level as a yardstick. In this framework, price stability means that this yardstick is reliable. If so, changes in consumer preferences and the progress of technological innovation will be efficiently translated into changes in individual prices. Thus, firms will be able to use changes in relative prices as a signal for their future business strategy. From a macroeconomic viewpoint, when the economic environment is continuously changing, stable prices facilitate the smooth reallocation of such resources as labor and capital and also technological innovation in response to, for example, consumer trends, thereby ensuring sound economic growth over the long run. If prices fluctuate considerably and the yardstick becomes unreliable, then the signaling function of individual prices will be greatly weakened. In this case, labor and capital will not be easily transferred to growth industries, and the inefficient allocation of resources will ensue. In addition, an economy with unstable prices will likely experience unstable business cycles. This, in turn, will make it difficult for firms and households to formulate prospects regarding profits and income, which obstructs sound investment activity. Thus, if price stability is impaired, the long-term growth rate will decline. Furthermore, price fluctuation distorts income distribution. For example, if inflation occurs, those with financial assets which are fixed in nominal terms, such as bank deposits, will see a fall in their real value. Conversely, those with financial liabilities will benefit from a reduction in their real value. As a result, inequality between those with assets and those with liabilities will arise. In contrast, if deflation occurs, the reverse inequality will follow. Policy objective of the Bank of Japan As such, price stability lays the foundation for sound economic development from the viewpoint of both efficiency and fairness. The Bank of Japan has been aiming at price stability that is neither deflationary nor inflationary. It is a mistake to think that the Bank is concerned only with inflationary risks. This can be understood from the conduct of monetary policy in the recent period. In February 1999, the Bank embarked on drastic monetary easing, namely the zero interest rate policy. And in April, it made clear its firm intent to maintain this policy until deflationary concerns are dispelled. In view of current economic conditions and price developments, Japan’s economy is judged not to be in the middle of deflation. What is frightening about deflation is that it induces a vicious circle called a deflationary spiral whereby price declines reduce corporate profits and wages which, in turn, leads to a slowdown in business activity and further price declines. These can be called “pernicious price declines”. In fact, there was a very high risk of Japan’s economy falling into a deflationary spiral up until around the spring of 1999, but concern over such risk materializing has greatly subsided in the past year. Both CPI and WPI have been almost level. Corporate profits have been increasing and economic activity gradually picking up. Though it is true that prices of a number of products have been declining, this is against the backdrop of various revolutionary changes including the so-called IT revolution, that is, the progress of technological innovation in information and telecommunications, as well as the revolution in distribution networks represented by the emergence of so-called “category killers”. Such phenomena cannot necessarily be regarded as pernicious price declines. Nevertheless, the Bank has been continuing its extremely accommodative policy symbolized by the zero interest rate policy. This is because, in our judgment, we might again face the risk of pernicious price declines until such time we can be confident that Japan’s economy has achieved a recovery underpinned by private demand. As such, the Bank of Japan has been conducting monetary policy by paying due consideration not only to inflation but also to deflation. 2. Problems with inflation policy Two views of inflation targeting Recently there have been various discussions on setting a specific numerical target to the inflation rate in order to achieve price stability, namely inflation targeting. At the outset, it should be noted that two different views have been discussed in Japan under the title of inflation targeting. Originally, inflation targeting is a policy framework to enhance the transparency regarding the conduct of monetary policy and to strengthen the credibility of the commitment to price stability. However, not a few advocate so-called inflation targeting in the same vein as inflation policy. Thus, before discussing inflation targeting in its original concept, let me say a few words about the problems involved with inflation policy. Inflation policy is not a well-defined concept. Most typically, as Professor Krugman of MIT advocates, it is a policy which aims at a somewhat high inflation rate of 4 to 5% and mobilizes all possible measures to achieve this target. Professor Krugman appears to have asserted this rather extreme policy prescription based on a very pessimistic view of Japan’s economy. As a matter of fact, however, Japan’s economy has started to improve. And, it is our judgment that, under such economic conditions, we should never adopt a policy that is contrary to price stability. There is a variation of inflation policy that says a moderate inflation rate of 2 to 3% is tolerable and it may vitalize economic activity. However, given the current situation in Japan where prices are almost level, such a proposal is tantamount to artificially creating inflation. Furthermore, to implement such a proposal, many have suggested that the Bank of Japan should increase its outright purchase of government bonds or underwrite them. Some even advocate that the Bank of Japan should purchase stocks or real estate. Thus, what started as a proposal aiming at a moderate inflation rate of 2 to 3% under the disguise of inflation targeting for price stability has ended up being the same as inflation policy in that inflation should be artificially created at any cost. Inflation is no solution to economic problems Regarding inflation policy, first and foremost, I would like to point out that inflation is no solution to economic problems. Inflation policy assumes that moderate inflation will revitalize economic activity, alleviate the debt burden of firms as well as financial institutions, and relieve the fiscal deficit problem. Apparently those who advocate inflation policy argue, while taking due account of its negative effects, that the intended positive effects would be greater than the negative effects under the current situation. But, if we look more closely, the intended positive effects themselves would not likely be achieved. Needless to say, financial markets today are sufficiently developed in major industrial countries, including Japan, and integrated on a global scale. And thus prospects for the economy and prices in Japan are of considerable interest to investors worldwide. Here, let us assume that the Bank of Japan announces a target inflation rate and market participants both at home and abroad believe that the announced target will be achieved. A well-developed financial market would immediately discount this announcement and long-term interest rates such as the yield on government bonds would rise even before we actually observed inflation. In theory, the nominal interest rate is defined as the sum of the real interest rate and the expected rate of inflation. Therefore, with such an announcement, the nominal interest rate would be pushed up by the same degree as the rise in the expected rate of inflation, leaving the real interest rate, which influences economic activity, unchanged. Furthermore, since uncertainty regarding the future normally increases as inflation rises, there would be a greater possibility that long-term interest rates might rise more than the amount corresponding to the increase in the expected rate of inflation because of risk premium accompanying higher uncertainty. If this happened, the debt burden of firms and the fiscal deficit would likely increase rather than decrease in real terms. The increase in long-term interest rates would also have an adverse impact on economic activity such as business fixed investment. Therefore, a policy to create inflation would most likely turn out to be counterproductive to the objective it was initially intended to achieve. Those proposing the solving of economic problems by way of inflation often refer to the experiences of history or developing countries. But, compared to such experiences, Japan today is placed in a totally different situation in terms of the development of its financial markets and globalization. Indeed, we would face the problem I just mentioned whether the target inflation rate were 4 to 5% or 2 to 3%. In this regard, it should be emphasized that what Japan needs now is an increase in real economic growth, not a rise in inflation. Difficulty of controlling inflation The second point is that inflation is most likely uncontrollable once triggered. Once inflationary expectations take a firm hold on society, they tend to proliferate. Workers would demand higher wage increases than would otherwise be the case. If wage costs rise, firms would try to pass them on to product prices. Such an economy has a built-in risk of increasing inflationary pressure. Some argue that since the Bank of Japan is an independent central bank, it can raise the inflation rate to 2 to 3% and then contain it around that level even if there exists further upward pressure. However, if we tried to contain inflation after it had gained momentum, we would need very strong monetary tightening, which might result in a substantial deterioration of economic activity and a steep climb in unemployment. While it is true that the Bank of Japan has the power to contain inflation, it is also true that enormous costs would be imposed on society to suppress inflation once triggered. In fact, prevailing thought in major industrial countries until the 1970s held that economies would be better off if a little inflation were tolerated. Partly because of such lax monetary policy, the world economy experienced high inflation from the 1970s through the first half of the 1980s. And to contain such inflation, many countries had to experience such hardships as higher unemployment. Because of such bitter historical experience, major industrial countries have now discarded the idea that a little bit of inflation will improve economic activity. Mainstream thinking now says that price stability should be maintained by a policy which prevents inflation from arising in the first place. Problems with further monetary easing The third point concerns measures to create inflation. In Japan, we have already exhausted orthodox monetary easing measures. Even if we wanted to create very modest inflation, we would have to resort to such unorthodox measures as an increase in our purchase of government bonds or even underwriting them. But here it should be noted that there is a risk that the negative side effects might be quite large once the Bank implemented such unorthodox measures. The severity of Japan’s fiscal situation has attracted attention from all over the world. Thus, if the Bank of Japan started purchasing government bonds in large quantities, credibility in them would most likely be impaired. Long-term interest rates would rise because of a higher risk premium occasioned by a deterioration in the creditworthiness of the Japanese government. Adoption of such a drastic policy would run the high risk of eroding not only fiscal discipline and the smooth functioning of financial markets but also the credibility of Japan itself. Effects of the zero interest rate policy Having said all this, we should ask ourselves whether there is anything more to do in terms of monetary policy. As a matter of fact, the zero interest rate policy is an extremely powerful policy tool for monetary easing. Under the framework that the zero interest rate policy will be maintained until deflationary concerns are dispelled, if uncertainty about the economic outlook increases, the timing of lifting the zero interest rate policy will be automatically delayed. By taking account of this automatic prolongation of current monetary policy, long-term interest rates will promptly decline. Thus, the zero interest rate policy is powerful in that it possesses flexibility of automatically absorbing, to a certain extent, the effects of any negative shock on the economy. Currently, Japan’s economy has started to improve. Industrial production continues to rise, and the increase in corporate profits is being confirmed. Though there remains uncertainty regarding the future, we have been observing quite a number of new developments in such areas as information and telecommunications. At this juncture, I believe it very important to promote structural reform and create an environment conducive to revitalizing the corporate sector while the economy is underpinned by fiscal and monetary policy. 3. Inflation targeting Original inflation targeting Next, let me talk about the original concept of inflation targeting. Basically, it is a policy framework that emphasizes the strong commitment of the central bank to maintaining price stability and enhances the transparency regarding the conduct of monetary policy. Inflation targeting has been adopted by such countries as the United Kingdom, New Zealand, and Sweden since around 1990. For example, in the United Kingdom, the target inflation rate is set at 2.5% for a price index roughly equivalent to CPI. At its monthly Monetary Policy Committee meetings, the Bank of England discusses the outlook for inflation and determines any necessary change in interest rates taking due account of the time lag for the effects of monetary policy to materialize so as to bring inflation to around 2.5% over the span of two years. Once every quarter the Bank of England releases an inflation report in which it explains the conduct of monetary policy and describes prospects for the economy and prices during the course of the following two years. While implementation of inflation targeting differs from country to country, the fundamental common factors are (a) setting a target inflation rate, (b) conducting monetary policy with the aim of achieving the target over the medium term, and (c) making available a substantial amount of information including the economic outlook which is the basis for policy judgment. It should be noted that the central bank is not required to achieve the target inflation rate in the short run. The aim of inflation targeting is to contain inflationary expectations and enhance accountability regarding monetary policy by making a numerical target the medium-term objective. This original concept of inflation targeting may have some merits. In fact, we have discussed the subject a number of times in our Monetary Policy Meetings. However, at the moment, I think adoption of such a framework in Japan presents many difficult problems. Price developments in Japan As far as prices are concerned, they have been very stable in Japan. Inflation targeting was originally adopted as a policy framework geared toward price stability by those countries who were suffering from high inflation. For example, in the United Kingdom, the average rate of inflation was more than 5% during most of the 1980s, reaching 7 to 8% in 1990 and 1991. And in 1992 inflation targeting was introduced. In the case of the United Kingdom, setting a target inflation rate at 2.5% is equivalent to announcing a strong commitment to containing inflation and maintaining price stability. In contrast, since the early 1980s when the effects of the Second Oil Shock waned in Japan, the average rate of CPI increase has been very low at around 1%, and was only 3% at the peak of the bubble period when the economy was overheated. In the case of Japan, prices have been extremely stable for nearly twenty years. Thus, we have not been put in a situation where we have to set any inflation target to maintain price stability even if we have not solved such difficult problems as defining and measuring price stability. New price revolution The problem of defining and measuring price stability is whether we can set an appropriate numerical target for inflation based on a specific price index. In addition to this rather difficult problem, we need to consider the possibility that major industrial countries, including Japan, are entering a “new price revolution era”. Such development has been born of the rapid expansion of economic activity related to information and telecommunications, in other words the “IT revolution”. This is characterized by extremely rapid technological innovation which induces price declines through the improvement in productivity and the development of new products. Since the mid-1990s the United States has witnessed stable and low inflation under extremely low unemployment, partly because economic expansion has been supported by the IT revolution. This phenomenon contradicts past experience. In addition to this worldwide IT revolution, Japan has been experiencing dramatic changes in its distribution and service industries which can be seen as a revolution in distribution networks. The progress of technological innovation and the revolution in distribution networks raise two big questions when analyzing prices. The first is whether prices of new products and price developments under the new distribution networks are appropriately reflected in price indexes. This is the oft-discussed issue of biases in price indexes. In view of the large number of new products and distribution networks available, this issue might have become more serious than previously envisaged. The second question is how to assess the price declines due to such revolutionary changes. If the IT and distribution network revolutions continue under the current situation of zero inflation, we cannot rule out the possibility that the economy could recover while the inflation rate is negative in terms of the existing price indexes, even though they may not sufficiently incorporate these revolutionary changes. And, in the case where cost reductions continue thanks to technological innovation, even if the inflation rate is statistically negative it would not be appropriate to judge the economy as being deflationary as long as it is recovering steadily. When the environment surrounding prices is likely experiencing dramatic changes, we have to carefully examine whether it is possible to set an appropriate target for inflation based on existing price indexes. Desirable rate of inflation Whether an optimal inflation rate should be exactly zero percent or a small but positive number is another argument worth noting. Following are some of the reasons why the optimal inflation rate could be a small but positive number. First, as I mentioned, it appears not so easy for existing price statistics to fully incorporate actual price declines due to such factors as the revolution in distribution networks. This is the problem related to the upward bias of price indexes. Second, since nominal wages hardly ever decline, which is because of the so-called downward rigidity of nominal wages, economic adjustment would proceed more smoothly with a positive rate of inflation. Third is the zero boundary problem for interest rates. Since nominal interest rates, which can be controlled by the central bank, never fall below zero, room for further monetary easing would be limited if conditions worsened. In this regard, there is an argument that it is better to have a positive rate of inflation as a cushion so that the central bank can maintain room for maneuvering when a policy response is needed. Indeed, this argument may be related to the fact that countries which adopted inflation targeting set, in principle, a positive target for inflation, including the United Kingdom which has 2.5% inflation as a target. However, careful examination seems warranted as to whether these discussions and the examples of foreign countries could be directly applied to Japan. In view of the fact that bonuses have fallen substantially and labor costs have been reduced by utilizing part-time workers and temporary employment agencies over the past one to two years, the downward rigidity of nominal wages in Japan’s labor market may not be so strong as has been argued. The idea of tolerating a certain positive rate of inflation to ensure a cushion for monetary policy seems to be something like putting the cart before the horse. As you may know, Japan has had an average inflation rate of only slightly over one percent for nearly twenty years. Thus, it would need a very good reason to accept an inflation rate of 2 to 3%. At this juncture, we should carefully examine the content of price stability that best contributes to the sound development of the national economy by taking due account of the features and structure of Japan’s economy. Toward enhanced transparency of monetary policy As I have just described, there seem to exist a number of difficult problems in applying inflation targeting to Japan in the way it is adopted in some foreign countries. As a matter of fact, not only the Bank of Japan but also the Federal Reserve Board and European Central Bank are cautious about adopting such a framework. Nevertheless, it is true that the Bank of Japan is keenly aware that the transparency of monetary policy should be further enhanced. Since it is impossible to foresee the economic outlook with certainty, we can neither predetermine the timing of any future policy changes nor set mechanical criteria for deciding policy changes. In fact, even in countries adopting inflation targeting, there is no rule whereby the central bank automatically tightens monetary conditions if inflation hits a certain target rate. In any country, monetary policy is based on the central bank’s judgment of future price developments, which are influenced by various factors such as demand at home and abroad, wages, oil prices, foreign exchange rates, and technological innovation. In the conduct of monetary policy, the central bank needs to make an overall judgment by examining the effects of all these factors on prices. In this sense, the overall judgment of the central bank is important regardless of whether a framework like inflation targeting is adopted or not. In other words, adoption of inflation targeting does not mean that people will be able to know in advance when and by how much the policy interest rate will be changed. The transparency of monetary policy is, after all, nothing more than clarifying what monetary policy is aiming at, and disclosing, to the extent possible, the overall judgment of the central bank with respect to current and future economic and financial conditions. With respect to the former, the new Bank of Japan Law clearly stipulates that price stability is the objective of monetary policy. With respect to the latter, the Bank has been trying to explain its overall judgment as clearly as possible in its Monthly Report on Recent Economic and Financial Developments and minutes of Monetary Policy Meetings. Such disclosure is stipulated in the new Bank of Japan Law. We thus believe that the transparency of monetary policy has been considerably enhanced compared with the situation under the old law. At the same time, we should be well aware that behind the heated discussion on inflation targeting, market participants and the public are calling for more transparency with respect to monetary policy. Truly, greater transparency is also important for the central bank from the viewpoint of the smooth transmission of policy effects. Furthermore, we recognize that it is an important mandate of the Bank of Japan to plainly explain our thinking on the conduct of monetary policy and price stability. Bearing such recognition in mind, the Bank has decided to conduct a comprehensive study on the concept of price stability and issue a report by around summer. The issues for study include: (a) our basic thinking regarding price stability; (b) the measurement of prices, namely, issues regarding price indexes; (c) the evaluation of recent price developments in Japan; and (d) issues related to the numerical quantification of price stability. Since I have often been asked about the relationship between this comprehensive study on price stability and the lifting of the zero interest rate policy, let me say a few words on this issue. The comprehensive study that we have undertaken is intended to review our basic thinking regarding price stability with a view to enhancing the transparency of monetary policy over the long run. And it should be understood that it is independent from the current conduct of monetary policy. Hence, it is not directly related to such issues as the timing of lifting the zero interest rate policy or conditions which must be fulfilled for lifting such policy. In other words, it does not imply that the zero interest rate policy will not be lifted until the study is completed nor that it will be lifted once the study is completed. Conditions for lifting the zero interest rate policy can be likened to those for a patient in a hospital coming out of the intensive care unit, while our basic study on price stability is similar to a medical study of how to maintain health and physical strength in normal times. With respect to the condition for lifting the zero interest rate policy, we have clearly stated that we will maintain the current zero interest rate policy until deflationary concerns are dispelled. 4. Concluding remarks: until deflationary concerns are dispelled I would like to conclude my remarks today by addressing the question of how we might decide that the economy has reached a stage where deflationary concerns have been dispelled. What is of central concern in our conduct of monetary policy is to avoid a deflationary spiral, which is a vicious circle of price declines and recession. However, it is difficult to define this spiral by such simple figures as a certain percentage decline in CPI. To reiterate, we cannot necessarily conclude that a situation is deflationary solely from a negative inflation rate when the IT and distribution network revolutions are in full swing. To the contrary, even if inflation is level statistically, stagnant demand would indicate future declines in prices and corporate profits, which means that deflationary concerns have yet to be dispelled. Thus, price developments must be assessed together with underlying factors. Furthermore, the most important point when judging whether deflationary concerns are dispelled is to analyze whether there exists pressure for pernicious price declines stemming from shrinking demand or a widening output gap. In other words, if we become confident that economic recovery is sustained and that the output gap continues to narrow, then we can say that deflationary concerns have been almost dispelled and Japan’s economy could leave the intensive care unit. In this regard, we need to have clearer indication that the economy is on a self-sustained recovery path led by private demand, not by policy and external factors. Private demand basically consists of household consumption and business fixed investment. While both are necessary for sustainable growth, business fixed investment is believed to play, in many cases, a more important role in giving impetus to a virtuous circle of a self-sustained recovery. Recently, the environment surrounding private demand has been gradually improving as evidenced by higher corporate profits and the improved sentiment of firms and consumers. It is crucial whether such improvement will lead to increased spending. The Bank of Japan will carefully monitor the economy with focus on the strength of private demand centering on business fixed investment. Today, I have tried to share our thoughts with you on price stability and the conduct of monetary policy by referring to inflation policy and inflation targeting. As always, I would appreciate it if you would continue to give us your understanding and support.
|
bank of japan
| 2,000 | 3 |
Bank of Japan, Communication, 19 May 2000.
|
Bank of Japan’s May report of recent economic and financial developments1 Bank of Japan, Communication, 19 May 2000. * * * The Bank’s view2 The improvement in Japan’s economy is becoming distinct. Recovery has been observed in some areas of private demand, with business fixed investment continuing to increase gradually. With regard to exogenous demand, net exports (real exports minus real imports) continue to follow an upward trend due to steady developments in overseas economies, and public investment has started to pick up reflecting the progress in the implementation of the supplementary budget for fiscal 1999. As regards domestic private demand, housing investment is on a moderate declining trend, and recovery in private consumption continues to be weak through lack of notable improvements in employment and income conditions. Meanwhile, business fixed investment continues to increase gradually. Reflecting such developments in final demand, industrial production is increasing, and corporate profits and sentiment continue to improve. Firms as a whole still strongly feel that they have excess capacity and employees, and that they should reduce their debts to restore financial soundness. Nevertheless, the number of firms that take positive action, such as increasing the amount of fixed investment, is increasing gradually, especially in high-growth sectors. Regarding employment conditions, although the decrease in the number of employees and in wages is slowing, efforts by firms to reduce personnel expenses have prolonged the severity of households’ income conditions. As for the outlook, public investment is likely to increase for some time. This, along with the favorable financial environment created partly by the Bank’s monetary easing, is expected to continue underpinning the economy. Moreover, net exports are likely to follow an upward trend reflecting the recovery of overseas economies, and it is also highly probable that business fixed investment will increase gradually with an improvement in corporate profits and sentiment. However, housing investment is expected to continue declining moderately, and there seems to be no substantial change in firms’ stance to reduce personnel expenses. Hence, it may take some time for households’ income conditions to improve and, in turn, for private consumption to recover. In addition, since firms’ prospects for sales remain modest, careful monitoring is still required to determine whether the recovery in business fixed investment is sustainable and whether it is likely to spread to a wider range of industries. With regard to prices, the rise in import prices is slowing, reflecting a temporary decline in international commodity prices such as crude oil prices. Domestic wholesale prices, notwithstanding the fall in prices of electric machinery, are somewhat strong mainly due to the rise in prices of petroleum and chemical products reflecting the increase in crude oil prices to date. Meanwhile, consumer prices continue to be somewhat weak due to the slight decrease in the prices of private-sector services and the decline in prices of imported products reflecting the past appreciation of the yen. Corporate service prices are still falling slowly. As for the outlook, upward pressure on prices is likely to arise from the gradual improvement in domestic supply-demand balance and from the rise in crude oil prices. On the other hand, downward This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on 17 May 2000. The Bank’s view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on 17 May as the basis of monetary policy decisions. pressure is expected from the long-term declining trend of machinery prices due to technological innovations and from the fall in prices of imported products reflecting the past appreciation of the yen. On balance, overall prices are likely to remain unchanged. However, attention should still be paid to the downward pressure on prices stemming from weak demand, although the pressure has weakened given some recovery in private demand. In the financial market, the overnight call rate has generally stayed near zero, and financial institutions have been confident about the availability of overnight funds. The amount outstanding of funds in the call money market has remained generally stable. Interest rates on term instruments have weakened somewhat. The Japan premium remains negligible. Yields on long-term government bonds once rose above 1.8 percent in mid-April but then declined and are recently moving in the range of 1.7-1.8 percent. The yield spread between private bonds (bank debentures and corporate bonds) and government bonds continues narrowing, primarily that between private bonds with relatively low credit ratings and government bonds. Stock prices on the whole recovered from a plunge triggered by a drop in U.S. stocks although they showed divergent movements by index. In the foreign exchange market, the yen strengthened slightly against the U.S. dollar in mid-April but generally weakened thereafter. The yen is currently being traded in the range of 108-110 yen. With regard to corporate finance, private banks have basically retained their cautious lending attitude. However, constraint that had been caused by severe fund-raising conditions and insufficient capital base has eased considerably. Given this, major banks are becoming more active in extending loans, while carefully evaluating the credit risks involved. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is increasing in parallel with a recovery in profits. Moreover, firms continue to reduce debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending seems to remain sluggish although its year-on-year rate of decline slowed in April for the second consecutive month. Issuance of corporate bonds and CP has been steady. Money stock (M2+CDs) grew faster in April compared with the previous month on a year-on-year basis. In this financial environment, corporate financing conditions are easing, and the lending attitude of financial institutions is perceived by firms as less severe. It continues to warrant careful monitoring how these favorable developments in the corporate financing environment will affect economic activities.
|
bank of japan
| 2,000 | 5 |
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Japanese Economic Research Center, Tokyo, on 29 May 2000.
|
Masaru Hayami: Revitalization of Japan’s economy Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Japanese Economic Research Center, Tokyo, on 29 May 2000. * * * I had opportunities to speak on the structural problems facing Japan’s economy and the medium to long-term issues which needed to be addressed. And, on each occasion, I emphasized that for Japan to achieve a full-fledged recovery, not only support from policy measures but also private sector vitality in the form of “creative destruction”, were of critical importance. As Japan’s economy has recently been showing clearer signs of improvement, we have witnessed earnest efforts toward structural reform being set in motion in various areas of the economy. Bearing in mind such a development, today I would like to talk about the issues which are considered important to Japan’s economy at the moment. 1. Recent economic developments and structural adjustment Current state of the economy Let me start by giving our view on the current state of the economy. The improvement in Japan’s economy is becoming distinct. And, recovery has been observed in some areas of private demand as witnessed by business fixed investment continuing to increase gradually. Looking back to around this time last year, it is true that some economic indicators had already begun to show signs of recovery. Such a recovery was brought about by an increase in public investment and favorable developments in overseas economies, and was far from being a self-sustained recovery led by domestic private demand. To the contrary, the recent improvement has been accompanied by a recovery in private demand centering on a moderate increase in business fixed investment, and deflationary concerns have gradually subsided, although private consumption, which is a major component of private demand, still remains short of what one would call a recovery. Granted that private consumption is unlikely to return to the high growth of the 1980s because of the declining growth potential of Japan’s economy over the long run, and given that consumer sentiment has been gradually improving, the key to the outlook for private consumption will be the impact of increased production and higher corporate profits on household income. With this in mind, we continue to carefully monitor the economic situation. Business cycle and structural adjustment While the economy is on a recovery path, we observe that structural problems have not yet been solved. Since such an observation leads to controversy over the relation between the business cycle and structural adjustment, allow me to elaborate a little. It is not correct to say that the economy will never recover unless structural problems are solved. Needless to say, some kind of structural problems always exist at any point in time in any economy, and I do not deny that Japan currently faces extremely big problems. Moreover, it should be remembered that at the same time we also experience business cycles. On the other hand, it is not correct to claim that an economic recovery has nothing to do with structural problems. If structural reform does not proceed smoothly, economic recovery will lack strength, or big problems will remain unsolved even after the economy recovers substantially as evidenced by the situation in Japan after the bursting of the bubble. I think it true to say that economic recovery would be all the more robust if accompanied by the progress of structural reform. The nature of structural problems may differ from time to time and from country to country, and it is not easy to come up with a clear-cut definition. Having said this, the current structural problems in Japan could be characterized as arising from the process of the economic system adapting to a new environment, in other words, it is a problem that has contained the dynamism of the Japanese economy. Indeed, changes in the economic environment in the 1990s such as the progress of information and telecommunications technology and the globalization of market economies had a substantial impact on Japanese firms in persuading them to change. The aftereffects of the bursting of the bubble can also be recognized as a structural problem in that they prevented firms and financial institutions from adapting to the change in the environment by eroding their financial strength. Significant changes in the environment can make an existing economic system obsolete and reduce profitability of the corporate sector. Particularly when the magnitude of change is large and firms are uncertain as to how to adapt, many initially tend to be defensive in their response by reducing investment and employment, which only leads to further downward pressure on the economy. In the process of cost reduction, however, firms that recover profitability and discover ways to adapt to the new environment will gradually increase in number. Then, the way a firm overcomes structural problems itself will become a source of new growth. This is the stage where firms take the offensive in that they implement comprehensive reform of their management system geared toward the new environment and invest in strategically important areas or new businesses. Though even at this stage there will exist not a few firms which are still defensive, the overall picture is that the economy will recover as structural reform progresses. And, as the number of firms taking the offensive increases, the economy will eventually shift to a full-fledged recovery path. Characteristics of economic recovery under structural adjustment Currently, it is our judgment that Japan’s economy is at the stage where the number of firms taking the offensive has started increasing, that is, the economy is moderately recovering parallel with structural adjustment. Let me point out some of the major characteristics of this recovery. First, the recovery has been led by the corporate sector. In the 1990s, the prolonged recession and slow adjustment of employment and wages under the prevailing management system led to a substantial rise in the proportion of labor income to national income, which was one factor behind the deteriorating profitability of Japanese firms. Putting aside the effects of active monetary and fiscal policy as well as steady developments in overseas economies, the current recovery is, to a large extent, triggered by the earnest restructuring of Japanese firms with the aim of restoring profitability. Thus, with respect to the recovery of private demand, it seems natural that the corporate sector, which has regained profitability as a result of restructuring, should take the lead by increasing investment followed by the household sector as income conditions gradually improve. This is the development we are now witnessing. Second, we observe polarization in various areas of the economy. For example, a moderate recovery of business fixed investment does not mean a uniform increase across the board. While those industries which produce basic materials are burdened with excess capacity and continue to restrain investment, those related to information technology, such as electric machinery, have increased investment substantially. Another example. In the labor market, we have recently witnessed the situation where new job offers have been growing at a double-digit rate on a year-on-year basis while the unemployment rate has remained high or even slightly increased. This signifies a widening mismatching of supply and demand in the labor market. Under the globalization of market economies and the progress of information and telecommunications technology, while workers with skills that firms need are in short supply, workers who have accumulated firm-specific skills under the traditional lifetime employment system are no longer in demand. When economic recovery and structural adjustment proceed simultaneously, we often observe conflicting developments. Thus, to accurately grasp economic developments, it is extremely important not only to examine macroeconomic indicators but also to thoroughly understand the microeconomic movements behind such macroeconomic indicators. 2. Movements toward structural reform Response to the aftereffects of the bursting of the bubble - declining financial intermediary function Now let me turn to the earnest structural reform efforts being seen in various areas of the economy. First, the problem of the declining financial intermediary function after the bursting of the bubble has begun to be resolved. It goes without saying that the aftereffects of the bursting of the bubble were one of the major factors responsible for making the 1990s a “lost decade” in Japan. The bursting of the bubble created the balance sheet problem. Indeed, the non-performing asset problem of financial institutions has reduced their risk-taking capacity and impaired the smooth circulation of money. In particular, behind the extremely severe recession from the end of 1997 to 1998 was a decline in confidence on the part of both the corporate sector and the household sector stemming from financial system instability and the deterioration of the financial intermediary function which has often been termed a credit crunch. Since spring last year when the Bank of Japan effected the zero interest rate policy and public funds were injected into major banks to strengthen their capital base, public confidence in the financial system has been gradually restored, and we are observing a favorable impact on the economy. Furthermore, an important development which has not been observed for nearly half a century since the end of World War II, is that the financial industry is moving toward large-scale consolidation. Last year, private consumption supported the economy in the midst of a decline in household income, which means a decline in the savings rate. This can perhaps be interpreted as households, which were concerned with financial system instability and increased their savings from the end of 1997 to early 1998, turning to loosen their purse strings. In this regard, the Survey on Lifestyle and Financial Behavior conducted by the Bank of Japan indicates that since spring last year not only has concern over the collapse of financial institutions subsided but also the number of respondents expressing worries about job security and earnings or refraining from spending has also gradually decreased. On the part of the corporate sector, responses to the Bank’s Tankan survey indicate that the improvements in the lending attitude of financial institutions and also their funding conditions have been gathering momentum. Moreover, the willingness of small and medium-sized firms to invest, which is mostly financed by bank borrowing, seems to have gradually strengthened, though up until now such investment has been contained within cash flow and has not yet led to an increase in bank borrowing. Considering that the non-performing asset problem of financial institutions has not been completely resolved, and taking into account the excess debt of the corporate sector, we have not yet reached a point where we can say that the problem of the aftereffects stemming from the bursting of the bubble has been resolved. In addition, the continuous decline in property prices is another matter of concern. Furthermore, the consolidation of financial institutions is not merely a matter of size. The key to successful consolidation is to become more efficiently managed through a strategy of “selection and concentration”, and it will take more time for such consolidation to bear fruit. Nevertheless, at this moment, it should be noted, and welcomed, that amid the irreversible trend of financial globalization and the advance of information technology it is the initiative of the private sector, not that of the public sector, which will pave the way to the new economy. Parallel with such moves on the part of major financial institutions, progress has been made in direct financing such as the establishment of MOTHERS on the Tokyo Stock Exchange in November 1999, followed by NASDAQ JAPAN established in early May at the initiative of the private sector and which will start operation in June. I have repeatedly emphasized that at the present time when structural adjustment is much needed, abundant domestic savings should be utilized to finance investment in the form of “risk capital”. And, I thus welcome that such markets have been inaugurated to fulfill an intermediary function for risk capital. New phase of corporate restructuring Second, efforts toward structural reform have also been made in terms of corporate restructuring, and I think we have begun to observe the result of such efforts. When talking about restructuring and the results in the recent period, those in the business world say that they have been pursuing restructuring for a long time. I fully commend past efforts toward corporate restructuring, but what I would like to emphasize here is that the restructuring witnessed since last year is of a different nature compared with the past and such a tendency has recently become more distinct. In my view, past restructuring focused mostly on cost reductions, in other words, downsizing. To the contrary, current restructuring, though initially having a tendency toward downsizing, has shifted to focus on business content or reengineering, which means the restructuring of production and management systems which have been rendered inefficient. I believe that the restructuring of Japanese firms has truly entered a new phase. Behind such a change in the focus of restructuring, those in the business world, as in the case of financial institutions, experienced a protracted recession and were faced with a very severe financial environment, particularly from 1997 to 1998. During this period, many small and medium-sized firms faced funding difficulties, and from the summer to the autumn of 1998 when financial and capital markets both at home and abroad were under stress due to such factors as the Russian crisis, not a few representative big Japanese firms also faced similar difficulties. Such an experience linked with changes in the accounting system, namely the consolidated and mark-to-market methods, brought about the recognition or a sense of crisis on the part of firms that Japan’s traditional corporate governance including the main bank system and cross-shareholdings would not be viable for long and that for their own survival they should enhance their evaluation in the capital market through such measures as improved capital efficiency. All this seems to have triggered current full-fledged restructuring. Current restructuring is different from past downsizing in its nature because firms are required more than ever to efficiently allocate resources and improve profitability. For example, since big firms engaged in the production of electric machinery and chemicals could not enjoy economies of scope any more, they concentrated on areas where they had the most edge, recently termed “areas of core competence” in Japan, and at the same time withdrew from or scaled down unprofitable business areas. And, among basic materials industries burdened with excess capacity, there have been movements toward consolidation including mergers and acquisitions and obsolete equipment beginning to be scrapped. Recent restructuring and consolidation in the corporate sector, including financial institutions, extends beyond the existing keiretsu and corporate group frameworks, and in some cases has proceeded globally with the involvement of foreign capital. Also, good use is being made of such new methods as mergers and acquisitions and the holding company format. Last year, mergers and acquisitions increased substantially and direct investment into Japan, which indicates foreign capital inflows, reached a record high 1.5 trillion yen on a balance of payment statistics basis, three times the prior-year level. Of course, it cannot be denied that the recovery of corporate profitability has been largely attributable to past restructuring, that is, downsizing centering on a reduction in labor costs. However, current restructuring can be expected to exert pressure on firms to withdraw from low profitability areas and concentrate resources on highly profitable and strategic areas such as investment in information technology-related areas. We continue to pay close attention to how the recent development will lead to the recovery of corporate profitability and competitiveness, and eventually the restoration of corporate vitality. Possibility of an information technology (IT) revolution Third, the IT revolution seems to have reached Japan. In the 1990s, with the improvement in productivity induced by the expansion of IT-related investment, the United States enjoyed prolonged expansion and price stability, although we observed such distortions as excessive consumption due to higher stock prices and a rising current account deficit. In Japan, we have recently witnessed a rapid increase in IT-related investment by semiconductor manufacturers. And, I feel that expectations are gradually emerging in Japanese business circles that a mega change which occurs only once or twice in a hundred years might have started in Japan. However, there still remains a deeply-embedded pessimism that Japan is more than ten years behind the United States in IT-related business areas and it is not easy even to catch up. To understand the coexistence of expectations and pessimism, let us examine discussions regarding how the IT-related revolution has been affecting Japan’s economy. One topic for discussion is the spread of IT-related investment in the corporate sector. In this regard, it is necessary to distinguish between investment by IT producers and that by IT users. It is true that IT-related investment in the United States has centered on the computer and telecommunications industries which have recorded the largest improvement in productivity. But it is also true that IT users in a wide variety of industries such as other manufacturing, financial, and distribution industries have improved productivity by way of IT-related investment, which has laid the foundation for the prolonged expansion of investment. In contrast, the current surge in IT-related investment in Japan seems to be at the stage where IT producers such as semiconductor-related manufacturers expand their investment in response to the worldwide expansion of IT demand. While they are important investments, the experience in 1995 and 1996 shows us that an investment boom is bound to be cyclical, which sometimes takes the form of large-scale stock adjustment. Therefore, it is important whether investment by IT users is sustainable. It is encouraging news that many firms are considering strengthening their production and sales systems by introducing supply chain management with the aim of information sharing among client firms as well as procuring materials through the Internet. In the Economic Planning Agency’s Survey on Corporate Behavior published this April, many surveyed listed firms reported excess production capacity on the one hand, and a shortage of information-related equipment on the other. The future outlook for investment by IT users needs to be judged in relation to Japanese-style management. Here, I would like to point out that the spread of such investment to a wide area, including small and medium-sized firms, will be the key to the sustainable expansion of investment, and eventually to an improvement in productivity. IT can be utilized by the corporate sector which is called B-to-B, that is, business to business, and also by the household sector which is called B-to-C, that is, business to consumer. Another topic for discussion is how Japanese firms will respond to the situation when IT is introduced to the household sector. The IT revolution in the United States in the 1990s substantially enhanced productivity through the enhancement of operational processes as personal computer networks were introduced to the corporate sector. Japan was behind the US in this regard, which is perhaps one of the reasons behind the “lost decade of the 1990s”. Some features of Japan’s corporate system were said to be related to this delay. As you may remember, up until the 1980s, Japanese-style management, as represented by keiretsu transactions, the main bank system, and lifetime employment, had been regarded as superior in terms of information sharing among related parties through long-term relationships. In contrast, since the US-style big business model was vertically integrated and susceptible to sectionalism, it had been considered inferior to the Japanese system in processing information. However, any management system should be evaluated in relation to the technology available at the time. The Japanese system is no exception and it has been found to be not necessarily superior on all accounts when the cost of transmitting and processing information is dramatically declining due to the rapid progress of information and telecommunications technology. Rather, the merits of the Japanese system led to a lack of incentive to actively introduce IT for cost reduction purposes. In addition, while firms must review existing transaction styles and reduce workers to take full advantage of the benefits of IT, the Japanese system tends to make it difficult for firms to implement such changes. Furthermore, it should be noted that the 1990s was a period during which Japan had to face the aftermath of the bursting of the bubble and also that it has been difficult to create “venture businesses” in the cultural and social climate of Japan. Considering that all this has constituted constraints for Japanese firms to introduce IT, the IT revolution has widened the gap in competitiveness between the United States and Japan. The recent move toward full-fledged restructuring and increase in investment by IT users can be seen as evidence that Japanese firms have begun to be aware of various problems related to IT. The foundation for venture businesses to be created and flourish is finally being laid as symbolized by the “bit valley”, and partly due to such development the number of newly established firms as a whole has been gradually increasing since last summer. The use of IT in the corporate sector has just started in Japan. Even though the corporate sector in Japan lags behind that in the United States in the use of IT, there is a piece of good news for Japan. The next ten years are regarded as a period during which IT will be actively used by consumers, and not only personal computers but also IT-related electrical appliances and mobile phones will be used as IT terminals. Japanese firms have traditionally had a competitive edge in such areas as electrical appliances and mobile phones, and indeed they are the front runner in such areas as the utilization of mobile phones as information terminals. Regarding the business-to-consumer area, the United States is yet to construct a plausible business model, and there is still a lot of uncertainty about the future. Notwithstanding this, it is important that even though the relative position of the United States and Japan may not be reversed, the possibility has emerged that Japan can fully compete with the United States in the IT field. These developments also seem to have had a positive impact on firms in enabling them to regain vitality. 3. Escape from the lost decade Remaining tasks Compared with my July 1999 speech in which I said that the dynamism of the Japanese economy had been contained, the developments that I have described today indicate that such dynamism has eventually begun to be re-ignited. However, this is far from saying that all structural problems inherent in Japan’s economy have been solved. For example, regarding the balance sheet problem of financial institutions, while the financial system has indeed escaped from instability, the problem is not yet fully resolved as I previously remarked. The excess debt problem on the part of firms has yet to be completely solved. Furthermore, as a result of firms putting more emphasis on capital efficiency, for a while they will continue to reduce assets with low profitability. In this regard, the Bank of Japan’s March Tankan survey showed that major manufacturing industries expected the ratio of ordinary profits to sales for the current financial year to be around 4 percent, which is about the past average. We may be able to say that profitability indices on a flow basis have recovered to the average level of the past. However, profitability indices on a stock basis such as ROE and ROA have remained substantially below the level in the 1980s, which is a different aspect of what I referred to as a “decline in capital productivity” in my speech last summer. Under such circumstances, while investment will be made in highly profitable new areas such as the IT-related field, asset reduction will continue in existing low profit areas in order to raise ROE and ROA. According to the Economic Planning Agency’s Survey on Corporate Behavior, about half of listed firms responded that it would take more than two years for their real estate, buildings, and production facilities to return to appropriate levels. With respect to corporate restructuring and the IT revolution, there is no knowing how they will lead to an improvement in corporate profitability and increase in investment. Even if higher profitability and larger investment were realized, there is a possibility that the polarization seen in the economy might become, albeit temporarily, more apparent. For example, while there are industries regaining profitability supported by restructuring and IT demand, not a few firms will be left behind in traditional and domestic demand-oriented industries. In this regard, public utilities, which have experienced a series of deregulatory measures, continue to suppress investment, and small and medium-sized wholesalers and retailers who are susceptible to the effects of the distribution revolution have been slow to exhibit a business recovery. Regarding employment, there is a possibility that while demand for workers who have skills compatible with the new era increases, demand for workers who lack such skills declines. In this context, the unemployment problem might become an issue. These negatives can be termed the “shadow of structural reform”. Since it is difficult to forecast the impact of IT on corporate profitability and growth, we should bear in mind that there may be large swings in the stock market which tends to strongly respond to a variety of forecasts. In fact, strong expectations last year for the growth of IT-related industry led to a substantial increase in the prices of IT-related stocks. On the other hand, while the improvements in Japan’s economy is becoming distinct, IT-related stocks in Japan have recently been bearish reflecting the worldwide correction of IT-related stocks. These swings are unavoidable to some extent when the market is trying to identify growth industries and the key firms which lead such industries. The swings in stock prices will reveal promising new technologies and firms which incorporate these technologies, and nurture them. The Bank of Japan continues to pay due attention to stock price developments, and, in so doing, we think it important to calmly identify the meaning and background of stock price fluctuations. Furthermore, a declining birth rate and aging society present a long-term challenge to Japan’s economy. For example, with respect to the high savings rate of the private sector in Japan, I have often remarked that the lack of consensus among the public as to how future pensions and medical fees should be funded has restrained consumption through anxiety about the future. In this regard, the introduction of a nursing care system from this year is certainly a step forward, and I hope this system will take hold. “Creative destruction” revisited When the economy recovers, as is now happening, it might well be the case that efforts for structural reform might be neglected due to a sense of security. In addition, when the shadow of structural reform becomes conspicuous, for example in employment, calls to reverse such reform and pressure for additional macroeconomic policy measures such as the expansion of aggregate demand are very likely to intensify. However, there is no doubt that structural reform has contributed to the current economic recovery, and we should not forget that remaining structural problems must be solved to achieve sustained economic expansion in the future. Structural problems cannot be solved solely by macroeconomic policy measures such as monetary and fiscal policy. Now that financial and capital markets are highly globalized, any attempt to wipe out past problems by generating inflation will never be successful. Let me emphasize again that it is private sector vitality in the form of “creative destruction” that can solve these structural problems. And, as the US experience shows, private sector vitality will gradually absorb the adverse effects of structural reform. In this “era of metamorphosis” as represented by the current IT revolution, there exists considerable uncertainty about the future. From another angle, we can say that it is an era where innovation can lead to business opportunities. Under such circumstances, the role which the public sector should play is to prepare a market environment which is conducive to nurturing innovation. One thing is the stability of the macroeconomic environment. In this regard, it is the responsibility of the Bank of Japan to maintain stable macroeconomic conditions through price stability. Other important roles that the public sector should play are to promote deregulation and improve the taxation and legal systems so that firms and households can take appropriate risks more easily and operate more flexibly. As such, it is my view that the role of the public sector in this era of metamorphosis should be to focus on preparing an appropriate market environment. In this regard, we should learn from the US experience where the early Clinton administration advocated the “information super highway” plan, but which was later dropped in favor of preparing an environment conducive to encouraging the IT revolution led by the private sector. In Japan, triggered by severe economic conditions in 1997 and 1998, we have seen efforts toward preparing an environment suitable for economic rebirth, including enactment of the Economic Revitalization Law. As we move toward a full-fledged economic recovery, the role of the public sector and economic policy should be flexible so as to be able to remain consistent with an era of metamorphosis. In this regard, it is necessary to examine the role of public investment, the level of which is said to be very high among industrial countries, from the viewpoint of fiscal deficits as well as whether such investment is in line with the current era of metamorphosis. In July 1999 when I spoke on structural problems in Japan’s economy, there were more pessimistic views about Japan’s economy than today. On that occasion, I said I was proud of Japan’s high quality labor force, technology, and management skills which had created a big economic power from the ruins after the war, and emphasized the need of ‘creative destruction”. And now, after almost a year, I am quite encouraged to find that signs of a recovery have been increasing. I hope the current favorable developments will gather momentum and that the day will soon come when Japan’s economy returns to a full-fledged recovery path led by the private sector. Let me conclude my remarks by saying I hope that the 1990s will be revaluated as the ten years which laid the foundation for the prosperity of the next generation.
|
bank of japan
| 2,000 | 6 |
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Executive Board of Directors' Meeting of the Japan Foreign Trade Council, held in Tokyo, on 7 June 2000.
|
Masaru Hayami: The role of Japan amid the changing international financial environment Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Executive Board of Directors’ Meeting of the Japan Foreign Trade Council, held in Tokyo, on 7 June 2000. * 1. * * Introduction Thank you for inviting me to the 263rd Executive Board of Directors’ Meeting. It is a great pleasure to have this opportunity to address such a distinguished audience. It also brings back memories of my days as one of the Council’s Executive Directors and Vice Chairman under Chairman Mimura. Your invitation today allows me to be here again, for the first time in almost ten years since I left the Council to become Chairman of the Japan Association of Corporate Executives. Knowing that many of you come from trading companies which are active globally, today I’d like to share my ideas from the viewpoint of the role of Japan amid the changing international financial environment. 2. Tensions generated by globalization Having previously worked for the Bank of Japan for 34 years, I had a chance to work in the then Foreign Department, our London Office and other positions related to the Bank’s international activities. It was a great experience for me to attend important international meetings such as the BIS and the then G5 meetings. Then, two years ago, I returned to the Bank of Japan as Governor. Now, representing the Bank, I have a chance to again take part in various international meetings. Attending such meetings, I have noticed two things. First, the number of international meetings has multiplied over the years. In this context, of particular note is that the presence of emerging-market countries, particularly the Asian economies, has also increased. One reason for this is somewhat paradoxical in that since the Asian currency crises of 1997, there is a consensus that the economic and financial stability of emerging-market economies is crucial for global economic and financial stability. Indeed, the rise in the number of international meetings and participants evidences the extent to which economies are becoming globalized. The second thing I have noticed is that various kinds of tensions have arisen as the market economy has become more globalized. I clearly recall NGO activists surrounding the WTO’s Ministerial Conference in Seattle last December. The IMFC meeting, which I attended in late April on the day after the G7 Meeting, was also the target of similar protests. How can it be that the IMF, a pivotal contributor to the development of the liberalized market economy after the Second World War, and the WTO, a legitimate successor to GATT, have become the targets of such protests? Perhaps the phenomenon can be seen as a typical example of increased tension between those who have ridden the tide of the market-oriented economy and those who have grave concerns about global environmental issues and widening gaps among regions which are possibly caused by rapid global developments. I think many agree that the world economy is currently in the midst of one of its most important turning points since the industrial revolution of the 19th century. Ongoing globalization and computerization are mega trends which will continue well into the future. In this context, competition at the global level is expected to intensify. It is global competition which is the principal driving force behind economic dynamism. No one can stop this trend and we should react positively. However, we cannot deny the fact that newly formed tensions and uncertainties have emerged. Therefore, we should continue to look for ways to promote the sound and stable development of the world economy through steady efforts to establish appropriate rules and regulations that are compatible with the new trends. One thing is certain, such efforts will be accompanied by difficulties, involving some disagreements on the international front, and it is incumbent upon us to try to find solutions. 3. Meaning of IMF reform Against the background of such trends, the international monetary and financial system is burdened with further responsibilities. In particular, the Asian currency crises brought to the fore various issues of concern to international financial circles including the prevention and resolution of future currency crises. And, the outcome of discussions constitutes part of the concept of the so-called “new financial architecture”. The Financial Stability Forum, which was inaugurated last April at the request of the G7, has published recommendations on such issues as highly leveraged financial institutions (for example, hedge funds) and international capital flows. This is one example of the fruit of work undertaken by international financial fora. The reform of the IMF has been a most important issue. And it was also the Asian currency crises that triggered intense debate about the necessity of such reform. The Asian currency crises that broke out as the result of the rapid outflow of short-term capital are called “21st century-type crises”. Here, the IMF has come to be the target of criticism which holds that IMF should improve its surveillance ability and increase transparency of its policy-making processes because it has not sufficiently carried out its mission of crisis prevention and resolution. I personally think the problems surrounding the IMF are deep-rooted and partly reflect its history. As you well know, the period preceding the Second World War was characterized by such negative factors as competitive devaluations, restrictions on current account transactions, and the widespread use of protectionist measures. Without doubt, these had a significant impact on the international economy and created tensions between countries, only fueling pro-war sentiment. The IMF was established with the aim of avoiding the repetition of such disruption. The primary concern of the time was to create a well-structured and crisis-proof international monetary system. For example, fixed parity between the US dollar and gold (with $1 equivalent to 35 ounces), the adoption of the adjustable peg system, and abolition of restrictions on current account transactions were key elements underpinning the Bretton-Woods architecture. Regarding capital account transactions, member countries of the IMF were allowed to impose some degree of restrictive measures. Therefore, it is fair to say that more attention was paid to the stable expansion of current account transactions rather than capital account transactions. However, things have dramatically changed since then. With respect to the foreign exchange regime, the so-called “Nixon shock” in 1971 marked an abrupt end to convertibility between the US dollar and gold, which eventually led to the arrival of floating exchange regimes on a global scale in 1973. And, capital account liberalization was pursued much more vigorously than most architects of the Bretton-Woods system envisioned. As a result, the volume of today’s cross-border capital flows far exceeds current account transactions. As I noted earlier, the huge increase in cross-border capital flows seems to exert a bigger impact than current account transactions on the economic and financial conditions of individual countries, and, at times, could trigger serious currency crises. In brief, present conditions surrounding the international financial system are entirely different from what they used to be when the IMF was created. Amid accelerating globalization and accompanying rising tensions, what kind of contributions can the IMF make to the stability of the international monetary system? What should be the core functions of the IMF in this context? These questions are prime movers behind recent discussions on IMF reform. The IMFC meeting I attended this April in Washington was previously called the Interim Committee. But, unlike the Interim Committee, the IMFC is structured as a permanent forum. Thus, the transformation of the Interim Committee into the IMFC comprises part of efforts to strengthen the IMF, and it can be seen as a symbol of the current challenges facing the international financial system. At the first IMFC meeting this April, we had lively discussions on how to reform the IMF. Although further consideration is needed to reach any realistic conclusions, I believe that some kind of consensus was formed regarding the future direction we should take in reforming the IMF. First, we agreed to develop rules under the basic concept of utilizing market functions. In this regard, the latest G7 and IMFC communiques underscore the importance of involving the private sector in forestalling and resolving currency and financial crises. At the same time, it was agreed to strengthen the IMF’s role in making various rules that can be applied to new developments in global markets, and in monitoring the observance of such rules by member countries. Such a role can be considered as ensuring conditions for proper market functioning are in place, or to correct market failures. Second, we agreed to review or redefine IMF operations under the basic concept of utilizing market functions. In this regard, it was suggested that, for instance, IMF lending operations be limited to short-term liquidity provision to members facing capital account crises. It was also argued that medium and long-term financial support for promoting development be reduced. Third, since the IMF has been strongly criticized for lack of transparency in its decision-making procedures, its accountability should be enhanced in the interest of better governance. IMF reform has just started. However, it is an important challenge that may determine the future course of the international monetary and financial system. Japan is the second largest subscriber to the IMF, following the US. At the same time, Japan is one of the countries most involved in international financial markets, as witnessed by the fact that Japan is the world’s largest capital exporter as well as largest net creditor. Japan has made various contributions to the formation of a consensus among international financial circles regarding the direction of IMF reform and it should continue to do so. 4. Role of Japan in a changing international financial environment What is expected of Japan? Now, let me clarify Japan’s role in this period of changing international finance. First, Japan should actively participate in developing international rules. The introduction of international standards and codes involves important elements that determine not only the future path of global economic development, but which may also have a substantial impact on domestic finance and the economy. For example, this can be seen in Japan by observing how corporate management is being affected by the introduction of international accounting rules. In practice, however, to take part in international rule making is not as easy as it may sound. It requires an enormous amount of knowledge as well as powers of persuasion. And here we should note Japan’s position in the global economy as well as the role it plays in Asian economies. It is thus desirable that Japan be actively involved in and contribute to international rule-making efforts with a full understanding of the situation in the region. In this context, the Bank of Japan seeks to strengthen relations with colleagues in EMEAP (Executives’ Meeting of East Asia-Pacific Central Banks) through more intensive dialogue regarding the regional economy and finance. Furthermore, Japan is expected to contribute to the process of implementing rules in Asia through technical assistance in the field of financial system reform and the establishment of economic and financial infrastructure such as data collection and dissemination systems. Japan’s second role is to directly contribute to the stable growth of the global economy by securing its own sustainable growth. For this purpose, bringing the economy back to the recovery phase of the business cycle is an important challenge. Furthermore, it is more important that Japan goes beyond this by regaining economic dynamism by steadily pursuing structural reform. In addition, as I will discuss later, it will be a big challenge for Japan to win global confidence in its economy as a whole. Japan’s economy and the role of the Yen I do not have enough time today to discuss Japan’s expected role in a comprehensive manner. Therefore, I would like to focus my thoughts on one of the important issues regarding the role of Japan’s economy in the global economy and finance; that is “the role of the yen as an international currency”. This issue is also closely related to the point I have just made: how to win global confidence in Japan’s overall economy. International currency can be defined as “a currency actively used by non-residents as a tool to measure, to store, and to exchange value”. Although non-residents are using the yen, it is perhaps hard to say that it is “actively used”. Rather, it is often argued that the yen is not sufficiently used as an international currency relative to Japan’s status in the global economy. What does this mean? For currencies to be widely used in a global manner, there are several conditions to be met. First, it is indispensable to win confidence in the currency internationally. In order to realize this goal, we need a strong economy supported by a stable currency value. In this connection, let me briefly describe the current state of Japan’s economy. It is becoming increasingly clear that the economy is improving with support from decisive macroeconomic policy. In particular, we are observing welcoming signs in private sector demand as evidenced by a continuing gradual increase in capital expenditures against the background of improving corporate profits. In the coming period, we will carefully examine momentum of the recovery, focusing on how such recovery in the corporate sector will spread to the household sector. Here, I come back to the issue of an international currency. As the second condition for the international use of a currency, I can point out its “user friendliness”. For a currency to be user friendly, the existence of a liberalized and open economic environment, which includes deep financial and capital markets, is necessary. Third, the existence of a mechanism by which the creation of an international network for a currency is catalyzed and accelerated is significant. For example, the global activities of the shipping, finance, and insurance industries under the British Empire, and then American multinational firms in the finance and IT industries, respectively accelerated global use of the pound and US dollar. It may be possible that Japan’s contribution to other countries through more intensive technical assistance will lead to an expanded network for the yen. In sum, to what extent a nation’s currency is globally used depends on confidence in the nation’s economy as a whole. To enhance such confidence, every measure should be taken with the three aspects I mentioned in mind. I would like to take up the issue of the Japanese government bond (JGB) market as an example. The ratio of JGBs owned by non-residents is currently only a few percent, which is extremely low compared to the US and other G10 countries. This is especially understandable when Japan’s cumulative current account surplus and high savings rate are taken into consideration. However, in terms of the global bond index, which world bond investors refer to when making investment judgments, the share of JGBs is the second largest next to that of US government bonds. If the current budget situation of the two countries remains unchanged for some time, it is possible that the share of JGBs will become comparable to that of US Treasuries. If so, it is imperative that the JGB market becomes attractive for international investors. What is necessary for the JGB market to achieve the global standard? Needless to say, policy decisions that might impair confidence in JGBs must be avoided. In this regard, budget policy of the government should be constrained in the long run. It would also be significant to improve the safety and user friendliness of the JGB market from the viewpoint of such aspects as the usability of futures and repo markets, the tax treatment of JGBs, and the standardization of trading and settlement customs. In my speech today, I have touched upon three conditions for a currency to be internationally used, namely, confidence in the currency, high degree of user friendliness, and an international network. I believe that these conditions coincide with the direction that Japan should move in the coming century. Let me add that every time I refer to the “internationalization of the yen”, it carries my strong hope that Japan will adjust to the new global economic order and contribute to international rule making and the foundation for sustainable economic and financial development in the Asian region.
|
bank of japan
| 2,000 | 6 |
Bank of Japan, Communication, 14 June 2000.
|
Bank of Japan’s June report of recent economic and financial developments1 Bank of Japan, Communication, 14 June 2000. * * * The Bank’s View2 The improvement in Japan’s economy is becoming distinct. Recovery has been observed in some areas of private demand, with business fixed investment continuing to increase. With regard to exogenous demand, net exports (real exports minus real imports) continue to follow an upward trend due to steady developments in overseas economies, and public investment is picking up reflecting the progress in the implementation of the supplementary budget for fiscal 1999. As regards domestic private demand, housing investment is on a moderate declining trend, and the recovery in private consumption continues to be weak through lack of notable improvements in employment and income conditions. Meanwhile, business fixed investment is increasing. Reflecting such developments in final demand, industrial production is increasing, and corporate profits and sentiment continue to improve. Firms as a whole still strongly feel that they have excess capacity and employees, and that they should reduce their debts to restore financial soundness. Nevertheless, the number of firms that take positive action, such as increasing the amount of fixed investment, has been increasing, especially in high-growth sectors. Regarding employment conditions, although the decrease in the number of employees and in wages is slowing, efforts by firms to reduce personnel expenses have prolonged the severity of households’ income conditions. As for the outlook, public investment is likely to increase for some time. This, along with the favorable financial environment created partly by the Bank’s monetary easing, is expected to continue underpinning the economy. Moreover, net exports are likely to follow an upward trend reflecting the recovery of overseas economies, and it is also highly probable that business fixed investment will increase gradually with an improvement in corporate profits and sentiment. However, housing investment is expected to decline for the time being. While there seems to be no substantial change in firms’ stance to reduce personnel expenses, an improvement in households’ income conditions, which should support private consumption, is likely to be moderate at the most. In addition, since firms’ prospects for sales remain modest, careful monitoring is still required to determine whether the recovery in business fixed investment is sustainable and whether it is likely to spread to a wider range of industries. With regard to prices, import prices are decreasing slightly, reflecting a temporary decline in international commodity prices such as crude oil prices. Domestic wholesale prices, notwithstanding the fall in prices of electric machinery, are unchanged mainly due to the rise in prices of petroleum and chemical products reflecting the increase in crude oil prices to date. Meanwhile, consumer prices continue to be somewhat weak owing to the slight decrease in the prices of private-sector services and the decline in prices of imported products reflecting the past appreciation of the yen. Corporate service prices are still falling slowly. As for the outlook, upward pressure on prices is likely to arise from the gradual improvement in domestic supply-demand balance and from the rise in crude oil prices. On the other hand, downward This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on 12 June 2000. The Bank’s view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on 12 June 2000 as the basis of monetary policy decisions. pressure is expected from the long-term declining trend of machinery prices due to technological innovations and from the fall in prices of imported products reflecting the past appreciation of the yen. On balance, overall prices are likely to remain unchanged. However, attention should still be paid to the downward pressure on prices stemming from weak demand, although the pressure has weakened given some recovery in private demand. In the financial market, the overnight call rate has generally stayed near zero, and financial institutions have been confident about the availability of overnight funds. The amount of funds outstanding in the call money market is declining gradually. Interest rates on term instruments basically continue to be stable but have increased somewhat from the start of June. The Japan premium remains negligible. Yields on long-term government bonds have been moving in the range of 1.6-1.8 percent. The yield spread between private bonds (bank debentures and corporate bonds) and government bonds remains mostly unchanged. Stock prices fell sharply until the end of May triggered by the drop in U.S. stocks but have recovered thereafter. In the foreign exchange market, the yen temporarily rose to around 110 yen in mid-May but then strengthened against the U.S. dollar. The yen is currently being traded in the range of 105-107 yen. With regard to corporate finance, private banks have basically retained their cautious lending attitude. However, constraint that had been caused by severe fund-raising conditions and insufficient capital base has eased considerably. Given this, major banks are becoming more active in extending loans, while carefully evaluating the credit risks involved. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is increasing in parallel with a recovery in profits. Moreover, firms continue to reduce debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. Issuance of corporate bonds and CP has been steady. Money stock (M2 + CDs) grew slower in May compared with the previous month on a year-on-year basis. In this financial environment, corporate financing conditions are easing, and the lending attitude of financial institutions is perceived by firms as less severe. It continues to warrant careful monitoring how these favorable developments in corporate financing environment will affect economic activities.
|
bank of japan
| 2,000 | 6 |
Opening Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Ninth International Conference, held by the Institute for Monetary and Economic Studies, Bank of Japan, Tokyo, on 3 July 2000.
|
Masaru Hayami: The role of monetary policy under low inflation in Japan Opening Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Ninth International Conference, held by the Institute for Monetary and Economic Studies, Bank of Japan, Tokyo, on 3 July 2000. * * * Good morning, Ladies and Gentlemen. It is a great pleasure to have an opportunity to meet such distinguished guests from academic circles and various central banks on the occasion of the Ninth International Conference hosted by the Institute for Monetary and Economic Studies. I would like to welcome all of you who have kindly found time out of your busy schedules to participate in this Conference. The topic of the Conference is “The Role of Monetary Policy under Low Inflation”, which is the very problem that the Bank of Japan has faced since the 1990s and perhaps what many central banks might face in the future. The 1990s is often referred to as the “lost decade” for Japan’s economy. During that period, Japan’s real GDP growth was next to last among G7 countries and also recorded the largest drop compared with the 1980s. Inflation declined to almost zero, and at times we faced the danger of falling into a deflationary spiral. In response, the Bank of Japan conducted aggressive monetary easing. In particular, since February 1999, the Bank has pursued the unprecedented policy of guiding short-term money market rates down to virtually zero percent to prevent the economy from tumbling into a deflationary spiral and also to support a recovery. What are the factors behind Japan’s lost decade of the 1990s? One basic structural factor is that a variety of systems which had supported the post-war development of Japan’s economy became unsustainable. Another factor is the emergence and bursting of the bubble. While the emergence of the bubble led to many much needed structural reforms being postponed, its bursting brought Japan’s economy to the verge of falling into a deflationary spiral. Though the main purpose of this Conference is not to discuss the emergence and bursting of the bubble, when we at the Bank of Japan discuss the role of monetary policy under low inflation, we cannot but refer to the problems we experienced during the bubble period. In this regard, let me outline some lessons from the bubble period which I find important in an individual study made by Bank staff relating to monetary policy in the late 1980s. One prominent feature which characterized the bubble period in Japan was the euphoric sentiment which prevailed in every segment of society, and which led to extremely bullish expectations. In this regard, we think it is not sufficient to understand the bubble solely in terms of the rise in asset prices such as property and equity prices. In the study I mentioned, the bubble economy is defined as a combination of the rapid increase in asset prices, the expansion of monetary aggregates, and the overheating of economic activity. And, Japan’s economy did indeed experience such developments from 1987 through 1990. A number of factors were intertwined in the background of such euphoria, and monetary easing was certainly one of them. Monetary easing was a necessary condition for the emergence of the bubble, and to that extent should be held responsible. But, in our defense, I have to say that if we had tried to prevent the emergence and expansion of a bubble by monetary policy alone, we would have had to raise interest rates to levels which could not be justified because of the relatively stable prices at the time. This is one of the difficulties we face in dealing with a bubble. The next question is: In what respect was monetary policy responsible for the emergence and expansion of the bubble? It is true that we had maintained low interest rates for a relatively long period, even after the summer of 1988 when the economy was clearly on a recovery path, and allowed unfounded expectations to be embedded in the market and society that such low interest rates would continue for a considerable period. We should take it seriously that this was undeniably one of the driving forces behind the expansion of the bubble. What should be done to avoid repeating such an experience? We hear a variety of suggestions: for example, “The Bank of Japan should have paid more attention to the movement of money supply or the rise in asset prices,” and “It has made a mistake by putting too much emphasis on the foreign exchange rate in the conduct of monetary policy”. Unfortunately, these are reflections and lessons with the benefit of hindsight, and we cannot fully use them as a practical guideline for making policy on a real time basis. We need a more pragmatic approach. From such a viewpoint, the most significant lesson that we should keep in mind is the importance of evaluating risks to the economy at an early stage, and of dealing with them in a preemptive manner. As I have said, it would not have been possible for monetary policy alone to have prevented the bubble from emerging. However, if we conducted monetary policy in a preemptive manner by taking into account future risks over the long run, economic fluctuation during the bubble period might have been less. As a matter of fact, it is extremely difficult to identify whether it is a bubble or not when we are actually experiencing bubble expansion. One of the reasons for this difficulty is that we cannot exclude from the observed reality the impact of changes in economic structure. For example, during the bubble period many presented a seemingly plausible argument that a rapid rise in property prices in Tokyo could be justified in view of the increasing role of Tokyo as an international financial center, but which could not be proved to be true at the time. Inevitably, the central bank always faces two risks. They are similar to statistical errors. One risk is that the Bank might mistakenly tighten monetary policy when the economy is about to benefit from a marked improvement in productivity, and as a result suppress the growth potential of the economy. The other risk is that it allows the bubble to expand by wrongly interpreting the supposed improvement in productivity as real. When we make a policy decision, we should evaluate not only which one of these two risks has the greater probability of emerging, but also the socioeconomic cost of each. Our experience of the bubble period seems to indicate that we did not fully recognize that the risk of wrongly interpreting a supposed productivity improvement could deliver such a serious blow to the sound development of the economy over the long run. What should have been done to calm the euphoric sentiment at that time and turn the focus of society to the potential risk facing the economy from a more long-term perspective? The important lesson from such a viewpoint is that we need to clearly state the objective of monetary policy, in other words, we need to substantiate the abstract concept of price stability. Looking back at Japan’s economy during the bubble period, CPI inflation had been stable until 1987, began to gradually rise in 1988, and recorded a year-on-year increase of about 1% in March 1989, which was immediately before the introduction of the consumption tax. Adjusted for the impact of the consumption tax, it continued to rise after April 1989, reached the 2% level in April and the 3% level in November 1990, and remained at that level until August 1991. Since such a price hike considerably lagged the rise in asset prices and could not be regarded as particularly high compared with the figure before the bubble period, the threat of inflation did not constitute a valid argument in convincing the public that monetary conditions needed to be tightened. While inflation during the bubble period was relatively mild, Japan’s economy had been brought to the verge of falling into a deflationary spiral in the 1990s. The deflation we observed at that time was largely the result of the bubble economy emerged in the late 1980s. Such an experience suggests that we as the central bank should aim at price stability which supports medium to long-term sustainable growth, not price stability at a particular point in time. In this context, even if measured inflation is stable, we need to promptly alter interest rates once we judge that the risk of damaging sustainable price stability has become higher. According to this criterion, we have not, to our regret, sufficiently succeeded in maintaining price stability in Japan since the bubble period. So far, I have mainly described the lessons for monetary policy derived from our experience during the period when the bubble emerged. Of course, we also need to learn from the experience after the bursting of the bubble. It may be too early to summarize the experience and draw lessons, but I am sure we will learn quite a lot from the discussion at this Conference. It is true that there is yet another major factor behind worldwide disinflation. It is the revolutionary progress of information technology, which we may perhaps call a new industrial revolution, and the resulting improvement of productivity. To find answers to what is price stability and an appropriate monetary policy in the face of rapid disinflation due to higher productivity, are difficult but positive challenges. In conclusion, I sincerely hope that through fruitful discussion at the Conference, both those from academic circles and central banks will learn more, share the fruit, and make use of the wisdom obtained for the future conduct of monetary policy.
|
bank of japan
| 2,000 | 7 |
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Fiftieth Anniversary Symposium of the Institute for Financial Affairs, Tokyo, on 14 July 2000.
|
Masaru Hayami: Financial system stability and future agenda need to strengthen the capital base Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Fiftieth Anniversary Symposium of the Institute for Financial Affairs, Tokyo, on 14 July 2000. * * * I am pleased to be invited to this Symposium celebrating the 50th anniversary of the Institute for Financial Affairs. Before I begin, allow me to explain one rule regarding monetary policy meetings under the new Bank of Japan Law, which became effective in April 1998. The rule dictates that the Governor, Deputy Governors and Members of the Policy Board should not, in principle, make remarks about monetary policy and operations immediately before or after monetary policy meetings. This is intended to avoid any unnecessary speculation or confusion which might be generated by such remarks. We call this the “blackout rule”. Since there is a monetary policy meeting next Monday, today happens to fall into the period when this blackout rule applies. Therefore, I will not talk about any matters relating to monetary policy and will refrain from answering any questions on the subject. I would appreciate your kind understanding on this. Since I began my career as a central banker a long time ago, I have received a lot of intellectual stimulus from reading the publications of the Institute as well as participating in the study groups and conferences organized by it. And I would like to take this opportunity to thank the Institute for publishing the book on the balance of payments which my colleagues in the then Foreign Department wrote and I edited some 20 years ago in 1977. On the occasion of the Institute’s 50th anniversary, when we look back at the past 50 years of Japan’s economy, we really have experienced a diversity of situations. Around the time of the Korean War, I was in Osaka and witnessed the reconstruction of the textile industry and the economic boom supported by the special procurements occasioned by that war. Other events in the past 50 years include the reconstruction period following the chaos just after World War Two, the high growth period, the oil shocks, the Plaza Agreement and the appreciation of the yen, the emergence and bursting of the bubble, and the current prolonged recession. When talking about Japan’s economy, some call the past 10 years the “lost decade”, and during this period average annual growth was a meager 1%. Against this background, financial institutions have been gradually changing their management strategy while bearing the heavy burden of the past legacy. Though Japan’s financial system has faced an extremely difficult situation for the past several years, it appears that overall stability has finally been restored thanks to various measures. For example, in overseas markets, the difficulty that Japanese banks faced in raising funds around the beginning of last year and the Japan premium, which was the extra cost that they had to pay, have largely subsided against such background as the injection of public funds into major banks in March 1999. At international meetings like the G10 central bank governors meeting at the BIS, which in fact I attended a few days ago, we have seldom heard any concern or criticism about financial system stability in Japan. In addition, the ratings of Japanese banks, mainly those that have announced merger and consolidation plans, have begun to be upgraded. And yet, it is true that there exist a number of agendas that we have to tackle to further strengthen financial stability, as evidenced by the recent collapse of Sogo Department Store. Today, I would like to talk about the need to strengthen the capital base, one of the most important agendas over the medium to long term. Among many issues regarding the capital base, the first is the capital structure of Japanese banks. The risk-based capital adequacy ratio of internationally active Japanese banks was 11.8% at the end of March 2000, out of which Tier 1 capital was 6.6%. In the case of US money center banks, the capital adequacy ratio was 13%, and Tier 1 capital 8 to 9%. It should be noted that in the United States, there has been no injection of public funds and deferred tax assets corresponding only to income for the following year are included in Tier 1 capital. If we calculate the Tier 1 capital of internationally active Japanese banks according to the US standard, it would decline from 6.6% to the 4% level. Indeed, there is clearly a big difference in the capital structure between major Japanese banks and US money center banks. In other words, there exists a difference, significantly larger than what is observed, between Japan and the United States in terms of the strength of banks’ capital position. Under such circumstances, Japanese banks need to strengthen capital base by increasing its key element. Furthermore, from the viewpoint of achieving multiple targets including not only the strengthening of capital base but also a reduction in capital cost and an increase in return on equity, banks should work toward the redemption of high-cost capital and an increase in internal reserves through higher profits. The second issue is how to measure various risks such as credit, market and operational risk by an advanced method and to align capital charges closely with these underlying risks. The Basel Committee on Banking Supervision chaired by Mr William McDonough, President of the Federal Reserve Bank of New York, is undertaking reform of the 1988 Basel Capital Accord. In June 1999, a consultative paper proposing a new capital framework was released and public comment was sought until March 2000. Currently, the Capital Accord is being reformed by incorporating the comments received from the public, with the reforms being put into effect two years from now. The following points deserve particular attention. First, the new Capital Accord will incorporate market and operational risks, which are not taken into account in the current Capital Accord, in banking accounts. Second, it will measure credit risk more precisely and impose capital charges more appropriately. For the past few years, banks have increasingly faced more complex and sophisticated types of risks. To satisfactorily deal with these risks as well as to win amid the severe competition that is to come, it is necessary that risks should be measured in an accurate way and appropriate capital charges set accordingly. The third issue for financial system stability in Japan is how to deal with intensified competition triggered by the entry of foreign capital and non-financial firms into the banking industry. One of the major topics in the financial community in recent years is that foreign capital and domestic non-financial firms, which have detected business opportunities in Japan’s banking industry, have become active in purchasing failed banks and establishing internet banks. Some of these banks have announced their intention to focus on lending to small and medium-sized firms, which had been profitable. There are also active moves to establish new types of banks which did not exist traditionally. One firm is considering providing payment services by installing automated teller machines in a myriad of convenience stores. Another one is aiming at offering various banking services efficiently through the internet to satisfy the diverse needs of customers. The management environment surrounding banks has significantly changed. Competition has further intensified. Under such circumstances, the recent strategy of many banks, whether establishing holding companies, forming a megabank by merger or focusing on local communities, has emphasized consumer banking and customer targeting, focusing, for example, on small and medium-sized firms. In consumer banking and customer targeting, competition is already intense among Japanese banks of all sizes, foreign banks and non-financial firms. To win the race, it is essential to have a detailed database regarding individuals and firms as well as to maintain a large network to reduce operational costs. For this, we need to take full advantage of the progress of information technology, which requires enormous investment. In this regard, whether or not one has sufficient capital to be able to finance such investment is the key to success. Banks that plan mega-mergers emphasize business areas such as investment banking, project finance, global cash management and networking in Asia as their primary strategies. In these business areas, major banks in the United States and Europe have already constructed a fairly solid business foundation. Particularly in such business areas as global cash management and global custody, Japanese banks need huge investment and technology to compete with banks in the United States and Europe. The key to success in these business areas is investment in information technology and sufficient capital. As I just described, strengthening the capital base and pursuing the efficient use of capital seems a typical case of “easier said than done”. Nevertheless, when we look back at the recovery of US banks from the banking crisis in the early 1990s, we observe the following virtuous circle. First, banks’ profitability improved thanks to restructuring. Then, their ratings were upgraded, which led to a reduction in capital cost and fund-raising costs. Such cost reductions contributed to higher profitability. Using increased profits, banks amortized high-cost capital by, for example, purchasing back preferred stock. Higher profits increased internal reserves, return on equity rose and ratings were further upgraded. These processes continued. Efficient use of capital means that we need to select targeted business areas and concentrate resources on these selected areas. This reminds me of the fact that Mr John Reed, Chairman of Citicorp, decided to abolish its investment banking section. In the mid-1990s, return on equity in the investment banking section was as high as 13%. Nevertheless, Citicorp pursued its chosen strategy by abolishing the investment banking section and transferring all human and physical resources in it to the consumer banking section. There were various criticisms about Citicorp’s decision, but it turned out to be successful. This episode shows that it is ultimately the decision of top management to achieve the strengthening of capital base and efficient use of capital. There are five months remaining before we enter the 21st century. We strongly hope that in the coming century Japanese financial institutions will be internationally competitive and provide the best financial services on a global basis thanks to the efforts of all those concerned in the management of financial institutions. We at the Bank of Japan will continue to make utmost efforts to maintain financial system stability by utilizing the experience and the lessons learned in the past 50 years, and to preserve independence and transparency, two fundamental concepts underpinning the new Bank of Japan Law.
|
bank of japan
| 2,000 | 7 |
Bank of Japan, Communication, 19 July 2000.
|
Bank of Japan’s July report of recent economic and financial developments1 Bank of Japan, Communication, 19 July 2000. * * * The Bank’s View2 Japan’s economy is recovering gradually, with corporate profits and business fixed investment continuing to increase. With regard to exogenous demand, net exports (real exports minus real imports) continue to follow a moderate upward trend due to steady developments in overseas economies, and public investment is picking up reflecting the progress in the implementation of the supplementary budget for fiscal 1999. As regards domestic private demand, business fixed investment is increasing. The recovery in private consumption continues to be weak as a whole through lack of notable improvements in employment and income conditions, although there are somewhat positive signs in some indicators. Housing investment is mostly unchanged. Reflecting such developments in final demand, industrial production is increasing. Corporate profits and sentiment continue to improve, and the number of firms that take positive action, such as increasing the amount of fixed investment, is increasing, especially in high-growth sectors. Income conditions of households still remain severe, but the decreases in the number of employees and in wages are slowing, while regular and overtime payments as well as new job offers are increasing in line with the recovery in corporate activities. As for the outlook, public investment is likely to start decreasing in the near future, but net exports are expected to continue increasing gradually, reflecting the expansion in overseas economies. In the corporate sector, firms still strongly feel that they have excess equipment and that they should reduce their debts to restore financial soundness. However, it is very likely that fixed investment in highgrowth sectors, including those related with information technology services, will increase as corporate profits continue to recover. Moreover, an improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. However, the pace of recovery in household income will be modest for the time being, since firms’ perceptions of excess employment still persist, and thus significant changes have not been observed in their efforts to reduce personnel expenses. Overall, the economy is likely to recover gradually led mainly by business fixed investment, unless there are major adverse external shocks. In addition, the favourable financial environment created partly by the Bank’s monetary easing is expected to continue underpinning the economy. With regard to prices, import prices are decreasing slightly, reflecting a temporary decline in international commodity prices such as crude oil prices. Domestic wholesale prices, notwithstanding the fall in prices of electric machinery, are unchanged mainly due to the rise in prices of petroleum and chemical products reflecting the increase in crude oil prices to date. Meanwhile, consumer prices continue to be somewhat weak owing to the slight decrease in the prices of private-sector services and the decline in prices of imported products reflecting the past appreciation of the yen. Corporate service prices are still falling slowly. This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on July 17, 2000. The Bank’s view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on July 17, 2000 as the basis of monetary policy decisions. As for the outlook on prices, downward pressure on prices stemming from weak demand is declining significantly while an economic recovery is expected to continue moderately. Upward pressure on prices is likely to arise temporarily from the increase in crude oil prices. On the other hand, in addition to the declining trend of machinery prices due to technological innovations, the decline in prices of consumer goods arising from the past appreciation of the yen and the streamlining of distribution channels will exert downward pressure on prices. Thus, prices overall are expected to be stable or weak somewhat. In the financial market, the overnight call rate has generally stayed near zero, and financial institutions have been confident about the availability of overnight funds. The amount of funds outstanding in the call money market has increased slightly. Interest rates on term instruments have been increasing from mid-June reflecting a possible termination of the zero interest rate policy. The Japan premium remains negligible. Yields on long-term government bonds increased somewhat from mid-June and are recently moving around 1.7 percent. The yield spread between private bonds (bank debentures and corporate bonds) and government bonds remains mostly unchanged. Stock prices fell towards mid-June, but have recovered thereafter along with the rise in US stocks. In the foreign exchange market, the yen temporarily rose to around 104 yen in late June against the US dollar, but then started to decline. The yen is currently being traded in the range of 107-109 yen. With regard to corporate finance, private banks have basically retained their cautious lending attitude. However, constraint that had been caused by severe fund-raising conditions and insufficient capital base has eased considerably. Given this, major banks are becoming more active in extending loans, while carefully evaluating the credit risks involved. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is increasing in parallel with a recovery in profits. Moreover, firms continue to reduce debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. Issuance of corporate bonds and CPs has been steady. Money stock (M2 + CDs) grew slower in June compared with the previous month on a year-on-year basis. In this financial environment, the lending attitude of financial institutions is perceived by firms as less severe, and corporate financing conditions are easing.
|
bank of japan
| 2,000 | 7 |
Speech by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Japan National Press Club, Tokyo, on 4 August 2000.
|
Yutaka Yamaguchi: Thinking behind current monetary policy Speech by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Japan National Press Club, Tokyo, on 4 August 2000. * * * I am honored to be invited today to the Japan National Press Club. I once heard a joke that a central banker can deliver a speech to members of this esteemed Club, who are well known for their barrage of sharp questions, only when the economy is performing satisfactorily and he is confident enough to answer any questions. I am here today, not because this is the case, but because I think it is a good opportunity to elaborate on our thinking behind current monetary policy and ask for your comments. The main purpose of my remarks today is to present an overview of the zero interest rate policy by reviewing various discussions at past monetary policy meetings with respect to the termination of the zero interest rate policy. I. Economic developments after the zero interest rate policy was adopted Let me begin by briefly explaining what the zero interest rate policy is. It was in February 1999 that the Bank of Japan effected the zero interest rate policy. At the time, Japan’s economy was on the verge of falling into a deflationary spiral which was a vicious circle combining price declines and economic recession. In response, the Bank of Japan decided to guide the short-term interest rate, specifically the uncollateralized overnight call rate, down to virtually zero by flexibly providing ample funds to the money market. Then, in April 1999, the Bank decided to continue the zero interest rate policy until such time it could be ascertained deflationary concern had been dispelled. Chart 1 shows the development of market interest rates since April 1999. To the best of my knowledge, I cannot think of any precedents in financial history, either at home or abroad, where a central bank has guided short-term interest rates down to virtually zero and maintained that level for a long period. Short-term interest rates are the key variable in the transmission mechanism of monetary policy and a central bank influences them by controlling reserves in the money market, thereby affecting various aspects of the overall economy. Thus, guiding short-term interest rates down to virtually zero means that the central bank has used its traditional policy tool to the maximum extent possible. A variety of economic indicators suggest that Japan’s economy is on a recovery path, albeit moderate. Chart 2 compares recent economic conditions with those in February 1999. For example, the year-on-year growth rate of real GDP increased from minus 0.4% in the first quarter of 1999 to plus 0.7% in the same quarter of 2000, and industrial production growth rose from minus 3.8% in the first quarter of 1999 to plus 7% in the second quarter of 2000. Business sentiment in terms of the Tankan diffusion index for all industries and sizes of firms has substantially improved from minus 44 in March 1999 to minus 18 in June 2000. And, the consensus forecast of the private sector for real GDP growth for this fiscal year has been revised upward from 0.8% at the beginning of this year to 1.5% recently. Moreover, June’s Tankan survey showed that corporate profits were expected to mark a double-digit increase for two consecutive years in fiscal 1999 and 2000. While inflation in terms of WPI is slightly above the previous year’s level, that in terms of CPI is slightly below. There are a number of factors responsible for the moderate economic recovery. First and foremost is the implementation of several important policy measures to restore financial system stability. Public funds were injected into major banks to strengthen their capital base and a legal framework was established to speed up the bankruptcy process. Under such circumstances, financial institutions themselves are striving to reconstruct their management. The second factor is support from macroeconomic policy, which includes both fiscal policy of the government and the zero interest rate policy of the Bank of Japan. The third factor is the upturn of overseas economies. In addition to the expansion in the United States and Europe, Asian economies have been recovering rapidly after overcoming currency and financial crises. The fourth factor is the boom in the high-tech and IT-related business areas. Whether trends like the IT revolution witnessed in the United States will spread to Japan depends on how firms and individuals as users take advantage of information technology. Japanese producers related to high-tech business have swiftly responded to the rapid increase in demand both at home and abroad, and an increasing number of them have been expanding investment reflecting the tightening supply and demand conditions. It is natural that economic recovery leads to the question of whether the zero interest rate policy should be terminated. As I mentioned, the Bank of Japan announced in April 1999 that it would continue the zero interest rate policy until deflationary concern had been dispelled. Discussions at subsequent monetary policy meetings have disclosed that such deflationary concern would be dispelled if we became confident that economic recovery was led by private demand. As has been described in the minutes of these meetings, members of the Policy Board have closely examined economic and financial conditions to determine whether deflationary concern has been dispelled. Though the minutes of the 17 July meeting are yet to be released, the statement issued immediately after the meeting in Chart 3 said that the majority of the Policy Board considered that Japan’s economy was approaching a stage where deflationary concern might be dispelled. However, it also said that some views were expressed that before reaching a final decision to lift the zero interest rate policy, it was desirable to ensure the firmness of economic conditions including employment and household income. Moreover, it was pointed out that the Board needed to ascertain how the so-called Sogo problem would affect market sentiment. II. Points at issue relating to the termination of the zero interest rate policy As you know, there are arguments for and against the termination of the zero interest rate policy as evidenced in newspaper editorials of recent months as well as the opinions of business leaders, economists, and market participants. Such a division of opinions is usually the case every time the question of raising interest rates is brought up after a period of prolonged monetary easing. In May 1989 when interest rates were last raised in the midst of the bubble economy, very few articles in newspapers and magazines had supported it before the raise. Needless to say, at past monetary policy meetings, we have carefully examined various points related to the pros and cons of lifting the zero interest rate policy. Let me now discuss some of the important points at issue. Is private consumption recovering? The first point is whether or not we can conclude that the economy as a whole has fully recovered while a recovery of private consumption has yet to be confirmed. Indeed, the current economic recovery has been driven mainly by an improvement in the corporate sector. While June’s Tankan survey shows that the ratio of current profits to sales in the manufacturing industry for fiscal 2000 is expected to recover to 4.01%, which is slightly higher than the average of 3.84% since fiscal 1980, the recovery of the household sector has been delayed. The underlying trend of private consumption is determined by consumer sentiment and employee income. While consumer sentiment has been improving against such a background as receding concerns over financial system stability and stock prices, employee income has only very recently stopped declining. Thus, we cannot yet confirm a recovery of private consumption as a whole. Nevertheless, if we look more broadly at the situation Japan’s economy faces including such big challenges as the balance sheet adjustment of the corporate sector and the transformation of industrial structure, in the current recovery process we consider it quite logical that an improvement in the corporate sector precedes that in the household sector. In Chart 4, labor’s share of income has shown a significant increase, which on the other hand means a substantial decrease in return on capital since the bursting of the bubble. Needless to say, capital is an important factor of production supporting economic development. If capital cannot generate sufficient returns for a long period, it will become difficult for firms to raise capital. In such a case, firms cannot help but improve return on capital by reducing various costs including labor. The need to improve return on capital has become especially pressing for firms directly exposed to pressure from the global financial market. In other words, restructuring of the corporate sector is a prerequisite for sustainable growth of the overall economy including the household sector. In view of the need to improve return on capital, it is unlikely that household income and private consumption will significantly increase for the time being. Of course, if labor’s share of income declines substantially, the resultant stagnation of private consumption will hamper the recovery of the overall economy. Therefore, a delicate balancing of income distribution is the key to a full-fledged economic recovery. In this regard, though the number of employees is still below that of a year ago, supply and demand conditions in the labor market have somewhat tightened as evidenced by the increase in job offers. Wages, which had been decreasing for the past two to three years, have this year increased on a year-on-year basis. We sometimes discuss the relation between corporate profits and household income metaphorically likening it to the relation between the water level in a dam and the release of water from it. If we can clearly observe the rise in the water level, which signifies increasing corporate profits, the probability that water will be released from the dam rises, leading to an increase in household income and then an increase in private consumption. However, since it is not easy and takes time for firms to raise return on capital and improve their balance sheets, the release of water from the dam cannot increase significantly. Yet I think that if household income recovers even moderately, there is a higher probability that the economy will return to a growth path led by business fixed investment. If I may interpret the thinking of members of the Policy Board behind the statement of 17 July, the majority would like to confirm with more confidence that such a mechanism is at work. Are prices declining? The second point is whether or not it can be maintained that deflationary concerns have been truly dispelled when CPI and the GDP deflator are still falling. As Chart 5 shows, these price indexes are declining while WPI has recently begun to exceed the prior-year level. Such movements in CPI and the GDP deflator may provoke an argument that not only has deflationary concern not been dispelled, but that the economy is actually in a deflationary state. The reason we are afraid of deflation is because once the economy falls into a deflationary spiral, which is a vicious circle where price declines depress economic activity in turn leading to downward pressure on prices, it is very difficult to escape from it. To avoid such a situation, in February 1999 the Bank adopted the zero interest rate policy, which was a drastic monetary easing measure. All this shows that how to interpret the decline in CPI and the GDP deflator is an important issue and we have been carefully examining it. A close look at the movement of price statistics may not always lead to a full understanding of what price changes indicate. This is because various price indexes often move in different directions or temporarily their movement does not appear consistent with the movement of other economic indicators. For example, take the latter half of 1988, which is the peak of the bubble period. While the economy was strong, measured prices were extremely stable. Another example is 1991, immediately after the bursting of the bubble. Notwithstanding the fact that the economy entered a serious recession, inflation marked a peak. Furthermore, in 1996 while the GDP deflator traced its largest decline of the 1990s, GDP growth recorded its highest figure in the post-bubble period. These examples underscore the importance of assessing the movement of price indexes in relation to the overall economic situation. The current decline in CPI is partly attributable to such structural changes as those in the distribution system in addition to the past appreciation of the yen and the falling prices of consumer durables. It is also due to the decrease in unit labor cost, which is often observed in the early stage of economic recovery. In the early stage of recovery, productivity rises as idle resources are brought back into use, unit labor cost declines, and then downward pressure on prices is seen. The phenomenon of the decline in labor costs and prices coupled with higher growth was observed in 1987 and 1996. It appears that the factors behind this phenomenon have been partly responsible for the recent decline in prices, particularly in the GDP deflator. On the other hand, it may be possible to argue that any price declines would eventually lead to the danger of the economy falling into a deflationary spiral. However, if the recent decline in CPI had entailed danger of a deflationary spiral, corporate profits would have declined leading to a decrease in business fixed investment and employment, whereas, in fact, we have observed increases in both corporate profits and business fixed investment. Moreover, such a danger would have adversely influenced the labor market through the supply and demand of goods and services, but, as a matter of fact, wages have stopped declining. To sum up, I do not think it appropriate to judge whether or not the economy might fall into a deflationary spiral simply by looking at the decline in CPI and the GDP deflator alone. Based on such argument, the Policy Board has closely monitored and examined the deterioration in the supply and demand balance, and the risk of price declines stemming from weak demand. Conceptually, the supply and demand balance in Japan’s economy as a whole could be described by such indicators as the output gap. The problem is that it is difficult to accurately estimate the output gap. The difficulty is common to many industrial countries, and the main reason is that the speed of technological innovation has become so fast that it is not easy to measure the economic value of capital. As a result, we face a situation where the estimated output gap cannot explain the fluctuation in prices. For example, in 1998 and 1999, calculations based on traditional models produced large output gap estimates, and not a few economists thus forecast considerable price declines. The actual price decline, however, was not so large as the forecast. On the other hand, the supply and demand balance perceived by firms reported in the Tankan survey has greatly improved during the past year. These observations suggest that in order to grasp the change in the supply and demand balance, we should not only apply the estimated output gap deduced from conventional methodology but also make full use of the information regarding the supply and demand balance for individual goods and services. Let me summarize my view. First, it is very difficult to accurately estimate the output gap, which is the degree of excess supply in macroeconomic terms. Second, it is likely that the potential growth rate has recently declined substantially as a result of stagnant investment over the past ten years. Thus, even if aggregate demand only grows moderately for one to two years, the supply and demand balance should improve, which is indeed evidenced by economic developments since last year. Third, whether the output gap continues to narrow depends on prospects for economic recovery led by private demand. If we become confident of such a recovery, moderate declines in some price indexes should not necessarily be interpreted as a supply and demand imbalance or manifestation of the risk of a deflationary spiral. Excessive corporate debt and the financial system problem The third point is whether or not the economy will exhibit a robust recovery in a situation where firms are burdened with excessive debt and banks still hold a large amount of non-performing assets. Indeed, one of the major factors behind the sluggishness of Japan’s economy during the 1990s was balance sheet adjustment at firms and banks. We fully recognize the gravity of the excessive debt held by firms, especially those in the construction, real estate, and distribution industries, not to mention the non-performing assets held by banks. In fact, we experienced a serious financial system crisis in 1997 and 1998 characterized by a large-scale credit crunch and the financial sector exerting strong downward pressure on economic activity. Thus, it is extremely important to incorporate the assessment of financial system into economic outlooks. This is one reason we believe that the economic recovery is more likely to be moderate rather than robust. It is also true that financial system stability has been significantly restored as a result of the injection of capital into major banks in March 1999. With improved creditworthiness and receding concern over liquidity, banks are once again competing to win good customers. According to the Tankan survey, firms have reported a gradual relaxation in the lending attitude of banks. While we may be far from a situation where many banks aggressively assume credit risk with appropriate risk control systems in place and strongly support economic growth, we are not in a situation where the lending attitude of banks is so cautious that it would hamper economic recovery. Therefore, while there remain industries and firms burdened with excessive debt, I think it possible to expect a recovery, though not as speedy as in previous recoveries, of the overall economy as momentum for new growth intensifies reflecting the progress of technological innovation. Another reason we care about the debt problem is that when large firms like Sogo collapse, the market sometimes becomes extremely nervous. It should be noted that the impact of a shock differs from case to case. For example, the case of Sogo is special in that its reconstruction framework was suddenly changed. In any event, if there are no problems in the financial system, the collapse of an individual firm is likely to be perceived as an isolated case. At the moment, we need to closely monitor whether there is the risk that the market may suddenly turn nervous, and this is, in my view, one of the factors that should be rightly taken into account in the conduct of monetary policy. The relationship between structural adjustment and monetary policy Since the release of the statement on 17 July, there have been various comments to the effect that the Bank of Japan should continue the zero interest rate policy until concern of large-scale bankruptcies disappears and structural adjustment is completed. There have also been comments to the contrary, namely, that the continuation of the zero interest rate policy is delaying the progress of structural adjustment. This brings me to my fourth point relating to the termination of the zero interest rate policy, the relationship between it and structural adjustment. Regarding the view that the Bank should continue the zero interest rate policy until structural adjustment is completed, we do not think this necessary. In discussing this, we need to distinguish between the potential growth rate and the cyclical and short-term growth rate of Japan’s economy. In recent years, it is often said that the potential growth rate of the US economy has been boosted by the IT revolution. But it should be pointed out that it took a long time before IT was applied to business and resulted in improved productivity. Similarly, it will take a long time before structural reform promoted by Japanese firms leads to improved productivity and higher potential growth. Here, it should be noted that various forces other than structural adjustment influence the economy. And hence, even if the potential growth rate is low, the economy will be able to grow strongly with the cyclical growth rate exceeding the potential growth rate. This, I think, is the business cycle. To deal with the decline in potential growth stemming from structural factors, a policy targeted to solve structural problems and firms’ own efforts for restructuring are indispensable. There is no other way. In short, monetary policy cannot replace structural policy. Let me now turn to the contrary comments that the zero interest rate policy has been holding back structural adjustment. We also hear related comments that the zero interest rate policy has been generating various kinds of moral hazard, both socially and economically. It is true that the zero interest rate policy, which provides the market with ample funds to guide the overnight rate to virtually zero, could create a situation where banks and firms have become less sensitive to borrowing costs and liquidity risks. Indeed, it is through this effect that the policy supports economic recovery and promotes structural reform. At the same time, it cannot be denied that the policy may tend to delay structural reform by making economic agents with a large amount of debt less conscious of borrowing costs and liquidity risks. Of course, I do not think it appropriate to lift the zero interest rate policy to prevent moral hazard. Let me make it clear that the termination of the zero interest rate policy depends on whether we can be confident that the economic recovery is being primarily led by private demand. Is the termination of the zero interest rate policy consistent with fiscal policy? The fifth point is the relation between the termination of the zero interest rate policy and the government’s fiscal policy stance. Some argue that a stimulus from the monetary policy side is essential and it is premature to terminate the zero interest rate policy because no further stimulus from fiscal policy can be expected considering the significant deterioration in the government’s fiscal position. Others argue that, when the government formulates a supplementary budget to stimulate the economy, fiscal policy aimed at achieving an economic recovery led by private demand and the Bank’s monetary policy should be harmonized. Of course, the Bank of Japan never ignores the government’s fiscal policy stance when conducting monetary policy. As I have reiterated many times, we will not terminate the zero interest rate policy unless we feel confident that the economic recovery is led by private demand. Chart 6 shows the contribution of private demand and government expenditure to the year-on-year growth of real GDP, which indicates that the driving force behind the economy has steadily shifted from government expenditure to private demand, and the GDP growth rate has been gradually rising. The Bank of Japan will terminate the zero interest rate policy only when it feels confident that an economic recovery led by private demand is in prospect, and I believe this is consistent with what the government is aiming at. Impairing the proper functioning of the market mechanism The sixth point relates to the functioning of the market mechanism. There is a view that the proper functioning of the financial market has been impaired by the zero interest rate policy and that it should be restored by terminating the policy. In fact, we too were worried about the impairment of market functions when adopting the unprecedented zero interest rate policy in February 1999. Therefore, we took a cautious approach in guiding the overnight call rate to zero by confirming the proper functioning of the market mechanism on the way. In retrospect, it is my tentative assessment at this point in time that the impairment of market functions turned out to be smaller than anticipated. The overnight call rate is not exactly zero percent, though as close to zero as can be, and long-term interest rates are above zero. Under such a configuration of interest rates, the market mechanism is functioning. The contraction of the call market is often cited as an example to evidence impairment of the market mechanism. This reflects the fact that, as the interest rate on ordinary deposits has been higher than the call rate, investors have transferred funds from the call market to ordinary deposits. Under such circumstances, a sudden withdrawal of funds by investors from ordinary deposits would cause instability in the liquidity position of banks which have received these deposits, and might eventually influence the formation of the overnight call rate. However, this problem cannot be a decisive factor in determining whether to terminate the zero interest rate policy. Interest income of pensioners The seventh and last point is the fact that the zero interest rate policy is having a negative effect on economic agents who largely depend on interest income, such as pensioners. Obviously interest income from financial assets has fallen significantly under the zero interest rate policy, and we are well aware of the fact that the policy is adversely affecting households that depend heavily on interest income. The elderly hold a relatively large amount of financial assets as evidenced by the fact that about half of the total financial assets of individuals is held by those aged 60 and over, and whose earned income is not much. As a result, the elderly are most affected as low interest rates have continued for a long period, and we sympathize with their situation. However, let me emphasize that raising interest rates would not solve the problem. Households can earn interest income from their deposits because banks obtain interest income on their loans. In other words, the source of interest income received is economic growth, and interest income will not be generated if the economy does not grow. Viewed from a different angle, economic growth and increased employment opportunities would ensure the stability of household income. Household income primarily consists of employee income, which accounts for more than 70% of national income. By reviewing these facts, I hope you will understand the imminent need to achieve a sustainable economic recovery led by private demand. III. Monetary policy under uncertainty So far I have presented the majority view of the Policy Board on issues related to the termination of the zero interest rate policy. The Bank of Japan has recently stated that Japan’s economy is coming to a stage where the condition for lifting the zero interest rate policy is being met. However, since there are no inflationary risks, some argue that termination of the zero interest rate policy is unnecessary, besides which the risks involved in termination are unknown. We have been discussing the conduct of monetary policy, always bearing in mind the risks of both termination and continuation of the zero interest rate policy. The difficulty inherent in the conduct of monetary policy stems from the fact that a clear decision, whether or not to change interest rates, has to be made under uncertainty with inherently limited information on the outlook and the mechanism of the economy. Among various metaphors about the central bank, I remember one that says a central bank is like a driver on a winding road with a misted up windshield and rearview mirrors and an inaccurate speedometer. I think this well describes the essence of some of the difficulties that central banks face in conducting monetary policy. The economic outlook corresponds to the misted up windshield, and the limitation of economic statistics to the rearview mirrors and inaccurate speedometer. And the various risks that the economy faces correspond to the winding road. A central bank driving a car under such conditions has to stay alert to anticipated risks while making use of the lessons obtained from past experiences. With this comment as an introduction, let me present my personal view on the meaning of discussing the termination of the zero interest rate policy at a time when we do not observe any imminent risk of inflation. We often hear the argument that monetary policy should be changed only when the risk of inflation becomes evident. At first glance this argument appears reasonable since the target for monetary policy is price stability. As a matter of fact, in the bubble period of the late 1980s, the conduct of monetary policy was based on this argument. From 1986 through 1988, the economy grew at an annual rate of 5%, asset prices soared, and the general price level was extremely stable. Under such circumstances, the Bank of Japan could not find an opportunity to preemptively correct the low interest rate policy at the time. It was only in May 1989 when inflationary pressure became obvious to everybody that the Bank could raise the official discount rate. Since history never exactly repeats itself, we cannot claim that we have fully experienced all the various situations when monetary policy might be changed once inflationary pressure becomes evident. It should also be pointed out that today’s situation, which is heavily burdened with the aftermath of the bursting of the bubble, is vastly different from the situation during the bubble period. With these caveats, we should ask ourselves what are the lessons learned from the experience of the late 1980s in today’s context? Let me mention two points. First, the policy change in response to a clear and present risk of inflation would inevitably be monetary tightening, and, moreover, cumulative interest rate hikes would probably be needed as was the case in 1989 and 1990. In view of the very high amount of government bonds outstanding, for example compared with the late 1980s, the capital loss on these government bonds caused by higher interest rates would, other things being equal, pose much larger problems for the economy. We must thus avoid, to the extent possible, monetary policy that forces the central bank to raise interest rates rapidly and substantially at a later stage because it could destabilize the economy and the financial system. Second, if the zero interest rate policy continues for a long period even after the economy clearly recovers, more economic agents will tend to conduct activities based on the expectation that current extremely low interest rates will be sustained indefinitely. This is what happened in the bubble period, leading to an enormous waste of resources which continues to inflict pain on us today. I do not at all advocate a higher probability that a similar situation would occur on a similar scale. What I would like to mention is that the current situation of financial markets, where, for example, the premium on credit risk is suppressed by the liquidity effect of the zero interest rate policy, could include the potential risk of creating the misallocation of resources. Then, when is appropriate timing for adjusting interest rates before inflation risk becomes a matter of concern? If we can come up with a perfectly accurate economic outlook as well as the time needed for the policy effect to permeate the economy, we should conduct farsighted and preemptive policy at the right time on an appropriate scale. This is always an ideal vision for central banks. In fact, the Bank of Japan has been making efforts to accurately analyze the past, present, and future economy. Though we make policy judgments based on these analyses, admittedly we conduct monetary policy under great uncertainty with limited second sight as well as imperfect data and information just like the metaphor of the car driver. This is a brutal fact that central banks all over the world, including the Bank of Japan, must face. There are central banks that visibly incorporate this uncertainty into the modus operandi of the conduct of monetary policy. For example, the Bank of England forecasts inflation, not by a single figure, but by a probability distribution. We can thus easily understand how great uncertainty is in predicting, for example, the growth rate and inflation for 2002. If we have to humbly accept such uncertainty even after we try our utmost to make accurate economic forecasts, one useful approach might be to confirm the degree of economic improvement and adjust monetary easing accordingly in order to realize sustainable growth. As a digression, the Taylor Rule, the most well known of policy rule theories, attracts attention internationally and is actively studied. This Rule advocates the smooth adjustment of interest rates while paying attention to the output gap and fluctuation in prices, which seems to be based on a similar policy philosophy to what I have just described. A hundred and eighteen years have passed since the Bank of Japan was established. And, yet, it is also a “young” central bank as it was reborn two years ago under the new Bank of Japan Law, and thus no track record has yet been established. I believe a good track record will be won by calmly evaluating economic and financial conditions, fully explaining decisions and implementing them, and giving due consideration to constructive criticism from those who know the importance of having a central bank which can be trusted. Chart 1 Interest rates (1) Short-Term % Monthly Daily Call rates(overnight, uncollateralized) Euro-yen futures(3-month) CD rates(3-month) Official discount rate CY 00 11 12 1 CY99 August 3 Euro-yen futures 0.360% CD rates 0.11% Call rates 0.02% (2) Long-Term 6.0 % Daily Monthly 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 August 3 1.675% Government bond yield (10-year) 1.5 1.0 0.5 CY 11 12 1 CY99 Sources: Bank of Japan; Tokyo International Financial Futures Exchange; Japan Bond Trading Co., Ltd. Chart 2 Economic developments Around Feb. 1999 • Real GDP -0.4% (changes from a year earlier) Recent → (1999/Q1) • Domestic Private Demand -2.0% (changes from a year earlier) (2000/Q1) → (1999/Q1) • Industrial Production -3.8% (changes from a year earlier) -44 (DI; “favorable”-“unfavorable”) → -2.1% (changes from a year earlier) (1999/Q1) • Consumer Price Index -0.1% (excluding perishables, changes from a year earlier) +7.0% (2000/Q2) → (1999/Mar.) • Domestic Wholesale Price Index +2.1% (2000/Q1) (1999/Q1) • Business Conditions (Tankan) +0.7% -18 (2000/Jun.) → +0.3% (2000/Q2) → (1999/Q1) -0.3% (2000/Q2) <Ref.1> Forecasted Real GDP Growth Rate for FY 2000 December, 1999 +1.0% (average of 39 institutions) → June, 2000 → +1.6% (average of 25 institutions) <Ref. 2> Growth Rate of Current Profits (Tankan, All Enterprises, All Industries) FY 1999 (Actual) → FY 2000 (Forecast) +24.2% → +13.1% Chart 3 On the current monetary policy 17 July 2000, Bank of Japan At the Monetary Policy Meeting held today, the Bank of Japan decided to maintain its “zero interest rate policy”. The Policy Board views that Japan’s economy is recovering gradually, with corporate profits and business fixed investment continuing to increase. The Policy Board also judges that the economy is likely to recover gradually led mainly by business fixed investment, unless there are major adverse external shocks. With regard to the prices, the Policy Board views that the downward pressure on prices stemming from weak demand is declining significantly while an economic recovery is expected to continue moderately. Given the above considerations, the majority of the Policy Board views that Japan’s economy is coming to a stage where deflationary concerns are dispelled, which the Board have clearly stated as the condition for lifting the zero interest rate policy. At the Meeting, however, some views were expressed that before reaching a final decision to lift the zero interest rate policy, it was desirable to ensure the judgment on the firmness of economic conditions including employment and household income. Besides, it was pointed out that the Board needed to see how the commencement of reconstruction proceedings of Sogo Co. could affect market developments and business sentiments. Taking account of these factors, the Policy Board decided, by majority vote, on the maintenance of the zero interest rate policy. Chart 4 Labor’s share of income % FY Notes: 1. Labor’s share of income = personnel expenses / (personnel expenses + operating profits). 2. Data are taken from the Financial Statements Statistics of Corporations by Industry, Quarterly (total). 3. Shaded areas represent recession periods. Chart 5 Price developments (1) Consumer price index & domestic wholesale price index Changes from a year earlier, % Consumer price index (nationwide, excluding perishables) -1 Domestic wholesale price index -2 -3 CY 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 Notes: Excluding the effects of the consumption tax hike in April 1997 on the assumption that prices of all taxable goods fully reflect the rise of the tax rate. (2) GDP deflator Changes from a year earlier, % -1 -2 -3 CY (3) Nominal wage per person -1 -2 -3 -4 -5 Changes from a year earlier, % 6-month moving average CY 9 1 Chart 6 Contribution of private and public demand to real GDP year on year contribution rate for each item, % Domestic private demand Public expenditure 1.6 1.4 1.2 1.0 0.7 0.1 -0.1 -0.5 -1 -1.6 -1.6 -2 -3 1999/Q1 Q2 Q3 Q4 2000/Q1
|
bank of japan
| 2,000 | 8 |
Bank of Japan, Communication, 15 August 2000.
|
Bank of Japan’s August report of recent economic and financial developments1 Bank of Japan, Communication, 15 August 2000. * * * The Bank’s view2 Japan’s economy is recovering gradually, with corporate profits and business fixed investment continuing to increase. With regard to exogenous demand, net exports (real exports minus real imports) continue to follow a moderate upward trend due to steady developments in overseas economies, and public investment remains at a high level reflecting the progress in the implementation of the supplementary budget for fiscal 1999. As regards domestic private demand, business fixed investment is increasing. The recovery in private consumption continues to be weak as a whole through lack of notable improvements in employment and income conditions, although there are somewhat positive signs in some indicators. Housing investment is mostly unchanged. Reflecting such developments in final demand, industrial production is increasing. Corporate profits and sentiment continue to improve, and the number of firms that take positive action, such as increasing the amount of fixed investment, is increasing, especially in high-growth sectors. Income conditions of households still remain severe, but regular and overtime payments as well as new job offers continue to increase in line with the recovery in corporate activities, and compensation of employees has stopped decreasing. As for the outlook, public investment is likely to start decreasing in the near future, but net exports are expected to continue increasing gradually, reflecting the expansion in overseas economies. In the corporate sector, firms still strongly feel that they have excess equipment and that they should reduce their debts to restore financial soundness. However, it is very likely that fixed investment in highgrowth sectors, including those related with information technology services, will increase as corporate profits continue to recover. Moreover, an improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. However, the pace of recovery in household income will be modest for the time being, since firms’ perceptions of excess employment still persist, and thus significant changes have not been observed in their efforts to reduce personnel expenses. Overall, the economy is likely to recover gradually, led mainly by business fixed investment, unless there are major adverse external shocks. In addition, the favorable financial environment created partly by the Bank’s sustaining easy monetary stance is expected to continue underpinning the economy. With regard to prices, import prices are rising, reflecting an increase in international commodity prices such as crude oil prices since April. Domestic wholesale prices, notwithstanding the rise in prices of petroleum products reflecting the increase in crude oil prices, are mostly unchanged mainly due to the decrease in prices of electric machinery. Meanwhile, consumer prices continue to be somewhat weak owing to the slight decrease in the prices of private-sector services and the decline in prices of imported products reflecting the past appreciation of the yen. Corporate service prices are still falling slowly. This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on 11 August 2000. The Bank’s view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on 11 August 2000 as the basis of monetary policy decisions. As for the outlook on prices, downward pressure on prices stemming from weak demand is declining significantly while an economic recovery is expected to continue moderately. Upward pressure on prices is likely to arise temporarily from the increase in crude oil prices. On the other hand, in addition to the declining trend of machinery prices due to technological innovations, the decline in prices of consumer goods arising from the past appreciation of the yen and the streamlining of distribution channels will exert downward pressure on prices. Thus, prices overall are expected to be stable or weak somewhat. In the financial market, the overnight call rate has generally stayed near zero, and financial institutions have been confident about the availability of overnight funds. The amount of funds outstanding in the call money market has decreased slightly. Interest rates on term instruments once declined from mid-July, but have recently increased again reflecting the change in expectations that the zero interest rate policy would be terminated. The Japan premium remains negligible. Yields on long-term government bonds recently increased somewhat, and has been around 1.75 percent. The yield spread between private bonds (bank debentures and corporate bonds) and government bonds remains mostly unchanged as a whole. Stock prices fell from mid-July mainly due to the filing of reconstruction proceedings by a major retailer and the decline in U.S. stock prices. In the foreign exchange market, the yen fell moderately towards the end of July and the yen-dollar exchange rate temporarily rose to around 110 yen. The yen is currently being traded in the range of 107-109 yen to the U.S. dollar. With regard to corporate finance, private banks have basically retained their cautious lending attitude. However, constraint that had been caused by severe fund-raising conditions and insufficient capital base has eased considerably. Given this, major banks continue to be more active in extending loans, while carefully evaluating the credit risks involved. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is increasing in parallel with a recovery in profits. Moreover, firms continue to reduce debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. Issuance of corporate bonds and CPs has been steady. Money stock (M2 + CDs) grew faster in July compared with the previous month on a year-on-year basis. In this financial environment, the lending attitude of financial institutions is perceived by firms as less severe, and corporate financing conditions are easing.
|
bank of japan
| 2,000 | 8 |
Speech given by Mr Masaru Hayami, Governor of the Bank of Japan, at the 32nd Annual Joint Meeting of Japan-Midwest US Association and Midwest US-Japan Association, held in Tokyo, on 11 September 2000.
|
Masaru Hayami: The US and Japanese economies reflections of a central banker Speech given by Mr Masaru Hayami, Governor of the Bank of Japan, at the 32nd Annual Joint Meeting of Japan-Midwest US Association and Midwest US-Japan Association, held in Tokyo, on 11 September 2000. * * * I am honored to be invited today to the 32nd Annual Joint Meeting of Japan-Midwest US Association. As some of you may know, after having worked at the Bank of Japan from 1947 through 1981, I then entered the private sector where I spent about 17 years, during which time I often participated in meetings of business leaders from both the United States and Japan. At this Annual Joint Meeting, I am told that political and business leaders from both countries are going to discuss the problems that the world economy faces, including the IT revolution and globalization. Needless to say, I am looking forward to learning the results of the discussions. Some ten to fifteen years ago, that is, in the late 1980s, one of the main topics at such conferences was economic and trade friction between the United States and Japan. Indeed, I chaired a small group established under the Japan-US Business Conference that discussed the resolution of disputes, which I found an important, but not an easy job. One of the advantages of serving as chairman was that I had the opportunity to visit a number of US cities, including Cleveland in the Midwest. Fortunately, the economic and trade friction hotly debated at that time has been greatly alleviated, partly because the cause has been removed and also partly because misunderstanding on both sides has been resolved, which largely owes to the strenuous efforts made by those involved in solving the problems underlying the friction. However, I think it also reflects the fact that over the past ten years Japan’s economy has stagnated while the US economy has revived. Japan’s economy saw the peak of the bubble about ten years ago. At that time, Japanese firms and financial institutions were expanding their global market share and were full of confidence. Many of you will remember a book entitled “Japan as Number One” written by a professor of Harvard University which was published immediately before the bubble hit the peak. In contrast, ten years ago the United States was suffering from twin deficits, a combination of huge budget deficits and the expansion of current account deficits. But that was ten years ago. Now, the US economy has been enjoying its longest ever period of economic expansion. The unemployment rate has come down dramatically from 7.5% in 1992 to 4.1% recently. On the other hand, Japan’s economy has experienced severe trials since the bursting of the bubble. Such contrasting development between the United States and Japan is most typically witnessed in the movement of stock prices. The current Nikkei Stock Average is a little more than 40% of what it was at the end of 1989, which happened to be its peak, while the New York Dow-Jones Industrial Average has risen four-fold during the same period. Against this background, we Japanese have recently tended to become overly pessimistic about the medium- to long-term growth potential of Japan’s economy. However, I believe that Japan’s economy will be able to regain vitality if it firmly pursues economic reforms needed from a medium- to long-term viewpoint, as witnessed by the revitalization of the US economy since the 1990s. To that end, we should learn lessons from past mistakes. At the same time, it is crucial that we steadfastly implement concrete reform measures while earnestly discussing how to revive Japan’s economy. In view of the current boom of the US economy, it may be useful for US participants in this meeting to draw possible lessons from Japan’s bitter experience which began when its economy was still in a good condition. Bearing all this in mind, let me talk about two issues. The first issue is, in the context of the US-Japan economic relationship in the late 1980s, why did the bubble emerge and how did monetary policy affect the emergence of the bubble? The second issue is, though it might sound a little bit vague, to what extent do differences in economic and corporate management style, for example between the United States and Japan, affect economic growth? Regarding the first issue, there are various factors behind the stagnation of Japan’s economy in the 1990s. The emergence of the huge bubble in the late 1980s and its subsequent bursting in the 1990s was certainly one of the major factors. Although why the bubble emerged has not yet been fully analyzed, we can obtain a few common observations if we look back on the history of bubbles including the case of Japan. One common observation is that it is inevitable that a bubble will emerge if public expectations become extremely bullish for some reason. And, borrowing the expression of Fed Chairman Greenspan, “irrational exuberance” prevails nationwide when a bubble emerges. However, intensification of bullish expectations alone is not enough for the emergence of a bubble, for it has to be financed, which is another common observation. As a matter of fact, during the bubble period in Japan, the activity of financial institutions had become extremely aggressive and interest rates had been kept low for a long period of time. Now, in the aftermath of the bursting of the bubble, we hear various questions and criticisms such as “Why did the Bank of Japan maintain monetary easing for a long period?” There were a couple of reasons behind the delay in monetary tightening at that time. Above anything else, prices had been very stable. Furthermore, Japan had a sizable current account surplus, reaching 4.2% of GDP in 1986. And this strengthened the prevailing argument that Japan should continue monetary easing and expand domestic demand to reduce the external surplus, which was another reason for the delay in raising interest rates. The United States advocated that Japan’s current account surplus should be reduced through the expansion of domestic demand, but such an argument was widely discussed in Japan as well. The basic condition of the current account balance of a country is fundamentally determined by the trend of the net balance between savings and investment which reflects demographic and other underlying factors. Economic theory tells us that it is hardly possible for monetary policy to affect such a basic condition of the current account balance. Nevertheless, in reality, not a few advocated the erroneous argument which was not warranted by economic theory. I think this was partly because some support was given to a misconception that microeconomic problems could be solved simply by macroeconomic policy. In other words, there existed the mistaken notion that such problems as trade friction between the United States and Japan could be solved by monetary policy. Looking at the booming US economy while reviewing the experience of Japan’s bubble period, I cannot help but feel some difficulty in judging the arrival of the new economy, in other words, the difficulty in differentiating between “irrational exuberance” and “rational exuberance.” Most central banks would perhaps say “no” to the question as to whether monetary policy could prevent the emergence of a bubble. But, I think they would say “yes” to the assertion that monetary policy can play a very important role in maintaining a stable macroeconomic environment. As we have seen in the discussion based on the misconception about a reduction in the current account surplus, I strongly believe it is important for both policy makers and business leaders to understand and share some kind of basic logic in terms of macroeconomic theory for the conduct of sound economic policy. Let me move on to the second issue I want to address which is to what extent differences in economic and corporate management style, for example between the United States and Japan, affect economic growth. Against the backdrop of prolonged economic stagnation in recent years in Japan, there has been growing recognition that we should further incorporate into our system the US style management which emphasizes market-oriented economic management and shareholder-oriented corporate management. Simply put, regarding economic management, competition should be further intensified. The relaxation and lifting of regulations should be promoted. The financial system should be shifted from one led by banks to one led by the capital market. And, on the corporate management front, corporate governance should put more emphasis on shareholders. Needless to say, employment adjustment should be more drastic. From time to time such an argument goes to the extreme that further development of Japan’s economy cannot be expected unless we completely shift from Japanese style to US style management. I think this is overly pessimistic because Japanese style management is not something which never changes, but is rather something which has evolved in response to changes in the economic environment. Of course, I am not saying that current Japanese style economic and corporate management has no problems. Indeed, I often mention the importance of structural reform, and am sometimes criticized for going beyond my position as central bank governor by making too strong a statement on the subject. Nevertheless, I strongly believe Japan needs structural reform. First of all, let me emphasize that the growth potential of the economy can be increased largely by improvements on the supply side, that is, achieving steady productivity gains, rather than the short-term boosting on the demand side. For example, if we compare the productivity of workers in 1998, the figure for Japan was about 40% lower than that for the United States based on purchasing power parity in the IMF’s World Economic Outlook, and about 30% lower when based on the actual exchange rate. Of course, if the sole objective is higher labor productivity, it can be achieved by investing a huge amount of capital and raising capital per worker. But, in this case, capital productivity and return on capital would decline. Furthermore, growth driven only by the huge investment of resources would eventually reach a limit. For sustainable growth, we need to establish an indigenous mechanism that promotes growth by combining labor and capital in an optimal manner under given prices and which generates innovation in various fields. Under such circumstances, we have to deal with the following three agendas. First, the allocation of resources should be reviewed in light of changes in the economic environment and resources should be invested in more productive areas. In this way, resources would be more efficiently utilized. For example, labor and capital need to be reallocated from the public to the private sector, from low growth to high growth industries, and from less efficient to more efficient firms. Such redistribution would certainly be accompanied by pain, but without it we cannot expect the steady development of Japan’s economy. Second, the legal, tax and accounting systems, some of which are outmoded and can be an obstacle to innovation, should be reviewed. While I recognize that it is never easy to review any system, which inevitably entails conflict of vested interest, we should know that we will not be able to take advantage of the power of innovation unless systems are reviewed in response to changes in the economic environment. Third, what we really need to see is the emergence of innovators. Changes in the economic environment will create a variety of opportunities for making profits. Transforming such opportunities into profitable businesses cannot be achieved through a mechanical process. It can only be achieved if innovators are allowed to pursue their entrepreneurial abilities to the full. These three agendas boil down to the problem of how to improve the ability of the economy and society to cope with various changes. Such an ability is always needed, but, when technological innovation and economic globalization are rapidly progressing, economies and societies that can respond to such changes have a considerable competitive edge. I think the fact that the United States has recently recorded higher growth than Europe and Japan reflects a greater ability to cope with changes which can be characterized by flexibility and diversity. At a recent conference sponsored by the Federal Reserve Bank of Kansas City, Fed Chairman Greenspan emphasized that the flexible US labor market had contributed to recent high economic growth, by noting the seemingly paradoxical situation of low unemployment despite many layoffs. From these viewpoints, we definitely observe the seeds of changes in the recent development of Japan’s economy. Let me give you some concrete examples of such change. First, the reform of systems is proceeding rapidly. For example, a number of changes have been made in the area of accounting, including mark-to-market valuation, more adequate pension liability accounting, and the review of the relationship between subsidiaries and their parent companies. And, importantly, the level of disclosure has been greatly improved. By accurately showing the performance of a firm, these changes put strong pressure on corporate managers to pursue restructuring and higher profits. Second, corporate managers have become increasingly aware of return on capital. Third, the mentality of employees has changed. Japan’s labor market, which is characterized by lifetime employment and the seniority-based wage system, used to be perceived by many as lacking flexibility. However, recently we have seen gradual changes in the market as large-scale employment adjustment has begun to be observed. Fourth, reform of the financial system has been proceeding. Since the autumn of 1998, a legal framework for the smooth dissolution of failed financial institutions has been established and public funds have been injected into major banks to strengthen their capital base. Although there remain a lot of things to be solved, the condition of Japanese financial institutions has significantly improved thanks to the restructuring efforts on the part of financial institutions. Related to these positive developments, direct investment into Japan has substantially increased in recent years. In the past, inward direct investment was much smaller than outward direct investment. In fact, it was only 200 million dollars in 1996. However, it has been on a rising trend, amounting to 12.8 billion dollars last year. I have great expectations for a continuing increase in direct investment from abroad as it would stimulate Japan’s economy through the transfer of managerial resources and business expertise. Before closing, if I may summarize, firstly, a stable macroeconomic environment is a prerequisite for sustainable growth, and in this regard, monetary policy plays a very important role. Second, to raise the economic growth rate over the medium to long run, structural reform affecting the supply side of the economy is indispensable. I think that the contrast between the US and Japanese economies during the past ten to fifteen years exactly proves this point. Let me conclude my remarks by quoting the following prayer for “Serenity“ by Dr Reinhold Niebuhr which I cherish whenever I face challenging issues as Governor of the Bank of Japan: God grant me the serenity to accept the things I cannot change, The courage to change the things I can; And the wisdom to know the difference. Thank you very much for your kind attention.
|
bank of japan
| 2,000 | 9 |
Bank of Japan, Communication, 18 September 2000.
|
Bank of Japan’s September report of recent economic and financial developments1 Bank of Japan, Communication, 18 September 2000. * * * The Bank’s view2 Japan’s economy is recovering gradually, with corporate profits and business fixed investment continuing to increase. With regard to exogenous demand, public investment is about to decrease since the implementation of the supplementary budget for fiscal 1999 has peaked out. Net exports (real exports minus real imports) continue to follow a moderate upward trend due to steady developments in overseas economies. As regards domestic private demand, business fixed investment is on an increasing trend. The recovery in private consumption continues to be weak as a whole through lack of notable improvements in employment and income conditions, although there are somewhat positive signs in some indicators. Housing investment is mostly unchanged. Reflecting such developments in final demand, industrial production is increasing. Corporate profits and sentiment continue to improve, and the number of firms that take positive action, such as increasing the amount of fixed investment, is increasing, especially in high-growth sectors. Income conditions of households still remain severe but regular and overtime payments as well as new job offers continue to increase in line with the recovery in corporate activities, and compensation of employees has stopped decreasing. As for the outlook, public investment will decrease, but net exports are expected to continue increasing gradually, reflecting the expansion in overseas economies. In the corporate sector, firms still strongly feel that they have excess equipment and that they should reduce their debts to restore financial soundness. However, it is very likely that fixed investment in high-growth sectors, including those related with information technology services, will increase as corporate profits continue to recover. Moreover, an improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. However, the pace of recovery in household income will be modest for the time being, since firms’ perceptions of excess employment still persist, and thus significant changes have not been observed in their efforts to reduce personnel expenses. Overall, the economy is likely to recover gradually led mainly by business fixed investment, unless there are major adverse external shocks. In addition, the favorable financial environment created partly by the Bank’s sustaining easy monetary stance is expected to continue underpinning the economy. With regard to prices, import prices are rising, reflecting an increase in international commodity prices such as crude oil prices since April. Domestic wholesale prices, notwithstanding the rise in prices of petroleum products reflecting the increase in crude oil prices, are mostly unchanged mainly due to the decrease in prices of electric machinery. Meanwhile, consumer prices continue to be somewhat weak owing to the decline in prices of imported products reflecting the past appreciation of the yen, although prices of petroleum products and electricity increased from the rise in crude oil prices. Corporate service prices are still falling slowly. This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on 14 September 2000. The Bank’s view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on 14 September as the basis of monetary policy decisions. As for the outlook on prices, downward pressure on prices stemming from weak demand is declining significantly while an economic recovery is expected to continue moderately. Upward pressure on prices is likely to arise temporarily from the increase in crude oil prices. On the other hand, in addition to the declining trend of machinery prices due to technological innovations, the decline in prices of consumer goods arising from the past appreciation of the yen and the streamlining of distribution channels will exert downward pressure on prices. Thus, prices overall are expected to be stable or weak somewhat. In the financial market, the overnight call rate rose in response to the decision at the Monetary Policy Meeting held on 11 August to change the guideline for money market operations,3 and is generally moving around 0.25%. The amount of funds outstanding in the call money market has increased. Interest rates on term instruments increased towards the end of August, reflecting the termination of the zero interest rate policy, and has been mostly stable thereafter. The Japan premium remains negligible. Yields on long-term government bonds followed an upward trend from the second half of August and rose temporarily to 1.95-2.0%, but is recently moving in the range of 1.8-1.9%. The yield spread between private bonds (bank debentures and corporate bonds) and government bonds remains mostly unchanged as a whole. Stock prices rose from mid- to end-August but started to fall from late August and are recently moving around the level observed during mid-August. In the foreign exchange market, the yen-dollar exchange rate rose temporarily to around 109-110 yen in mid-August, but the yen appreciated thereafter. The yen is currently being traded in the range of 106-108 yen to the US dollar. With regard to corporate finance, private banks continue to be more active in extending loans mainly to blue-chip companies, while carefully evaluating the credit risks involved. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is at a high level in parallel with recovery in profits. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. Recently, however, the expansion in the year-to-year decline seems to be ceasing. Issuance of corporate bonds and CPs has been steady. Money stock (M2 + CDs) grew slower in August compared with the previous month on a year-on-year basis. Recently, funding costs for firms are increasing, albeit gradually, due to the rise in money market rates after the termination of the zero interest rate policy. In this financial environment, there seem to be no substantial changes in the lending attitude of financial institutions and easing of corporate financing conditions. “The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.25%.”
|
bank of japan
| 2,000 | 9 |
Remarks by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Joint Bundesbank/BIS conference on "Recent developments in financial systems and the challenges for economic policy", held in Frankfurt, 28-29 September 2000.
|
Yutaka Yamaguchi: Challenges raised by recent changes in the financial system Remarks by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Joint Bundesbank/BIS conference on “Recent developments in financial systems and the challenges for economic policy”, held in Frankfurt, 28-29 September 2000. * * * It is indeed an honor to be invited today to address such distinguished guests at this conference. The duty of a central bank is to contribute to sound and sustainable economic growth through price stability, though the legal description of its objectives may differ from country to country. Furthermore, a central bank has a substantial responsibility in maintaining financial system stability as a whole, regardless of whether or not it has supervisory authority over individual financial institutions. Thus, a central bank is unique in that it conducts its business while always paying close attention to the interfacing of the macro-economy and the financial system. Bearing these in mind, I will discuss some challenges which recent changes in the financial system raise. Let me begin with the background and characteristics of changes in the financial system. First of all, I should confirm the profound impact of innovations in information technology on the financial system. These innovations and the development of concurrent financial technology such as derivatives and securitization, which enable the unbundling and repackaging of risks, have greatly expanded the range of tradable risks. As a result, market transactions have become deeper and more liquid, fairer and more competitive prices have been realized, and transaction costs have declined substantially. This has led to the significant expansion of cross-border capital flows and financial transactions. And, with intensifying competition and interdependence, financial and capital markets in various countries have become similar “in certain respects”. The reason I said “in certain respects” is because middle and retail banking, which meets the financial needs of individuals as well as small- and medium-sized firms, continues to be supported by financial intermediaries indigenous to each country. Of course, in the future, such localized banking might be affected by globalization as the advance of telecommunications technology, particularly the Internet, further erodes regional barriers, even for the household sector. Right now, however, it is difficult to envisage globalization, which has been progressing in wholesale banking, to also be observed in middle and retail banking in the immediate future. Thus, a phenomenon, which can be labeled “home bias” in middle and retail banking, is likely to coexist with the globalization of wholesale banking. As globalization has progressed in wholesale banking, the institutional distinction among banks, securities companies, and insurance companies has become increasingly blurred. This is largely attributable to the fact that technological innovation has promoted the unbundling and flexible repackaging of such financial functions as settlement, financial intermediation, and risk allocation. At present, major financial institutions in many countries are gearing for the expansion of size and business area by way of consolidation. Such moves should be understood not only as the pursuit of economies of scale and scope by providing a variety of financial services in a comprehensive manner, but also as a process searching for a new combination of financial functions tailored for individual needs. With these moves gaining momentum, regulations based on the current fixed combination of financial functions have become increasingly outmoded when compared with reality. Under such circumstances, even in the United States and Japan where the financial systems used to be based on the strict separation of business areas, financial system reform which grants mutual entry of business areas among different types of financial institutions, has been implemented. These changes in the financial service industry will exert various influences on the financial system. In this regard, let me mention the enhanced role of capital base as an important example. Under a financial supervisory paradigm that aimed at ensuring the soundness of financial institutions by regulating their activities, capital base only played a limited role. However, as the effectiveness of such a regulation-oriented paradigm has greatly diminished, capital base has come to play an important role as a buffer against risks, and an accurate risk control method, which dictates as a core principle capital base being in line with risk profile, has become an established practice among advanced financial institutions. Bearing this practice in mind, the Basel Committee on Banking Supervision has been drafting a new guideline on capital requirements that redefines the amount of capital base corresponding to various risks. It will be interesting to see how the total amount of required capital for financial institutions will change as a result of the new guideline. For example, when many countries are said to be overbanked, it seems to indicate that capital and other resources are excessively allocated to the financial service industry, particularly the banking sector. With the new guideline that more accurately calculates the required capital corresponding to the risk profile of banks, will a similar conclusion hold? And, if examined from the viewpoint of economic capital, will there be any change in the conclusion? If the economy is considered overbanked even according to the new guideline, we will see the reallocation of resources, including capital, both in and out of the financial system. Through what kind of process will such reallocation of resources be realized? This question could have considerable bearing not only on the financial system per se but also on the conduct of monetary policy. As such, the fact that financial transactions are conducted globally and financial markets have become significantly deeper and more liquid should work to enhance financial system efficiency as well as stability by making it possible to absorb various external shocks through market functions. However, even in the 1990s, we repeatedly observed financial crises that went far beyond the collapse of individual financial institutions and affected entire financial systems, such as the asset bubbles in Japan and the Nordic countries, the currency crises in Asian countries and Russia, and the failure of the Long Term Capital Management. The increased frequency of crises along with changes in financial systems seem to suggest that while financial system efficiency has been considerably enhanced, vulnerability has also increased. Why should this be? Granted that the adoption of fixed exchange rate regimes and the impetuous liberalization of capital flows on the part of emerging economies were behind the recent turbulence, it is possible to conclude that technological innovation and globalization might have had a tendency to amplify such crises. Indeed, financial globalization, ignited by innovations in information technology, has dramatically increased cross-border financial transactions, and occasioned intensified competition and interdependence among financial markets in various countries. However, exactly because of such strengthened interdependence, stress will not only affect the country in which it emerges initially, for example, Thailand in the case of the Asian crisis, but also be transmitted immediately to markets in other countries. In the transmission process, stress will not only be transmitted to those countries perceived to have similar economic structures, but also could significantly affect markets, which are not directly related to the stress, through the global adjustment of highly leveraged positions. Indeed, during the Asian crisis, “flight to quality” and liquidity evaporation took place, foreign exchange stability which enables smooth market transactions extending over many countries was lost, and markets segmented. Thus, once a financial crisis occurs, the depth and liquidity of globalized financial transactions that should absorb the shock immediately disappear, and the wholesale banking market becomes segmented by each country just as in the case of middle and retail banking. In addition, where there are prospects for profit opportunities, in order to obtain maximum benefits, sophisticated financial techniques backed by financial innovation have to be highly leveraged. While it is true that such high leverage contributes to improving efficiency as long as forecasts turn out to be accurate and the financial system is smoothly operating, once an unexpected shock hits the market and profit opportunities are lost, a sudden reversal of prices could occur through position rebalancing and leverage rewinding. In such a situation, the very activity of individual financial institutions based on sophisticated risk management techniques aggravates market price instability. For example, market wisdom created the use of collateral in OTC derivative transactions as a self-defense measure to deal with counterparty risk. At the same time, as experienced during the Russian crisis, such collateral potentially has the negative aspect of triggering a vicious circle in times of stress where a decline in collateral value could, by converting counterparty risk to spread risk, induce margin calls and the unwinding of positions, thus leading to further declines in collateral value. Of course, from the managerial viewpoint, each market participant would naturally try to contain risk and losses within a certain limit. However, in a stress situation, this kind of individual activity could change prices in a non-linear and discontinuous manner and cause the evaporation of market liquidity at a macro level. Thus, we may be able to conclude that the depth and ample liquidity of markets created by technological innovation and globalization in normal times could be immediately lost in times of a financial crisis accompanied by enormous stress, and there is an inherent risk that it would further amplify the crisis. Let me now discuss the financial crisis caused by the asset bubble that Japan experienced in the 1990s in relation to financial innovation. A bubble in the form of rapidly rising asset prices is a phenomenon that has repeatedly been observed in history. In a period of euphoria, asset prices become inflated along with the credit expansion of financial institutions. And, in the subsequent period of adjustment, a decline in asset prices impairs the balance sheets of financial institutions and has a substantial adverse impact on the economy as the credit provision function of such financial institutions weakens. With the benefit of hindsight, such a process is nothing new. Having said this, however, in Japan we cannot deny the possibility that because the regulatory framework in the late 1980s did not keep up with rapid changes in the financial system, the activities of financial institutions became more risky than otherwise, thereby amplifying the extent of problems. Technological innovation in the capital market made the services offered by banks less attractive, and pressure from abroad for financial deregulation intensified. As a result, banks became strongly aware of the decline in their franchise value, which gave them a strong incentive to pursue risk-taking activities to maintain and improve their earnings. Furthermore, deregulation of the traditional segmentation of business areas and banking organization proceeded only gradually, thus making it difficult for banks to develop businesses that might open up new opportunities for profits. The result was excessive risk taking in lending which was their traditional business. Furthermore, financial institutions can temporarily prevent a fundamental deterioration in profitability from surfacing through aggressive lending. This kind of behavior and a rapid rise in asset prices during the emergence of the bubble that accelerated credit expansion, worked together to amplify the excess in the business cycle. During the bursting of the bubble in the 1990s, Japanese banks simultaneously faced two problems: the non-performing asset problem and a further rise in pressure stemming from global competition. The interaction of these two problems further delayed improvements in financial system functions, and was a significant factor behind the stagnation of Japan’s economy in the following years. Major Japanese banks found it difficult to make sufficient high-tech related investments due to capital constraints, and had to divest themselves of profitable overseas subsidiaries. This had a significant adverse impact on the competitiveness of investment banking, which has tended to yield the highest returns, and perhaps further delayed reconstruction of the medium-term profitability of banks. Furthermore, economic globalization promoted the convergence of factor prices, including property prices, and made reconstruction of the financial system more difficult by amplifying pressure stemming from asset deflation. What lessons can the central bank learn from recent changes in the financial system and the experience of financial crises? First of all, innovations in information technology and globalization are ongoing phenomena and will likely continue to change each country’s economy as well as its financial system at a rapid pace. For a central bank, this leads to increased uncertainty in the environment surrounding the conduct of monetary policy. A case in point is the argument that I made earlier on “overbanked” market. Such an argument is often made regarding the financial system in countries like Japan and Germany. If this argument is correct, it is envisaged that these countries would witness the rapid reduction of both deposits and loans, and the increase in such instruments as MMFs. In Japan, we hear conflicting views on the issue: while some advocate the need to expeditiously solve overbanking, others criticize the slow growth of money supply, which of course is the balance sheet of banks. Some may say that the increased uncertainty for a central bank stemming from such factors as, for example, overbanking would not pose qualitatively different problems compared with the introduction of new financial instruments like NOWs and MMFs in the past. However, I think technological innovation has the potential power to more profoundly alter the financial and economic structure over the medium- to long-run. For example, e-commerce, which develops as it interacts with innovation in financial techniques, has been rapidly expanding at an exponential double-digit annual rate in Japan and the United States, and may fundamentally change the price formation of goods and services. The spread of e-commerce could put downward pressure on prices due to the decline in distribution costs, dramatically reduce menu costs because, for example, price tags can easily be changed, and lead to price destruction as prices can be set differently from customer to customer. In fact, we see examples in such merchandise as CDs (compact discs) and books where e-commerce transactions are 10 to 20% cheaper than those in traditional commercial transactions, and merchandise sold with a unit price change of one dollar in traditional commerce is now sold with a unit price change of one cent in e-commerce. A decline in the price level and the rapid progress of price differentiation vis-à-vis customers would make it more difficult for the central bank to set a targeted inflation rate and substantially impair the reliability of price indices. Since economic theory teaches us that price rigidity is a big factor supporting the short-term effectiveness of monetary policy, lower menu costs might have a large impact on the effectiveness of monetary policy. The spread of e-commerce is only one aspect of the various influences of technological innovation, and as such innovation proceeds there will be many other new aspects to contend with. The intrinsic difficulty regarding the conduct of monetary policy lies in our limited knowledge of economic prospects and mechanisms, and innovation in information technology and advances in globalization may further aggravate such difficulty. Under such circumstances, we should not suppress, by regulation, the development of technology and innovation in the market. Rather, we should strive to provide a supportive market infrastructure, including regulation and supervision, market practices, disclosure, and accounting methods, in a broad context and to make it more robust. The systematic improvement of market infrastructure will contribute to reducing the risk of financial crises, which is the most serious uncertainty. In fact, to this end, vigorous and systematic efforts have been made in the international community, resulting in a plethora of fora, reports and proposals. It is indeed an encouraging development that many international committees are striving to discover and improve weaknesses inherent in the global financial system, and experts of the Financial Stability Forum have been double-checking such efforts. We must thus ensure that the results obtained from these precious efforts are implemented by the authorities of each country and market participants, and in this context I agree to the point made by many that appropriate incentives are needed. Of the various efforts to improve market infrastructure, let me mention the study called the “Fisher II” project, being undertaken by the Multi-disciplinary Working Group on Enhanced Disclosure, chaired by Mr Peter Fisher of the Federal Reserve Bank of New York. This developed from the study by the central bank group at the BIS, and it is currently examining ways to improve disclosure necessary for evaluating counterparty risk in collaboration with the supervisory authorities of banks, securities companies, and insurance companies, as well as with the support of major market participants. This study is important, not only because cooperation between the private financial sector and the supervisory authorities in charge of the financial service industry overall is realized, but also because it may reveal the new boundary of disclosure needed for such public goods as market stability in the context of recent crises. Moreover, we need to check whether or not market pressure, which is regarded as a main incentive, would result in establishing advanced disclosure as a market practice. At present, it is only a hypothesis that more advanced disclosure would lead to more appropriate risk management by market participants, let alone to further enhancing financial system stability through the better grasp of macro risk profile. In this regard, one lesson we have learned from the bubble period in Japan is that although individual financial institutions conducted risk management, which eventually turned out to be insufficient, enormous concentration of risk could arise at a macro level. Hence, we may need some other way to grasp the size and profile of risk at a macro level. Still, the study of how financial institution disclosure should be pursued has the possibility of linking financial system stability at a macro level to the incentives of individual market participants, and I believe it is worthwhile to explore such a possibility to the maximum extent. The next issue is how the central bank and the authorities should respond to increased uncertainty that cannot be directly controlled. Recently, many countries have experienced the fluctuation of asset prices, which is one example of uncertainty. Here, one issue is the difficulty of identifying whether such fluctuation reflects the arrival of a new era or the emergence of a bubble, and also how monetary policy should be conducted under such circumstances. Allow me to elucidate a little on these issues, which I think important, though they are not directly related to the problem of changes in the financial system. A key question for a central bank is whether excessive swings in economic activity can be avoided only if price stability is maintained by appropriate monetary policy. While this question requires careful examination, by looking at the experience in Japan, my preliminary answer is, to my regret, “No”. In fact, Japan’s bubble emerged in the midst of favorable macroeconomic performance where high growth and price stability had co-existed for several years. The yen’s appreciation resulting from the outlook for higher growth potential coupled with contained inflationary expectations brought about notable price stability during the period when asset prices rose rapidly, which made it difficult for the Bank of Japan to preemptively raise interest rates citing the future risk of inflation. During periods of euphoria when overheating of the economy is not reflected in price forecasts, and the central bank tolerates continued monetary easing despite uneasiness that leads to a delay in taking preemptive measures, the result will almost inevitably be an excess in asset prices and economic activity. In this regard, ironic as it may sound, favorable macroeconomic performance and price stability seem to be necessary conditions for the emergence of an asset price bubble. This seeming paradox poses a serious challenge to the central bank. If favorable economic performance and price stability that could be perceived as the arrival of a new era in fact turns out to be just euphoria, high asset prices will not last long, and the subsequent correction of asset prices will have a serious adverse impact on both financial and macroeconomic aspects of the economy. Such concern, however, is not convincing enough to persuade those who believe in the arrival of a new era to restrain ambitious investments. In many cases, the arrival of a new era and euphoria are both triggered by such changes in the environment as technological innovation, and it is never an easy task for anybody to judge whether the change witnessed in the middle of euphoria is simply more euphoria or if a new era is being ushered in. Technological innovation significantly raises such uncertainty. Generally speaking, in a situation where uncertainty surrounding the economy increases, prevailing thinking is that the central bank should conduct monetary policy more carefully and cautiously. At the same time, not a few criticize that such a gradualist approach to monetary policy might well end up in “too little, too late”. Some even argue that monetary policy should be decided from the viewpoint of the “minimax theorem”, which aims at minimizing damage in the worst scenario. According to this theorem, the central bank should first compare two policy options, for example, to erroneously tighten monetary conditions despite the arrival of the new economy and thus deprive the economy of an opportunity to raise growth potential on the one hand, or to misunderstand a bubble as part of the transition process to the new economy and continue monetary easing on the other hand. And it should conduct monetary policy by judging which one of these two policy options is likely to result in a less worse scenario. I suspect many central banks will perhaps be required to make such a comparison in the conduct of monetary policy. Today, I have discussed some problems resulting from changes in the financial system that central banks face and how they should respond. Despite the various efforts I have outlined, the probability of a financial crisis occurring can never be reduced completely to zero. With this in mind, a central bank should enhance its crisis management ability. In this context, it is necessary to conduct risk monitoring and analysis while paying close attention to the increasingly globalized financial system, and to strengthen a cooperative framework among central banks to deal with risks once they materialize. Of the various efforts made toward this end, the BIS Committee on Global and Financial Systems that I have the honor of chairing, has been actively working, as its primary mission, to discover potential market vulnerability at an early stage and to propose remedial measures, often in collaboration with the BIS sister committees. For example, based on the analyses of the recent international financial crises, we have put forward suggestions for a method of disclosing foreign exchange reserves, a market design for enhancing liquidity, and a way to improve statistics with regard to international fund flows. At the outset, I said: “A central bank is unique in that it conducts its business while always paying attention to the interfacing of the macro-economy and the financial system.” I think what is required of a central bank is to conduct appropriate monetary policy while giving due consideration to this unique feature, and at the same time to contribute to developing a market design in a broad context while strengthening close cooperation and dialogue with other public authorities as well as private financial institutions.
|
bank of japan
| 2,000 | 10 |
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, held at Kisaragi-kai, Tokyo, on 5 October 2000.
|
Masaru Hayami: The impact of innovation in information and communications technology on financial systems Speech by Mr Masaru Hayami, Governor of the Bank of Japan, held at Kisaragi-kai, Tokyo, on 5 October 2000. * * * It is an honor to be invited and given this opportunity to speak at Kisaragi-kai. Today, I would like to share with you our thoughts on changes in Japan’s financial system against the backdrop of the rapid pace of innovation in information and communications technology, and how, under such circumstances, we should continue improving both the stability and efficiency of the financial system. The recent rapid evolution of information and communications technology, which is generally called the “IT revolution”, has been exerting a profound impact on economies and finance as a whole. In the United States where such technological innovation has been one of the driving forces behind the longest period of economic expansion in its history, there are views that a new economy that is totally different from the old economy has been born. Some even claim it is comparable to the Industrial Revolution of the 19th century. Though it will be a long time before economic historians can make an objective assessment of innovation in information and communications technology, which is still under way, there is no doubt that it has had a profound impact on economies and finance as a whole. Indeed, I don’t think I need tell you that technological innovation has brought about the speedy processing and transmission of information enabling a substantial reduction in costs, wider networking, and globalization on an unprecedented scale and scope. Moreover, it has affected a wide range of industries, having a particularly dramatic impact on the financial services industry. Man created an instrument called “money”, which is a unit of account, a means of exchange and a store of value, for the smooth execution of economic activity. The financial services industry is closely related to this instrument we call money, and its core business is based on information processing and networking. Therefore, the financial services industry has been a major user of information and communications technology, and, significantly, it is an industry that can easily take advantage of technological innovation. As we all know, computers and exclusive communications networks have greatly contributed to improving the efficiency and safety of business, for example, in retail deposit taking where an enormous amount of information must be processed and recorded as well as in fund transfers and domestic and foreign exchange where extensive networks are required. Furthermore, the recent rapid growth of derivatives and securitization has been made possible through downsizing and the spread of computers. Changes in the financial system stemming from the recent advance of information and communications technology are not limited to improving the efficiency of traditional businesses and enabling the development of new instruments in specific fields. Here, a good example is the development of a new supply channel for financial services, namely the internet, which has made it possible to establish extensive and low-cost financial networking. Traditionally, the provision of financial services was very much dependent on the branch networks of financial institutions. But now, information and communications technology has enabled the more diversified and convenient provision of financial services, including via the internet and unmanned ATM networks. The creation of a new supply channel for financial services has substantially reduced the cost of financial transactions. For example, internet banking has greatly lowered the processing cost of banking. According to research conducted in the United States, in some cases processing by the internet is estimated to cost less than one hundredth what it does at a bank branch window. Furthermore, the emergence of a new supply channel for financial services and the substantial reduction in processing costs have brought forth changes in the composition of financial service providers. One example is entry into financial services by non-financial business firms. While the provision of financial services was traditionally via the branch networks of financial institutions featuring vaults and lobbies, the emergence of new supply channels such as internet banking and unmanned ATM networks has made it possible to convert without much difficulty networks used for non-financial activities into ones that can provide financial services. The reduction in processing costs of financial transactions and the easy conversion of non-financial networks to financial ones have created a profitable opportunity for non-financial business firms to enter the financial services industry by selecting such specialized areas as payment and settlement without needing the synergies obtained from accepting deposits and extending loans. Because entry into selected financial services has become possible, it appears that the initial entry cost has been further reduced and the incentive for non-financial business firms to enter the sector further strengthened. Following revision of the Securities and Exchange Law in 1998 that permitted entry into the securities field through simple registration instead of licensing, quite a few non-financial business firms began to engage in securities activities. And recently, some non-financial business firms have announced plans to start banking operations. Such active entry into banking has not been seen since 1993 when the Financial System Reform Law was enacted and securities houses began entering the banking area through subsidiaries. The reduction in entry costs, thanks to technological innovation in information and communications, has enabled not only mutual entry into each other’s field between banks and securities houses within the financial services industry, but also new entry into the financial services industry by non-financial business firms. The advance of information and communications technology has not only strengthened the incentive of non-financial business firms to engage in banking but also urged existing financial institutions to review their management. Recently we have observed various forms of alliances and reorganization among financial institutions, and particularly conspicuous is the movement of major financial institutions toward M&A and consolidation among themselves. The main aim of the movement toward mega-banks is for financial institutions with different niches to strengthen competitiveness by complementing each other. Under the current situation where information and communications systems might strongly affect competitiveness, it is indispensable that financial institutions effect huge IT-related investments to strengthen their competitive position. Thus, it cannot be denied that the incentive to rationalize IT-related investments in overlapping fields, thereby alleviating the financial burden and making it possible to increase IT-related investments in strategic areas, has been a big driving force behind financial consolidation. While innovation in information and communications technology will bring about advances, diversification and improved efficiency, thus eventually leading to better services for users, it is also true that more information-oriented financial services and networking will give rise to greater and more complex risks, the quicker transmission of such risks, and possibly new types of risks. For example, the diversification and greater use of derivatives has resulted in more complex and bigger risks. Moreover, financial globalization has further deepened the linkage of financial markets both at home and abroad, thus significantly increasing risk of financial turbulence in one market being transmitted to other markets overseas. The spread of financial networks has further exacerbated the possibility of illegal entry into computer systems by hackers, leading to the diversification and proliferation of operational risks. What should be our basic attitude toward changes in the financial system generated by innovation in information and communications technology? Given that innovation will further proceed in terms of both transmission speed and scope, and since it is a major driving force promoting structural reform, one of the most important agendas for the current Japanese economy, we have no alternative but to embrace innovation and try to reap the maximum benefits. Before I elucidate on this, let me summarize the main points of what follows. First, technological innovation proceeds very rapidly, and it is not easy to foresee its impact on the financial system. Under such circumstances, we should be positive and flexible in responding to changes in the financial system. Second, it is not appropriate to maintain financial system stability through traditional ex ante regulations since they would nip the seed of private sector innovation in the bud and weaken the dynamism of financial markets. To realize both an active and stable financial system, we rather need to emphasize risk management and market discipline. There is a possibility that innovation will ultimately make the existing financial system obsolete, threaten the status of financial institutions that have traditionally provided financial services, change the nature of deposits at banks, and eventually the currency created by the central bank. In view of accelerating technological innovation, those who are involved in the financial system, including the central bank, should bear such possibilities in mind. But before that eventuality occurs, existing financial institutions will most likely strive to improve the financial services they offer by taking advantage of technological innovation. Thus, it can be anticipated that competition between existing financial institutions and the new entrants will continue for a long time. So far, changes in the financial system generated by innovation in information and communications technology have been gradual with the existing framework being improved step by step. For example, non-financial business firms, which intend to enter the payment area, will establish subsidiaries to acquire banking licenses and accept deposits, which are the traditional medium of payment, rather than establish firms that will introduce a new medium of payment. This suggests that, in such areas as payment where the existing infrastructure can be utilized, at least for the time being traditional institutions and transaction channels, like banks and deposits, will be more useful than otherwise. In other words, technological innovation has progressed to the point where barriers to non-financial business firms entering financial services have been lowered, but not to the extent where the existing framework has been made completely obsolete. It appears that rapid technological innovation and subsequent changes in the financial system have thus far had little effect on the fundamental functions of finance, including the transfer of funds from fund surplus to fund shortage sectors, the reallocation of risks, and payment and settlement. To summarize so far, while it is true that technological innovation may significantly change the financial system, there exists great uncertainty regarding the extent and speed of change. Therefore, when responding to change, we should be positive and flexible while paying close attention to uncertainty. Then, what should we do to reconstruct an efficient and stable financial system under the rapid advance of information and communications technology? In Japan we have traditionally emphasized detailed ex ante regulations and specific guidelines for individual financial institutions as ways to maintain financial system stability. It cannot be denied that such measures have, to some extent, contributed to the stability of Japan’s financial system characterized by the strict segmentation and specialization of business areas. However, over-dependence on ex ante regulations and specific guidelines will undermine the incentive for management to pursue differentiation because the development of new instruments is not linked to initial rewards attaching to innovators, thereby leading to the spread of a “keep up with the Joneses” mentality among financial institutions. Furthermore, we might have to pay a huge price in terms of the weakened vitality of the financial system as innovation and competition are hindered. Currently, the “Big Bang”, which is based on the basic principle of free, fair and global, is being promoted in Japan, and we have effected a wide range of reforms, such as the diversification of financial instruments and services, the promotion of competition in the financial services industry and the improvement of financial markets. These reforms are much needed to invigorate financial markets and should be further effected as expeditiously and steadily as possible. The truth of the matter is that with the rapid advance of innovation in financial technology we can no longer maintain financial system stability solely through traditional ex ante regulations. It has become impossible for the authorities to foresee changes and the direction of financial markets and transactions and to implement detailed regulations in advance. When changes are dramatic and entail a lot of uncertainty, it is important to further emphasize risk management and market discipline in order to maintain financial system stability without impairing its efficiency. Though we cannot exclude uncertainty regarding the impact of the advance of information and communications technology on the financial system, what is crystal clear is that financial institutions will need a risk management ability corresponding to the advances in information and communications technology. It is thus a prerequisite for financial institutions to improve risk measurement methods so as to accurately grasp more complex risks and establish an appropriate capital base in order to win amid intense competition. In the process of innovation, risk management is also the object of innovation, and only those who succeed in risk management will be able lead the world. Technological innovation has made traditional thinking that believes risk management is a cost completely outmoded. Financial institution management must realize that risk management is a way to maximize profits. While risk management has hitherto been primarily concerned with the management of credit risk, in the future financial institutions will have to construct advanced risk management systems covering operational risk and interest rate risk in banking accounts, and also establish a high quality capital base consistent with the level of risks they carry. To establish a more efficient and stable financial system, market discipline is important. It is necessary that financial institutions constantly strive for sound management and higher profitability fully realizing that their every move is being closely monitored by the market. From this viewpoint, it becomes important for them to actively disclose their financial conditions according to appropriate accounting methods. In this regard, we have received criticism from abroad that accounting methods and disclosure standards in Japan need to be improved in a number of areas. In response, I have to say that based on the lessons we learned from the bursting of the bubble we have been rapidly improving the infrastructure related to disclosure, including improvement of the standards for write-off and the provisioning of non-performing assets. Also, consolidated balance sheets have been refined and markto-market accounting expanded from the viewpoint of international compatibility. In the area of corporate information disclosure, markets have begun to positively evaluate those firms that see legally required disclosure standards as minimum standards and which at their own initiative disclose management strategy and financial conditions beyond such minimum standards. I hope these movements will further prevail and take firm root in Japan. How should the Bank of Japan respond to changes in the financial system as innovation in information and communications technology progresses? Before examining this issue, let me begin by briefly reviewing the role of the Bank of Japan in the context of the financial system and the payment system. In general, banknotes issued by the central bank finalize the payment of transactions when handed over to transaction counterparties. Similarly, current accounts with the central bank can also finalize payment, a function which is supported by public confidence in the central bank. As such, settlements through the liabilities of the central bank, namely banknotes and current accounts, possess “finality” in the sense that they completely settle payment. Furthermore, various private sector clearing systems eventually complete fund settlement as well as securities settlement by directly or indirectly making use of the medium of settlement with finality conferred by the central bank. Thus, each payment system is operated in a responsible manner by a respective steering body, and the central bank is responsible for maintaining the smooth and safe operation of the nation’s overall payment systems. Article 1 of the Bank of Japan Law clearly stipulates that the Bank’s mission is to maintain the smooth and stable operation of Japan’s payment and settlement systems: “The objective of the Bank of Japan, ... , is to issue banknotes and to carry out currency and monetary control. In addition ..., the Bank’s objective is to ensure the smooth settlement of funds among banks and other financial institutions, thereby contributing to the maintenance of an orderly financial system.” To fulfill this mission, the Bank of Japan performs a variety of functions. First, it provides the medium of settlement in the form of Bank of Japan notes and current account services, and constantly strives to improve efficiency and safety. Its function to examine the authenticity of banknotes and prevent counterfeiting while securing the efficient circulation of banknotes lays the foundation for public confidence in banknotes. Furthermore, the Bank has been making various efforts to improve the efficiency and safety of the settlement system for funds and government securities by providing online services for current accounts through the BOJ-NET system. In addition to such efforts, the Bank of Japan conducts on-site examinations and off-site monitoring of financial institutions that hold current accounts with it, and obtains information regarding their financial strength and risk management. If a financial institution faces a liquidity shortage that might seriously impair the smooth operation of payment systems, the Bank of Japan will provide liquidity as the lender of last resort, thereby preventing systemic risk from emerging. With this preamble, let me turn to the role of the Bank of Japan in securing efficient and safe payment systems, thereby maintaining financial system stability under innovation in information and communications technology. Payment systems in Japan consist of those operated by the Bank of Japan and private sector ones. In view of the fact that payment systems are a fundamental infrastructure for economic activity, it is always important to maintain the safety of payment systems as a whole regardless of whether technological innovation creates a new provider, a new channel or a new means of payment. In this regard, all related parties, that is, financial institutions, the steering bodies of private payment systems and the central bank, need to be in close contact and make efforts to discharge their respective responsibilities. The Bank of Japan provides a settlement service called BOJ-NET. BOJ-NET is the core settlement system for yen funds and government securities and is participated in by major financial institutions and private payment systems. We continue to make efforts to accurately grasp new waves of innovation in information and communications technology and to make our settlement systems support the advances of financial institutions and private payment systems. The Bank of Japan is currently making preparations so that current account transactions and the settlement of government securities will be executed by real-time gross settlement, RTGS, from the beginning of next year. There are two current account settlement methods: fixed-time net settlement is where settlement is finalized by paying net debit or credit balances among financial institutions at a pre-designated time, and real-time gross settlement is where each settlement is finalized on a real-time basis without calculating net debit or credit balances. Most settlements are presently fixed-time net settlement though it has the serious drawback that if one of the participating financial institutions fails to make a payment, then all settlements of all financial institutions will be disrupted. To overcome this we will abolish, in principle, fixed-time net settlement and introduce real-time gross settlement from January next year. It is recognized globally that real-time gross settlement is appropriate for large fund settlements like interbank transactions since it reduces systemic risk, in which a chain reaction of defaults arises. There have recently been discussions in the securities industry that the settlement period between contract and delivery should be shortened for transactions in equities and government securities. The current practice is to settle such transactions within three days after the contract. Many argue that settlement should be one day after the contract, which is basically the right direction from the viewpoint of reducing the outstanding amount of unsettled transactions so as to enhance safety of the settlement system. Such discussions have indeed been promoted by the rapid improvement of information processing capabilities and communication speed under the advance of technological innovation. We will constantly strive to improve the services we offer so that we will be able to appropriately support future changes in settlement practices. Moreover, in order for BOJ-NET to contribute to greater efficiency and enhanced safety of Japan’s payment systems as a whole, we must cooperate with the steering bodies of private payment systems. For example, it is possible to conceive a situation in which we cannot easily enhance the safety of payment systems when one system among various systems is deficient in terms of risk management and settlements become concentrated on this one system. In particular, although technological innovation enhances profitability and transaction convenience, it also creates new kinds of risks and increases the degree of risk involved, thus making coordination with private payment systems all the more important. In collaboration with other central banks, we have been working to establish internationally agreed core principles that major private payment systems must comply with. In this regard, Lamfalussy standards, which were established 10 years ago, are well known worldwide, and, based on these standards, the drafting of new core principles is in progress. With these principles as a guideline, we will continue to closely monitor private payment systems and ensure that they continuously pursue greater efficiency and safety, which is often called “oversight” abroad. Innovation in information and communications technology has raised a new issue about our relationship with individual financial institutions. Since their financial strength and risk management might have a big adverse impact on the efficiency and stability of the financial system as a whole, it is an important issue for the central bank to evaluate its business relationship with individual financial institutions. As I mentioned, we have recently begun to observe a new provider of payment services such as institutions that specialize in internet banking. If a banking subsidiary of a non-financial business firm requests to open an account with us, we will decide whether to enter into a business relationship with it in light of the already published standards for account opening and by examining such factors as its capital base in comparison with the intrinsic risks faced, the relationship with its parent, and its contingency plans. The Bank of Japan has been paying close attention to how such subsidiaries might develop payment operations because their activity might exert not a small influence on the efficiency and safety of payment and settlement systems. If we establish a business relationship with such subsidiaries, we will monitor them through on-site examination and off-sight monitoring. Views are now divided as to how the move toward mega-banks will change risks in the financial system. Some are concerned that the financial system might become more vulnerable to contagion than before because such moves will bring about the concentration of risks. Others are more optimistic and believe that the financial system as a whole will become more robust in terms of risk taking because individual financial institutions will become stronger due to higher profitability and an improved BIS capital ratio as financial consolidation progresses. At the moment, non-financial business firms are expected to enter banking by first establishing a subsidiary which will acquire a banking license. Amid the move toward mega-banks, many financial groups will establish banking subsidiaries under their respective holding companies. The Bank of Japan will naturally examine those banking subsidiaries that are direct current account holders. However, if parent companies and holding companies have the power to make important management decisions, such as business operation and risk management strategy, for subsidiaries that hold current accounts with the Bank of Japan, then examination of subsidiaries alone might not be sufficient to truly grasp their condition. In such a case, we will need to conduct a review of parent companies, including on-site examinations, to the extent necessary. Japan’s financial system has been changing against the background of rapid innovation in information and communications technology. And, as always, it is an important task for the Bank of Japan to contribute to improving the functioning of the financial system by increasing the efficiency and safety of payment and settlement systems. By responding to this task, we hope that the financial system will function to appropriately reallocate the financial assets of the household sector, which amount to more than 1,380 trillion yen. If such a reallocation mechanism works properly according to market discipline, it will provide strong support, from the financial side, for the promotion of structural reform, which is one of the major challenges Japan’s economy faces.
|
bank of japan
| 2,000 | 10 |
Bank of Japan, Communication, 16 October 2000.
|
Bank of Japan’s October report of recent economic and financial developments1 Bank of Japan, Communication, 16 October 2000. * * * The Bank’s view2 Japan’s economy is recovering gradually, with corporate profits and business fixed investment continuing to increase. With regard to exogenous demand, public investment is starting to decrease since the implementation of the supplementary budget for fiscal 1999 has peaked out. Net exports (real exports minus real imports) continue to follow a moderate upward trend due to steady developments in overseas economies. As regards domestic private demand, business fixed investment is on an increasing trend. The recovery in private consumption continues to be weak as a whole through lack of notable improvements in employment and income conditions, although there are somewhat positive signs in some indicators. Housing investment is mostly unchanged. Reflecting such developments in final demand, industrial production is increasing. Corporate profits and sentiment continue to improve, and the number of firms that take positive action, such as increasing the amount of fixed investment, is increasing, especially in high-growth sectors. Income conditions of households still remain severe but regular and overtime payments as well as new job offers continue to increase in line with the recovery in corporate activities, and compensation of employees has stopped decreasing. As for the outlook, public investment is expected to decrease. While the expansion in overseas economies is likely to continue, the increase in exports is likely to slow down as restocking activity in Asian economies has peaked out. Meanwhile, imports are projected to continue increasing, particularly for those of information-related goods. Therefore, real exports will level off for a while. In the corporate sector, firms still strongly feel that they have excess equipment and that they should reduce their debts to restore financial soundness. However, it is very likely that fixed investment in highgrowth sectors, including those related with information technology services, will increase as corporate profits continue to recover. Moreover, an improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. However, the pace of recovery in household income will be modest for the time being, since firms’ perceptions of excess employment still persist, and thus significant changes have not been observed in their efforts to reduce personnel expenses. Overall, the economy is likely to recover gradually led mainly by business fixed investment, while the developments in crude oil prices as well as foreign and domestic capital markets, along with their effects on the economy, need careful monitoring. In addition, the favorable financial environment created partly by the Bank’s sustaining easy monetary stance is expected to continue underpinning the economy. With regard to prices, import prices are rising, reflecting an increase in international commodity prices such as crude oil prices since April. Domestic wholesale prices, notwithstanding the rise in prices of petroleum products reflecting the increase in crude oil prices, are mostly unchanged mainly due to the decrease in prices of electric machinery. Meanwhile, consumer prices continue to be somewhat weak This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on 13 October 2000. The Bank’s view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on 13 October as the basis of monetary policy decisions. owing to the decline in prices of imported products reflecting the past appreciation of the yen, although prices of petroleum products and electricity increased from the rise in crude oil prices. Corporate service prices are still falling slowly. As for the outlook on prices, downward pressure on prices stemming from weak demand is declining significantly while an economic recovery is expected to continue moderately. Upward pressure on prices is likely to arise temporarily from the increase in crude oil prices. On the other hand, in addition to the declining trend of machinery prices due to technological innovations, the decline in prices of consumer goods arising from the past appreciation of the yen and the streamlining of distribution channels will exert downward pressure on prices. Thus, prices overall are expected to be stable or weak somewhat. In the financial market, the overnight call rate is generally moving around 0.25%. The amount of funds outstanding in the call money market has increased slightly. As for interest rates on term instruments, those on contracts maturing beyond the year-end have risen somewhat. The Japan premium remains negligible. Yields on long-term government bonds are generally moving in the range of 1.8-1.9%. The yield spread between private bonds (bank debentures and corporate bonds) and government bonds remains mostly unchanged as a whole. Stock prices dropped from early October and are recently moving around the lowest level since the beginning of this year. In the foreign exchange market, the yen depreciated gradually from the end of September and the yen-dollar exchange rate temporarily rose to ¥109-110. The yen is currently being traded in the range of ¥107-109 to the US dollar. With regard to corporate finance, private banks continue to be more active in extending loans mainly to blue-chip companies, while carefully evaluating the credit risks involved. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is at a high level in parallel with recovery in profits. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. Recently, however, the expansion in the year-to-year decline seems to be ceasing. Issuance of corporate bonds and CPs has been steady. Money stock (M2 + CDs) grew faster in September compared with the previous month on a year-onyear basis. Recently, funding costs for firms are somewhat increasing, due to the rise in money market rates after the termination of the zero interest rate policy. In this financial environment, there seem to be no substantial changes in the lending attitude of financial institutions and easing of corporate financing conditions.
|
bank of japan
| 2,000 | 10 |
Bank of Japan, Communication, 20 November 2000.
|
Bank of Japan’s November report of recent economic and financial developments1 Bank of Japan, Communication, 20 November 2000. * * * The Bank’s View2 Japan’s economy is recovering gradually, with corporate profits and business fixed investment continuing to increase. With regard to exogenous demand, public investment is decreasing gradually since the implementation of the supplementary budget for fiscal 1999 has peaked out. Net exports (real exports minus real imports) continue to follow a moderate upward trend due to steady developments in overseas economies. As regards domestic private demand, business fixed investment is on an increasing trend. The recovery in private consumption continues to be weak as a whole through lack of notable improvements in employment and income conditions, although there are somewhat positive signs in some indicators. Housing investment is mostly unchanged. Reflecting such developments in final demand, industrial production is increasing. Corporate profits and sentiment continue to improve, and the number of firms that take positive action, such as increasing the amount of fixed investment, is increasing, especially in high-growth sectors. Income conditions of households still remain severe but regular and overtime payments as well as new job offers continue to increase in line with the recovery in corporate activities, and compensation of employees has stopped decreasing. As for the outlook, public investment is expected to continue decreasing for the time being. While the U.S. economy is decelerating gradually, the expansion in overseas economies is projected to continue, albeit at a slower pace. In these circumstances, the increase in exports is likely to slow down, as inventories of some raw materials and electronics parts are somewhat excessive at present in Asian economies. Meanwhile, imports are projected to continue increasing, particularly for those of consumer goods, and capital goods and parts. Therefore, net exports will level off for a while. In the corporate sector, firms still strongly feel that they have excess equipment and that they should reduce their debts to restore financial soundness. However, it is very likely that fixed investment in highgrowth sectors, including those related with information technology services, will increase as corporate profits continue to recover. Moreover, an improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. However, the pace of recovery in household income will be modest for the time being, since firms’ perceptions of excess employment still persist, and thus significant changes have not been observed in their efforts to reduce personnel expenses. The increase in industrial production is expected to slow down somewhat for a while mainly because of the slower rise in exports. Overall, the economy is likely to recover gradually led mainly by business fixed investment, while the developments in crude oil prices as well as foreign and domestic capital markets, along with their effects on the economy, need careful monitoring. In addition, the favorable financial environment created partly by the Bank’s sustaining easy monetary stance and the new economic stimulus package are expected to underpin the economy. This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on November 17, 2000. The Bank’s view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on November 17 as the basis of monetary policy decisions. With regard to prices, import prices are rising, reflecting an increase in international commodity prices such as crude oil prices since April. Domestic wholesale prices, notwithstanding the rise in prices of petroleum products reflecting the increase in crude oil prices, are mostly unchanged mainly due to the decrease in prices of electrical machinery. Meanwhile, although prices of petroleum products increased, consumer prices continue to be somewhat weak owing to the decline in prices of other imported products and their substitutes. Corporate service prices are still falling slowly. As for the condition surrounding price development, the balance between supply and demand in the domestic market is projected to be on a gradual improving trend, while an economic recovery is expected to continue moderately. In these circumstances, upward pressure on prices is likely to arise temporarily from the increase in crude oil prices. On the other hand, in addition to the declining trend of machinery prices due to technological innovations and the weakening of semiconductor prices, the decline in prices of consumer goods arising from the streamlining of distribution channels will exert downward pressure on prices. Overall, prices are expected to be stable or weak somewhat for the time being. In the financial market, the overnight call rate is moving around 0.25 percent. As for interest rates on term instruments, Euro-yen transactions maturing beyond the year-end are rising somewhat while TB and FB rates are declining slightly. The Japan premium remains negligible. Yields on long-term government bonds have been declining since mid-October and are recently moving around the level below 1.8 percent. The yield spread between private bonds (bank debentures and corporate bonds) and government bonds remains mostly unchanged as a whole. Stock prices remain weak overall and are recently moving around the lowest level since the beginning of this year. In the foreign exchange market, the yen continues to be stable and is currently being traded in the range of 107-110 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans mainly to blue-chip companies, while carefully evaluating the credit risks involved. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is at a high level in parallel with recovery in profits. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. Recently, however, the expansion in the year-to-year decline seems to be ceasing. Meanwhile, issuance of corporate bonds continues to be steady. Issuance of CPs is increasing towards the year-end. Money stock (M2 + CDs) grew faster in October compared with the previous month on a year-on-year basis. Funding costs for firms basically remain unchanged although the short-term funding rates maturing beyond the year-end increased somewhat. In this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy.
|
bank of japan
| 2,000 | 11 |
Keynote Speech by Mr Sakuya Fujiwara, Deputy Governor of the Bank of Japan, at the Fourth Paris EUROPLACE Financial Forum, held in Paris on 27 November 2000.
|
Sakuya Fujiwara: Recent financial and economic developments in Japan and the euro area Keynote Speech by Mr Sakuya Fujiwara, Deputy Governor of the Bank of Japan, at the Fourth Paris EUROPLACE Financial Forum, held in Paris on 27 November 2000. * * * Introduction Ladies and Gentlemen, It is my great honor to be given this opportunity to speak again at this Paris EUROPLACE Financial Forum. I also understand that this is a forum, where exchange of views among distinguished participants of different experiences is of special importance. Therefore I reserve the right to ask for your opinions on such interesting topics as recent developments in capital markets and the impact of information technology in the euro area. Now, with respect to my duty today, I have three topics in my mind. First, I will discuss Japan’s economy and the challenges it faces. Then, I will turn to recent developments in the euro area, a subject which is of particular interest to myself. Here, I dare to introduce my observation on the economic structural reform recently underway in the euro area. And last, I will briefly touch on enhanced interrelations between the euro area and Japan. 1. Japan’s economy and the challenges it faces Compared with a year ago, when I gave a speech at this forum last year, Japan’s economy has shown notable improvement. The recent economic recovery is mainly driven by the corporate sector, where we witness the increases in production and corporate profits. Against such background, business fixed investment has been increasing, especially in the IT and telecommunications fields. Although the pace of recovery remains sluggish in the household sector, positive developments are observed in employment and income, reflecting the recovery of business activity. In sum, Japan’s economy is recovering gradually, with business fixed investment continuing to increase. At the same time, however, we cannot ignore the fact that Japan has yet to solve structural problems in the economy. In this context, Japanese firms and banks continue to suffer from balance sheet problems, the aftereffects of the bursting of the bubble in the 1990s. And, while the world economy, especially the United States, has registered high growth by exploiting the benefits of new technology supported by salient entrepreneurship as well as the vibrant capital market, Japan has somewhat lagged behind in its ability to adjust itself to such new environment. With a nascent recovery now underway in Japan, constant efforts are necessary to continue to tackle the remaining structural problems head on, which in turn should be the prerequisite for sustainable growth. Important progress has already been observed, though, in the financial sector. Bank capital base has been strengthened by the injection of public money. There has also been a progress in reinforcing safety nets. On top of that, the consolidation of financial institutions, especially large ones, is in progress, something which Japan has never experienced since the end of the World War II. I sincerely hope these changes will beef up the profitability and competitiveness of financial institutions, thereby enhancing the efficiency and stability of the financial system as a whole. Meanwhile, ongoing corporate restructuring process may exert downward pressure on the economy in the short run. But I believe this should facilitate efficient allocation of resources to high-growth industries, contributing to sustainable growth in the long run. To accelerate such structural change, determined efforts on the part of policy makers are also important. Such efforts should include deregulation, tax reform and improvement of accounting and legal systems. The Bank of Japan, as a central bank, must contribute to ensuring a stable macroeconomic environment through appropriate monetary policy measures, which will form the basis for creative and future-oriented corporate activity. In addition to this, the Bank of Japan assumes important responsibilities in improving the financial market and payment system infrastructure. The start of real-time gross settlement of fund transfers and government bond transfers from the beginning of next year is one of such efforts. 2. Dynamism of the euro area economy When I think about structural reforms in the Japanese economy, I always think of the experiences of the euro area economy on this front. Today, nobody doubts the importance of structural reform, but it is difficult to achieve a social and political consensus as to the most practical approach. Reform is accompanied by pain, and also takes a long time to bear fruit. But once the direction is set, reform calls for further reform, thereby generating autonomous momentum. Developments in the euro area economy have considerable implications and are encouraging to us. I realize it may sound too simplistic but the essence of reform lies in market integration. I say this because market integration leads to intensified competition. In the euro area, mergers and acquisitions are a driving force for corporate restructuring and industry reorganization. This increase in M&A, which started from around 1997, was no doubt sparked by the introduction of the euro. In addition, firms are being forced to change their management strategy so that they can survive amid global competition and keep up with technological innovation. Indeed, firms are increasingly aware that efficient management and higher profitability are more important today than ever, and such recognition is evident in recent M&A examples. These days firms are not expanding their business fields, but rather streamlining businesses that they have little competitive edge in, and beefing up the ones that are strategically important. Market integration in the euro area has also brought about dynamic changes in the economic infrastructure, including transportation, electric power, telecommunications, and finance. In the area of finance, some examples of positive developments include the creation of new payment systems, such as TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer), the rapid expansion of capital markets, and the merger and integration of stock exchanges. In addition, the euro area has begun to review tax systems and labor practices. Amid the sea change of market integration and the introduction of the euro, deregulation and market infrastructure consolidation are being seen. And the private sector is making the most of resources, so to strengthen competitiveness. Thus, market integration accelerates momentum for competition, and in turn stimulates momentum for reform in other areas of the economy and finance. I believe that every economy has the potential for growth. The problem is how to realize such potential. Structural reform seems to be a trigger in this regard. I know that some are skeptical about the euro area economy. Such voices often argue that the weak economy is the reason for the weak euro. For example, they say that structural rigidity of the euro area economy, or the difference in productivity between the United States and the euro area, has induced the massive outflow of capital to the United States thus causing the euro to weaken. The mechanism behind exchange rates is very complex, and as a central banker, I ought not to make any careless remarks on this delicate subject. However, I have to say we should not hastily assume that the weak euro merely reflects a weak economy. Capital outflows across the Atlantic could be the result of intensified global competition that has stimulated various types of strategic alliances across the border. Integration of the European markets and the introduction of a common currency are historically the most remarkable events since the collapse of the Bretton Woods system nearly thirty years ago. As such, they can be characterized as part of a project which has the potential to dramatically change the landscape of the world economy. With this in mind, I will continue to keep a close watch on economic developments in the euro area. 3. Interrelations between the euro area and Japan Lastly, I would like to give my view on interrelationships between the euro area and Japan, focusing on capital flows. As I have mentioned, in the euro area, monetary union has triggered various kinds of structural change, bolstering the development of the overall economy. The impact is so large that it has affected not only the euro area itself, but also Japan. An example of the effect is direct investment. Direct investment from western Europe to Japan soared more than tenfold in a year, from about 100 billion yen in 1998 to over 1 trillion yen in 1999. Investment from France was especially large, which reflects the capital collaboration that was seen in the automobile industry. Direct investment from Japan to the euro area is also on the rise. The increase in direct investment will promote the reallocation of management resources, technology transfer, and competition, resulting in boosting both economies. The increase in capital flows between the two economies is well evidenced in portfolio investment. In 1999, Japan’s portfolio investment in the euro area exceeded that in the United States. Japan’s foreign portfolio investment in France, Germany, the Netherlands, and Luxembourg, the four euro area countries for which individual data are available, totaled almost 5.6 trillion yen in 1999. On the other hand, Japan’s portfolio investment in the United States was 1.4 trillion yen. This is rather noteworthy, because, in international capital markets, the United States, with its huge current account deficit, absorbs a lot of funds provided by the euro area and Japan. Despite such a situation, capital flows between the euro area and Japan are surging, and both economies are growing more interdependent in international capital markets. In the increasingly integrated global market, the euro area and Japan are becoming more and more dependent. I hope today’s forum will contribute to bringing the two economies closer, and serve as an opportunity to enhance communication between the private sector of the euro area and that of Japan. I know this forum will be a success.
|
bank of japan
| 2,000 | 11 |
Bank of Japan, Communication, 18 December 2000.
|
Bank of Japan’s December Report of Recent Economic and Financial Developments1 Bank of Japan, Communication, 18 December 2000. * * * The Bank’s View2 Japan’s economy continues to recover gradually, albeit at a somewhat slower pace due to decelerating export growth. With regard to exogenous demand, public investment is decreasing gradually since the implementation of the supplementary budget for fiscal 1999 has peaked out. Net exports (real exports minus real imports), which had been increasing, are starting to level off as inventories of some raw materials and electronics parts became somewhat excessive in East Asian economies. As regards domestic private demand, business fixed investment is on an increasing trend. The recovery in private consumption continues to be weak as a whole through lack of notable improvements in employment and income conditions, although there are somewhat positive signs in some indicators. Housing investment is declining slightly. Reflecting such developments in final demand, industrial production remains on a rising trend although the pace is somewhat slowing. Corporate profits continue to improve, and the number of firms that take positive action, such as increasing the amount of fixed investment, is rising, especially in high-growth sectors. Income conditions of households still remain severe, but regular and overtime payments as well as new job offers continue to increase in line with the recovery in corporate activities, and compensation of employees has stopped decreasing. As for the outlook, public investment is expected to maintain the current level for the time being, but is likely to start increasing again in the future along with the implementation of the new economic stimulus package by the government. While the U.S. economy is decelerating gradually, the expansion in overseas economies is projected to continue, albeit at a slower pace. In these circumstances, exports are likely to remain level for the time being mainly due to inventory adjustments in East Asian economies. Meanwhile, imports are projected to continue increasing, particularly for those of consumer goods, and capital goods and parts. Therefore, net exports will decline slightly for a while. In the corporate sector, firms still strongly feel that they have excess equipment and that they should reduce their debts to restore financial soundness. However, it is very likely that fixed investment in high-growth sectors, including those related with information technology services, will increase as corporate profits continue to recover. Moreover, an improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. However, the pace of recovery in household income will be modest for the time being, since firms’ perceptions of excess employment still persist, and thus significant changes have not been observed in their efforts to reduce personnel expenses. Industrial production is expected to remain on a rising trend, although the pace of increase may slow down further temporarily. This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on December 15, 2000. The Bank’s view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on December 15 as the basis of monetary policy decisions. Overall, the economy is likely to follow a gradual upward trend led mainly by business fixed investment, while the developments in overseas economies as well as in foreign and domestic capital markets, along with their effects on the economy, need to be carefully monitored. In addition, the favorable financial environment created partly by the Bank’s sustaining easy monetary stance and the new economic stimulus package by the government are expected to underpin the economy. With regard to prices, import prices are rising, reflecting an increase in international commodity prices such as crude oil prices. Domestic wholesale prices, notwithstanding the rise in prices of petroleum products reflecting the increase in crude oil prices, are declining somewhat mainly due to the decrease in prices of electrical machinery. Consumer prices continue to be somewhat weak owing to the decline in prices of other imported products and their substitutes, although prices of petroleum products increased. Corporate service prices are still falling slowly. As for the condition surrounding price developments, the balance between supply and demand in the domestic market is projected to be on a gradual improving trend, while an economic recovery is expected to continue moderately. On the other hand, semiconductor prices are declining reflecting softer international semiconductor prices, and crude oil prices, which had been exerting upward pressure on prices, are dropping recently. In addition to the declining trend of machinery prices due to technological innovations, the decrease in prices of consumer goods arising from the streamlining of distribution channels will exert downward pressure on prices. Overall, prices are expected to be somewhat weak for the time being. In the financial market, the overnight call rate is moving around 0.25 percent. As for interest rates on term instruments, Euro-yen transactions, TB and FB rates maturing beyond the year-end are rising somewhat. The Japan premium remains negligible. Yields on long-term government bonds have been on a downward trend since mid-October, having decreased to around 1.55 percent temporarily, and are recently moving around 1.65 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or decreasing somewhat. Stock prices continue to be weak, having recorded this year’s lowest level towards the end of November. In the foreign exchange market, the yen has been depreciating from the beginning of November, and is currently being traded in the range of 111-113 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans mainly to blue-chip companies, while carefully evaluating the credit risks involved. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is at a high level in parallel with recovery in profits. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish, although the expansion in the year-to-year decline is ceasing. Meanwhile, the amount outstanding of corporate bonds issued is slightly above the previous year’s level. Issuance of CPs is increasing towards the year-end. Money stock (M2 + CDs) continues to grow at around 2 percent on a year-on-year basis. As for the funding costs for firms, the short-term funding rates basically remain flat but the long-term funding rates are declining slightly reflecting the decrease in market interest rates. In this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy.
|
bank of japan
| 2,000 | 12 |
Speech given by Mr Masaru Hayami, Governor of the Bank of Japan, at the Keizai Club on 22 December 2000
|
Masaru Hayami: Challenges for Japan's Economy - The Central Bank's Perspective Speech given by Mr Masaru Hayami, Governor of the Bank of Japan, at the Keizai Club on 22 December 2000. * * * Introduction We have just a week or so to go until the end of the year. I would like to present my own thinking on what has been achieved over the past year and what remains to be done. At the same time, I would also like to explain our basic stance regarding the conduct of monetary policy in order to deepen your understanding in this respect. 1. Three Features of the Current Economic Recovery Economic developments this year Economic developments this year The first thing to be emphasized is that Japan has finally reached a stage where there are emerging signs of an economic recovery. At the beginning of this month, GDP statistics based on a new calculation method (SNA93) were released. GDP growth on this new basis was -0.6% for fiscal 1998 but turned positive in fiscal 1999 (+1.4%) and the corresponding figure for the third quarter of this year stands at +1.5%. What should be noted in this connection is how private demand and public investment have contributed to this recovery trend. When the Bank of Japan adopted the zero interest rate policy around two years ago, public investment for the first quarter of 1999 increased (+13.3%) compared with the previous year. In contrast, private demand such as household consumption and business investment declined (-2.0%) in the same period. However, this contrast has been gradually reversed during the last two years. In the third quarter of this year, public investment decreased (-4.1%) on a year-on-year basis while private demand grew (+1.1%). In other words, the gradual upturn in private demand is strengthening while the fiscal stimulus has turned negative. Under these conditions, corporate profits as a whole are expected to record a double-digit increase for the second consecutive year. At the same time, employment and household income conditions are slowly improving, as demonstrated by the positive growth of wages since this spring and a slight decrease in the unemployment rate from its all-time high. Some of you might not feel comfortable with my diagnosis of the present economic situation and we are fully aware that such a perception does exist. In our opinion, this perception typically reflects the very characteristics of the ongoing recovery phase. 'Polarization' of economic recovery The first feature of the ongoing recovery is that there remains considerable divergence among various sectors or segments of the economy regarding the pace of recovery, which is sometimes called 'polarization.' At present, for example, the corporate sector is showing a notable improvement while the household sector is being left behind. This is clearly reflected in the fact that business investment is markedly increasing although personal consumption remains lackluster. In other words, the recovery trend now underway is being driven mainly by the corporate sector with the household sector lagging. Moreover, the stark contrast between the IT-driven new economy and traditional old economy is also a case in point, and the contrasting picture between large manufacturers and small and medium-sized non-manufacturers is also often mentioned. At this point, I would like to add further explanation of the sharp contrast between the corporate and household sector. In the corporate sector, the profit improvement is becoming more pronounced and business investment is on an upswing, though firms are not likely to immediately increase wages and hiring. This is because the corporate sector is attaching top priority to eliminating over-indebtedness and reinforcing profitability under strong pressure from financial markets in this rapidly globalized environment. I assume this is the main reason why household and consumption-related firms do not feel any strong sense of a recovery at the present moment. Vigorous restructuring and the resulting recovery in the corporate sector is a precondition for sustainable growth, but it is highly likely that improvements in employment and income conditions and personal consumption will remain slow for some time to come. However, if income distribution to the household sector is overly constrained as a consequence of aggressive efforts to pursue corporate restructuring, we will face a greater risk, at a macro level, of personal consumption falling, thereby jeopardizing the nascent recovery. In view of the above, Japan's economy seems to be precariously balanced in building the foundation for a sustainable upturn. Price developments The second characteristic of the present recovery phase is the continuing weakness of prices. Yearon-year growth in CPI and the GDP deflator has been negative. Under these circumstances, even if sales volume increases it will not likely result in any conspicuous increase in nominal sales. Lack of a clear sense of recovery among business managers also reflects such a factor. Yet, we can detect some positive aspects in the current soft trend of prices. For instance, the expansion of new distribution businesses - often called 'category killers'- is offering considerable benefits to consumers through their bold pricing strategy. It is said that this new strategy, making extensive use of overseas networks in terms of procurement and production, is providing a new business model for distribution firms. Furthermore, rapid progress in telecommunications technology is also exerting downward pressure on prices, as is typically seen with PCs and IT-related goods. The weak trend of prices can be explained under the supply and demand framework. With regard to the demand side, downward pressure on prices stemming from weak demand is markedly receding unlike in the first half of last year when Japan's economy was on the brink of falling into a deflationary spiral. On the other hand, downward pressure on prices arising from supply-side factors such as technological innovation, the streamlining of distribution channels, and deregulation is increasing. This downtrend caused by supply-side factors is not necessarily a new phenomenon. Indeed, if we look at technological innovation, it is proceeding much faster in the United States than in Japan. However, given that Japan has various industrial sectors less exposed so far to competitive pressure, we cannot disregard the possibility that the impact of technological innovation and economic globalization might become stronger. In addition, as the current recovery is still gradual with a substantial output gap lingering, we are aware that downward pressure on prices has not been entirely subsided. As factors stemming from both the supply side and demand side affect prices in a complex manner, it is also becoming more difficult to grasp an accurate assessment of price developments. The Bank of Japan has paid special attention to whether the downward trend of prices is aggravating the economic situation through suppressing nominal income such as corporate profits and wages, thereby inducing a further decline in prices. In other words, the Bank has been watchful of the possible risk of a deflationary spiral. To make a correct judgment on this point, it is necessary to examine not only the development of price indexes, but also the underlying supply and demand balance as a whole, corporate profits and earnings, and the like. At present, corporate profits are increasing and income conditions of households are gradually moving toward an improvement. In highly promising sectors, the declining prices of goods are helping to revitalize corporate activity. Considering these phenomena, we judge it unlikely that current weak prices will translate into a deflationary spiral. Financial Developments The third feature of the present recovery is the slow growth of monetary aggregates and bank lending. In a normal recovery phase, new risk-taking activities increase against the background of positive interaction between the real and monetary side of an economy. However, this pattern does not seem to hold in the current situation because the financial system, still plagued by non-performing loans, is not sufficiently robust to propel the recovery of the real economy. I hasten to add that I do not mean to say that any severe financial constraint is acting as a drag on real economic activity. This can be confirmed in our TANKAN survey, which shows that while the number of small and medium-sized companies that feel the lending attitude of financial institutions is 'severe' is still more than those who think it is 'accommodative,' the figure is decreasing. As for large companies, the number of firms that feel the lending attitude is 'accommodative' has been exceeding those who think it is 'severe' since around September 1999. In light of these results and other micro-level information on corporate financing, corporate funding conditions as a whole seem to be steadily easing. Yet, the pace of easing in this regard remains slower than warranted by the extremely low level of interest rates. Without the resolution of financial system problems, we will continue to be susceptible to adverse side-effects on economic and financial conditions, whenever a problem in financial institution management surface. We have recently witnessed the successive failure of Japanese life insurance companies and credit cooperatives, and such incidents tend to put the household and corporate sectors on the defensive. In connection with the financial conditions just mentioned, I would like to briefly explain the recent trend of monetary aggregates in Japan. Over the past several years, the highest growth of monetary aggregates was recorded in 1998 when Japan was suffering economic deterioration and financial system instability. M2+CDs, the typical measure of monetary aggregates, was growing by roughly 5% at that time, but gradually slowed to 3-4% in 1999 and further declined to the 2% level this year. Undeniably, this monetary development does not fit well with the normal pattern in which economic recovery leads to higher monetary growth through robust corporate activity. However, there are several reasons for the recent downtrend of the monetary aggregates. First, although corporate cash flow remains plentiful thanks to recovering profits and restructuring effects, expenditures such as business investment are lower than this level. Second, until last year, there was a widespread tendency on the part of the corporate sector to hold precautionary liquidity on hand amid prevailing concern over financial instability. But such accumulation of liquidity on hand has peaked due to the effects of various policy measures aimed at restoring financial stability materializing, and more companies are striving to slash both external borrowings and cash on hand in order to improve balance sheet efficiency bearing in mind their market evaluation such as credit ratings. Thus, it might be possible, for the time being, that the growth rate of monetary aggregates will further dip despite improving corporate profits and abating anxiety over the financial system. This paradoxical development regarding monetary aggregates is also one of the salient features of the current recovery phase in the sense that its root cause is associated with problems in Japan's financial system. 2. Challenges for the Japanese Economy Structural problems and implications of a gradual recovery The three characteristics of the current economic recovery I just mentioned are closely linked to long-standing structural problems in Japan's economy -- the disposal of non-performing loans created by the bursting of the bubble -- and the necessary response to economic and financial globalization and technological innovation. Thus, with those structural challenges in mind, I would like to think about the future course of Japan's economy. Since this October, the Bank of Japan has started to release "Outlook and Risk Assessment of the Economy and Prices." This report, to be published twice a year, presents a baseline scenario of Japan's economy for the coming one to two years as envisaged by the Bank's Policy Board members, and also gives their assessment of various risk factors. In the first report published in October, the Bank judges that "Japan's economy will continue to trace a gradual recovery mainly led by private demand," but "because of various structural adjustment pressures, including balance sheet problems and continuing restructuring at firms and financial institutions, expansion of the economy is unlikely to be vigorous." Two important messages from this are worth mentioning. First, Japan's economy at present is in a preparatory stage for sustainable future growth. Structural adjustment has a variety of implications. On a macroeconomic level, such adjustment includes further utilization of competitive mechanisms, deregulation and the review of existing regulations, and reform of the industrial structure. As for individual corporate management, on the other hand, adjustment means shareholder-focused corporate governance, employment adjustments, and personnel relocation, all of which calls for a re-examination of the social and economic system. This process is inevitably accompanied by pain. In addition, the persistent burden of non-performing loans on corporations and financial institutions cannot disappear overnight, and should thus be alleviated by value added generated by economic activity each year. In a nutshell, although structural adjustment requires considerable patience, it is an inescapable challenge if we are to return to sustainable economic growth. Hence, from this viewpoint, the pace of economic recovery is likely to remain slow for the time being. Nevertheless, we must remain fully committed to resolving various structural problems and not just seek higher growth in a myopic manner. At the same time, however, I would like to stress another essential point, which is the fact that it is difficult to strengthen resilience to adverse external shocks, given the slow pace of recovery, which will very likely remain the case for some time to come. Therefore, we must closely watch the world economy and developments in international capital markets. I will revisit this later in relation to the conduct of monetary policy. IT revolution I would now like to turn to the issue of how to respond to the substantial changes commonly referred to as the IT revolution in light of the implications for structural problems. The two major problems I have described - the disposal of non-performing loans and reform of economic structure - have long been pointed out since the bursting of the bubble. With respect to the reform of economic structure, its future direction has not been clear for some time, namely it has been difficult to identify areas or leading industries which are likely to support future growth. However, it gradually became clear recently that how to respond to rapid changes in the area of telecommunication and how to utilize fruits resulting from such changes are important questions to be tackled. Since I am not an expert on IT, I would just like to give my comments from the viewpoint of economic growth, which is obviously a concern for central bankers. There are two points. First, considering that technological innovation has an enormous impact on the socio-economic fabric as a whole, the IT revolution currently underway might be comparable to the Industrial Revolution in Britain or the quantum leap of the US railroad industry. What is common in these two cases is the large-scale migration of labor to the leading industry exhibiting higher productivity. In Britain during the Industrial Revolution, this employment shift was mainly seen from agriculture to the textile industry. As for the dramatic growth of the railroad industry in the US, it is well known that the numbers working in the railroad and steel industries increased dramatically. Furthermore, among the 14 million increase in the work force in the non-agricultural sector over the past five years in the US, nearly a half can be attributed to an increase in service-related industries, reflecting the rapid growth of IT. Of this seven million increase, three million was seen in such areas as software design and the provision of temporary staff. As such examples typically illustrate, structural adjustment does not stop at referring to management reform at an individual firm level, but can be regarded as a process through which production factors such as labor, capital, and land are shifted to more efficient fields. Second, technological advancement has much broader implications than the mere expansion of highproductivity sectors and substantial increase in employment. The essence of the IT revolution is that it triggers a rise in productivity of the economy as a whole, while at the same time inducing profound changes in various entities including corporations and governments. For example, Chairman Greenspan of the US Federal Reserve has repeatedly taken up the subject in his speeches. The IT revolution is enabling companies to grasp their production lines and consumer needs on a real-time basis. Moreover, it also makes it possible for them to slash precautionary buffers such as inventories, funds, and workers, a point Chairman Greenspan emphasizes when discussing the benefits of the IT revolution. In short, the improved efficiency of information processing has reduced uncertainties for corporate management, thereby enabling the transfer of resources to more productive uses. This, in his view, is the main benefit of enhanced productivity at the macro level created by the IT revolution. In Japan, discussions are likely to mainly focus on the past development and performance of individual IT-related companies, although there are also various new directions being seen. For instance, some companies are introducing so-called 'supply chain management' aiming at centrally controlling all planning, procurement, production, distribution, and sales not only for themselves but also for their clients. It will be interesting to see how this new system, just one example of recent new directions, will evolve. This reminds me of what J. Schumpeter, a great academic economist, wrote. He saw the process of economic development as 'creative destruction.' As a driving force for economic development, he propounded a movement which he called 'new combination,' which comprises five elements: new products, new production methods, new markets, new resources, and new organizations. To borrow his terminology, the most visible changes which we are currently witnessing in Japan are in the field of 'new products,' though such signs of change are also being seen in the other four areas. Conditions for successful utilization of IT Next, I would like to spell out the fundamental conditions through which we can pursue structural adjustment of the whole economy, aided by technological innovation in the IT sector. First, labor mobility needs to be enhanced. As I explained in the examples of Britain and the US, successful structural adjustment presupposes the smooth reallocation of labor to more productive areas. Recently, part-time jobs and temporary workers have increased substantially, which is assessed as improving the mobility of labor markets. However, mismatching between supply and demand in labor markets is still considerable, and, under such a situation, more efforts are required to eliminate the obstacles to labor mobility. Second, it is necessary to rebuild the financial system and revitalize market functions. In this connection, Schumpeter put great emphasis on the role played by 'bankers' in promoting his 'new combination.' In a contemporary context, 'bankers' in a Schumpeterian sense can be interpreted as the 'financial system' as a whole which includes banks as financial intermediaries as well as financial and capital markets. To nurture new industries and businesses, a sound and robust financial system through which capital and risks are efficiently allocated is pivotal. The desirable financial system framework varies across time and countries. It cannot be set as a fixed goal to be pursued. Nevertheless, what I would like to stress is that it is important for the financial system to foster and embed a culture that credit including deposits, loans, security investments, and derivative transactions is provided with constantly taking account of the risk-return relationship. Third, various institutional obstacles to innovative activities should be removed along with the strenuous pursuit of deregulation. In this regard, various efforts by the private sector and government have been bearing fruit. However, there are not a few points to be examined such as whether institutional frameworks like accounting rules, taxation, and the legal system are compatible with the new era. Viewed from this perspective, many attempts at utilizing IT are conducive to creating an environment in which corporations and individuals find it easy to bear risk. At the same time, this has an important bearing on facilitating structural reform in Japan. In that sense, I think that the degree of prevalence of IT revolution in the economy can be a measure of the progress in the structural adjustment in Japan. 3. Role of the Bank of Japan Conduct of Monetary Policy Given the above, what role should the Bank of Japan play as a central bank in promoting structural reform of Japan's economy? We cannot expect much progress in structural reform when inflation or deflation is developing. The aim of monetary policy is to contribute to the sound development of the economy through the pursuit of price stability, which is the biggest contribution a central bank can make toward accomplishing structural adjustment. In this context, I would like to briefly discuss some challenges facing the conduct of monetary policy. The Bank of Japan lifted the zero interest rate policy last August. This decision signifies "a small adjustment to the degree of monetary easing" in line with the improvement of the economy as I mentioned at the outset, and that the Bank has not changed its stance to support economic recovery through keeping accommodative monetary conditions. Looking at various risks surrounding the current economy, because the pace of recovery is still gradual, we need to pay due attention to the possibility of a downswing due to adverse external shocks or the rekindling of deflationary concerns. While the risk factors which the Bank has been paying attention to were explained in detail in the "Outlook and Risk Assessment of the Economy and Prices," let me highlight two points which I am especially focusing on at the moment. The first is the development of the world economy in general, and the US economy in particular. While the US economy has been expanding at an above-potential rate, its real GDP growth for the third quarter of this year (+2.2%) is slower than the previous high-growth path of four to five percent. The deceleration of the US economy per se has been considered desirable for ensuring sustainable growth, as far as it is leading to a soft landing. However, at the same time, the slowdown of the US economy might have an adverse impact on Japan's economy, including indirect effects channeled through the Asian economies that are heavily dependent on exports to the US. We should remain vigilant as to whether the economic slowdown in the US will affect sustainable growth of the world economy. The second risk to be noted is the continuous volatile movement of stock markets in and outside of Japan. If falling Japanese stock prices dampen the sentiment of the business and household sectors or undermine the risk-taking capacity of financial institutions and corporate entities, the recovery could be hampered. At present, the trend of increased corporate profits has been maintained, and there seems to be few signs of adverse effect on the real economy. Needless to say, however, we remain watchful of stock market developments and their potential ramifications. Monetary Policy and Structural Reform As I have discussed, the Bank of Japan, closely watching various risk factors, is determined to conduct monetary policy in an appropriate and flexible manner with the aim of supporting the nascent economic recovery and preventing the Japanese economy from falling into a deflationary spiral. At the same time, I would like you to understand that monetary policy is no panacea, and cannot be a substitute for needed structural reform. Needless to say, over the long haul the source of economic growth should be found in the full realization of private sector vitality with the support of various innovations. In pursuing structural reform, both policy efforts and corporate endeavors to directly address structural problems are imperative. In that sense, as I mentioned, we need to continuously re-examine our social and economic system and reduce uncertainties and anxieties surrounding various economic activities to the extent possible, thereby creating an environment in which risk-taking is facilitated. As the central bank of our country, the Bank of Japan provides a variety of banking services, the quality of which affects the course of Japan's economy. Therefore, we are willing to contribute to the reform of financial systems by improving the functioning of financial markets and payment systems. Currently, we are striving to introduce RTGS -- real-time gross settlement -- which will start on January 4th next year. At the same time, we are also exploring the possibility of adopting electronic systems to carry out operations related to treasury funds. I hope that these assiduous efforts will bear fruit in building an efficient and stable financial system. Concluding Remarks In reviewing economic developments in Japan, I have presented my view of the challenges facing us and the basic stance concerning the conduct of monetary policy. Now that we are close to the dawn of the twenty-first century, let me wind up my speech with a brief overview of the economic developments of the past century. Over the past 100 years, annual growth has averaged 3.3% in the US and 1.9% in Britain. Both nations experienced two world wars and several smaller ones. On the economic and financial fronts, they both experienced rampant inflation and deflation, as well as severe financial disruption. And, it was some twenty years ago that the decline of their national power was debated. As for the recent five years, however, both the US and the UK have achieved average growth of 4.4% and 2.8%, respectively, both of which figures are one percentage point higher than the average growth for the whole 20th century. This is an eloquent demonstration that even mature economies can expand vigorously if they are successful in rejuvenating the dynamism of the private sector. In contrast, the average growth rate of Japan's economy for the past 100 years is 3.9%. The figure for the last 50 years is 5.8%, and for the last five years, 1.4%. As such, the recent prolonged low growth rate has provoked a pessimistic view with respect to the medium- to long-term growth capacity of Japan's economy. However, I think one does not need to be that pessimistic. As is evident from overseas examples, as far as an economy is an embodiment of human activities, the track of the economy will be shaped depending on how we judge the prospects for the economy and how we act on such judgement. As I mentioned today, it is true that Japan's economy has been preoccupied in dealing with the aftermath of the bursting of the bubble in the past ten years and thus might have not adapted appropriately to changes in the environment surrounding the world economy as represented by the term 'globalization.' Therefore, if this was the case, what is necessary is to share a recognition, among ourselves, that we cannot escape the pressure of global competition. With such a shared view, the specific content of structural adjustment which awaits to be tackled will emerge spontaneously. I strongly believe that if the private sector takes the initiative in structural adjustment with the government's support in laying the ground for such efforts, Japan's economy will regain robust growth. I mentioned that the roles of the Bank of Japan in relation to structural reform are to make efforts to realize economic stability as well as to improve banking services of the central bank itself. I would like to conclude my speech by emphasizing that the Bank will bear these two roles in mind and continue to make the utmost efforts for the development of Japan's economy. Thank you very much for your kind attention.
|
bank of japan
| 2,001 | 1 |
Bank of Japan, Communication, 22 January 2001
|
Bank of Japan’s January Report of Recent Economic and Financial Developments1 Bank of Japan, Communication, 22 January 2001. * The Bank’s View * * Japan’s economy continues to recover gradually, but the pace is slowing due to decelerating export growth. With regard to final demand, business fixed investment is on an increasing trend. The recovery in private consumption continues to be weak as a whole through lack of notable improvements in employment and income conditions, but there are somewhat positive signs in some indicators. As for public investment, the pace of decline is slowing. Meanwhile, net exports (real exports minus real imports) are starting to decrease reflecting a slowdown in overseas economies such as the U.S. and East Asia. Housing investment is declining gradually. Reflecting such developments in final demand, industrial production remains on a rising trend, but the pace is slowing considerably. Inventories of some materials and electronics parts, of which demand from overseas is declining significantly, become somewhat excessive, but inventories as a whole still remain at a low level. Meanwhile, corporate profits continue to improve. Income conditions of households still remain severe but are not deteriorating as employment conditions are on an improving trend and wages are slightly above the previous year’s level. As for the outlook, public investment is expected to start increasing with the implementation of the new economic stimulus package by the government. In the corporate sector, firms still strongly feel that they have excess capacity and that they should reduce their debts to restore financial soundness. However, it is very likely that fixed investment in high-growth sectors, including those related to information technology services, will increase as corporate profits continue to recover. Moreover, the improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. However, the pace of recovery in household income will be modest for the time being, since firms’ perceptions of excess employment still persist, and thus significant changes have not been observed in their efforts to reduce personnel expenses. Reflecting the overseas slowing economies, a temporary decline in exports seems to be inevitable. Imports are projected to continue increasing, particularly those of consumer goods, and capital goods and parts. Hence, net exports are expected to decline. Mainly due to these developments in exports, industrial production is expected to slow down and remain at around the current level for a while. Overall, it is likely that the economy will continue a gradual upward trend led mainly by business fixed investment. In addition, the favorable financial environment created partly by the Bank’s continuation of easy monetary stance and the government’s new economic stimulus package are expected to underpin the economy. However, risks of downward pressures on the economy induced by the slowdown in overseas economies as well as developments in foreign and domestic capital markets, need more careful monitoring for the time being. With regard to prices, import prices are rising, mainly reflecting the depreciation of the yen. Domestic wholesale prices are declining somewhat mainly due to the decrease in prices of electrical machinery, although the rise in crude oil prices was passed on to the prices of petroleum products. Consumer prices continue to be somewhat weak owing to the decline in prices of other imported products and their substitutes, despite the increase in prices of petroleum products. Corporate service prices are still falling slowly. As for the conditions surrounding price developments, the recent yen depreciation is exerting upward pressures on prices. Moreover, the balance between supply and demand in the domestic market is This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on January 19, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on January 19 as the basis of monetary policy decisions. projected to be on a gradual improving trend, while an economic recovery is expected to continue at a moderate pace. Recently, however, the pace of recovery seems to be slowing and crude oil prices, which had been exerting upward pressures on prices, are falling. The declining trend of machinery prices due to technological innovations and the decrease in prices of consumer goods arising from the streamlining of distribution channels will continue to exert downward pressures on prices. Overall, prices are expected to be somewhat weak for the time being. In the financial market, the overnight call rate is generally moving around 0.25 percent. Interest rates on term instruments have declined after the increase towards late December. The Japan premium remains negligible. Yields on long-term government bonds have been around 1.5-1.7 percent since the end of November and are recently moving in the range of 1.5-1.55 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or expanding somewhat. Stock prices continue to be weak and are moving around the lowest level recorded since the beginning of 2000, while having recovered somewhat recently. In the foreign exchange market, the yen has been depreciating sharply since late December and is currently being traded in the range of 117-120 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. There seem to be no significant changes in the fund-raising conditions of firms in the markets for such instruments as corporate bonds and CP. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is at a high level in parallel with the recovery in profits. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish, although the expansion in the year-on-year decline is ceasing. Meanwhile, the amount outstanding of corporate bonds issued is slightly above the previous year’s level. The amount outstanding of CP issued was at a high level as the year-end approached. Money stock (M2 + CDs) continues to grow at around 2 percent on a year-on-year basis. As for funding costs for firms, short-term funding rates basically remain flat but long-term funding rates seem to be declining reflecting the developments in market interest rates. In this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy. However, the effects of the decline in stock prices on the fund-raising conditions of firms need to be carefully monitored.
|
bank of japan
| 2,001 | 1 |
Bank of Japan's February report of recent economic and financial developments
|
Bank of Japan’s February report of recent economic and financial developments1 Bank of Japan, 13 February 2001. * The Bank’s view * * Japan’s economy continues to recover gradually, but the pace is slowing due to decelerating export growth. With regard to final demand, business fixed investment is on an increasing trend. The recovery in private consumption continues to be weak as a whole due to lack of notable improvements in employment and income conditions, but there are somewhat positive signs in some indicators. Housing investment is virtually unchanged. As for public investment, the pace of decline is slowing. Meanwhile, net exports (real exports minus real imports) are starting to decrease reflecting a slowdown in overseas economies such as the U.S. and East Asia. Reflecting such developments in final demand, industrial production remains on a rising trend, but the pace is slowing considerably. Inventories of some materials and electronics parts, for which demand from overseas is declining significantly, have become somewhat excessive, but inventories as a whole still remain at a low level. Meanwhile, corporate profits continue to improve. Income conditions of households still remain severe but are not deteriorating, as employment conditions are on an improving trend. As for the outlook, public investment is expected to start increasing with the implementation of the government’s new economic stimulus package. In the corporate sector, firms still strongly feel that they have excess capacity and that they should reduce their debts to restore financial soundness. However, it is very likely that fixed investment in high-growth sectors, including those related to information technology services, will increase as corporate profits continue to recover. Moreover, the improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. However, the pace of recovery in household income will be modest for the time being, since firms’ perceptions of excess employment still persist, and thus no significant change has been observed in their efforts to reduce personnel expenses. It seems to be inevitable that exports will decline for some time reflecting the slowing of economies overseas. Imports are projected to continue increasing, particularly those of consumer goods, and capital goods and parts. Hence, net exports are expected to decline. Mainly due to these developments in exports, industrial production is expected to remain at around the current level for a while. Overall, it is likely that the economy will continue a gradual upward trend led mainly by business fixed investment. In addition, the favorable financial environment, created partly by the Bank’s continuation of its easy monetary stance, and the government’s new economic stimulus package are expected to underpin the economy. However, attention should be paid to growing risks of downward pressures on the economy induced by a possible further slowdown in overseas economies as well as by developments in foreign and domestic capital markets. With regard to prices, import prices are rising, mainly reflecting the depreciation of the yen. Domestic wholesale prices are declining somewhat mainly due to the decrease in prices of electrical machinery. Consumer prices continue to be somewhat weak owing to the decline in prices of other imported products and their substitutes, despite the increase in prices of petroleum products. Corporate service prices are still falling slowly. This report was written based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on February 9, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on February 9 as the basis for monetary policy decisions. As for the conditions surrounding price developments, the recent yen depreciation is exerting upward pressures on prices. Moreover, the balance between supply and demand in the domestic market is projected to be on a gradual improving trend, while an economic recovery is expected to continue at a moderate pace. Recently, however, the pace of recovery seems to be slowing and crude oil prices, which had been exerting upward pressures on prices, are falling. In addition to the declining trend of machinery prices due to technological innovations, the decrease in prices of consumer goods arising from the streamlining of distribution channels, and the reduction in communications fees aided by deregulation will continue to exert downward pressures on prices. Overall, prices are expected to be somewhat weak for the time being. In the financial market, the overnight call rate is generally moving around 0.25 percent. Interest rates on term instruments have been declining somewhat. The Japan premium remains negligible. Yields on long-term government bonds have declined to around 1.4-1.45 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or expanding somewhat. Stock prices continue to be weak and are moving around the lowest level recorded since the beginning of 2000. In the foreign exchange market, the sharp depreciation of the yen since late December has come to a pause. The yen is currently being traded in the range of 114-117 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. There seem to be no significant changes in the fund-raising conditions of firms in the markets for such instruments as corporate bonds and CP. On the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms’ cash flow is at a high level in parallel with the recovery in profits. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, lending by private banks remains sluggish, declining at around 2 percent year-on-year. Meanwhile, the amount outstanding of corporate bonds issued is slightly above the previous year’s level. The amount outstanding of CP issued continues to be at a high level. Recently, the growth rate of money stock (M2 + CDs) is slightly increasing due to the inflow from postal savings. As for funding costs for firms, short-term funding rates basically remain flat but long-term funding rates seem to be declining reflecting the developments in market interest rates. In this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy. However, the effects of the decline in stock prices on the fund-raising conditions of firms need to be carefully monitored.
|
bank of japan
| 2,001 | 2 |
Speech by Mr. Masaru Hayami, Governor of the Bank of Japan, at the Research Institute of Japan, Tokyo, 7 March 2001
|
Masaru Hayami: Recent economic developments and monetary policy Speech by Mr. Masaru Hayami, Governor of the Bank of Japan, at the Research Institute of Japan, Tokyo, 7 March 2001. * * * 1. Introduction Two months have passed since the dawn of the new century. After Japan’s economy went through a very tough decade at the end of the twentieth century, it has yet to regain economic strength and restore a full-fledged growth. In 2000 Japan’s economy was on a moderate recovery path as improvements became increasingly evident mainly in the corporate sector. However, unsavory developments followed. In particular, US economic growth slowed down in autumn 2000 more steeply than had been expected, and has recently begun to exert a significant influence over Japan’s economy. In a longer-term perspective, there had been a number of incipient cyclical recoveries in Japan’s economy during the past decade, but they were followed not by a strong recovery but by a repeated threat of recession. At present, pessimism seems to overwhelm Japan’s economic outlook. This has an aspect of both short-term business cycle and longer-term adjustment of Japan’s economy. Bearing these in mind, I would like to discuss, today, recent developments in Japan’s economy as well as financial markets, and offer my thought about monetary policy. 2. Recent economic and financial developments Economic developments Allow me first to discuss economic and financial market developments. To put it in short, the Bank of Japan is of the view that Japan’s economic recovery is slowing further and uncertainty over economic prospects is growing. Accordingly, we are becoming increasingly cautious. During the past two years, a moderate economic recovery has been supported by the following mechanism. Growth in exports and demand for information technology (IT) has led recovery in production as well as profits, which in turn induced increase in business investment. However, the recovery in the business sector has exerted only a limited impetus to the personal sector because of strong pressures of corporate restructuring. Nonetheless, wages began to grow year on year in summer 2000. In other words, there was a momentum in the economy by which recovery in the business sector led, albeit slowly, that in the personal sector. In late 2000 it became gradually evident that growth in exports and production slowed under the influence of rapid slowdown in US economic growth. In fact, Japan’s exports stopped growing in the final quarter of 2000, which is now being followed by a decline. In accordance with export deceleration, production has come to a halt, and inventories have become somewhat excessive in some areas of industrial materials and semi-conductors whose export demand fell sharply. Consequently, some IT firms have announced a downward revision of their profit forecast although they continued to expect an increase. Under these circumstances, some concern has begun to be voiced with respect to the prospect for business investment. In view of the fact that economic recovery has been pulled by manufacturing and other industries, the recent developments might as well be considered to foreshadow economic outlook. Downside risks These discussions lead to the question of what are important risks in economic outlook and the magnitude thereof. The economy always faces a variety of risks, but since last autumn, we have paid particular attention to two downside risks, i.e. slowdown in world economic growth and instability in capital markets both at home and abroad. These risks intensified in early 2001, and now appear to be materializing gradually. With respect to world economic slowdown, US economy has a key role to play. Having displayed a rapid growth of 5 percent until mid-2000, US economy has slowed its growth considerably in the second half. This slowdown proved to be more drastic than had been widely anticipated. Against this background, the Federal Reserve, or the central bank of the United States, decided on a reduction of its target interest rate by 0.5 percentage points at an unscheduled meeting of the FOMC at the beginning of the year, followed by an additional reduction of 0.5 percentage points at the end of January 2001. This sudden change in the economy is reflected in a significant downward revision of the central tendency among FOMC members with respect to real GDP growth rate from 3 ¼-3¾ percent in July 2000 to 2-2 ½ percent in February 2001. With respect to US economic outlook, a low growth rate seems inevitable as far as the first half of 2001 is concerned. A more critical question concerns the likelihood and degree of rebound later in the year. Economists and market players are divided in this regard: some expect a quick rebound, some others a modest recovery, and others prolonged deceleration. Optimists, who expect V-shaped recovery in the second half of 2001, point out the continued improvements in productivity bolstered by IT revolution as well as wide room for actions of both monetary and fiscal policies. On the other hand, it is pointed out that after an extremely high economic growth, the subsequent adjustment might prove to be severe and also that the adjustment period is practically unpredictable before it is over. In recent months, optimistic views appear to be receding. Under these circumstances, I would like to remain vigilant as well as unprejudiced about the extent to which US economy regains its strength later in the year. As I have mentioned earlier, the US economic slowdown has already begun to exert a negative influence on Japan’s economy through a variety of channels including an indirect impact involving economic slowdowns in East Asian countries that are closely linked to the US economy. In Japan, production growth slowed under the influence of decreases in exports. If this leads to declines in corporate profits and reductions in business spending, the momentum for economic recovery stemming from the business sector will be put at a greater risk than before. Therefore, we all need to examine carefully the ongoing production, profits, and investment plans for some time. There is another downside risk for Japan’s economy, i.e., capital markets both at home and abroad, especially stock price developments and their impact. Weakness of Japanese stock prices has been particularly pronounced in recent months. Nikkei Stock Average renewed its lowest record during the post-bubble period beginning in 1990 although one must make allowances for the technical changes in the index of April 2000. It is by no means easy to identify the causes for weak stock price developments, but they seem to be influenced by not only US stock market adjustments but also bearish sentiment in the market with respect to Japanese economic outlook. They may as well be a reflection of concerns that the markets both at home and abroad have with respect to delays in addressing a number of structural problems that Japan’s economy has. The Bank of Japan will remain vigilant about the influences that these weak stock prices will have on consumer and business sentiment as well as corporate finance. Price developments Against the background of recent economic and financial market developments, analysis of price developments is becoming an issue of renewed interest. In recent months, a variety of price indices, such as domestic wholesale prices, consumer prices, and corporate service prices, have been showing small declines year on year, and are expected to be weak for some time. These price developments have obviously been influenced by both supply and demand elements. A wide output gap remains after a significant improvement on the demand side since the economy hit the bottom two years ago. Because economic growth is decelerating further at present, there is a concern that downward pressures on prices stemming from weak demand might intensify in coming months. On the supply side, a variety of elements are at work, e.g., technological innovation, increase in efficiency in the distribution system, and deregulation, all of which exert a downward pressure on prices. Take domestic wholesale prices for example. Declines in prices of electric equipments and other machines have been most pronounced under the influence of a very rapid technological innovation. For another example, declines in consumer prices have been accounted for in large part by imports and import competitive goods, e.g., clothing. Let me hasten to add to it by saying that the Bank of Japan has never argued for so-called “good price declines.” Instead, the Bank has repeatedly said that the present price developments have been under the complex influence of both demand and supply elements, and therefore, no one can afford to understand on the basis of movements of price indices alone whether the ongoing price developments are consistent with sound developments in the economy. The issue of utmost importance is whether the current weak prices will invite declines in corporate profits and/or incomes of workers, leading to a deflationary spiral, or vicious cycle of economic recession and price declines. The Bank of Japan is of the view that Japan’s economy has so far avoided such a deflationary spiral, but that because economic growth has recently weakened further as I mentioned a few minutes ago, the economy has entered the phase that warrants enhanced attention to price developments. 3. Deliberation on monetary policy a. Improvements in the way of liquidity provision and reduction in interest rates Decisions of February 9 and February 28, 2001 Now let me offer my thought about monetary policy on the basis of the economic and financial developments I have discussed. As you are well aware, the Bank of Japan decided at its Monetary Policy Meeting of February 9, 2001 on both improvements in the way in which liquidity is provided to the market and a reduction in the official discount rate by 0.15 percentage points. With respect to liquidity provision, we decided upon three specific measures: introduction of a Lombard-type standby lending facility, active use of outright purchase operations of short-term government securities, and preparation for bill purchase operations at all offices of the Bank. At the Monetary Policy Meeting of February 28, 2001, the Bank decided to reduce, by 0.10 percentage points, both its target level of overnight call rate to 0.15 percent and the official discount rate to 0.25 percent. Lombard-type lending facility and the new role of the official discount rate Among these policy measures, the Lombard-type lending facility is new to Japan. Officially, it has a name of “Supplementary Lending Facility.” Under the existing framework of liquidity provision, the Bank of Japan selects its counter-parties and decides on the timing as well as amount of lending. In contrast, the Lombard-type lending facility entitles financial institutions to borrow at the Bank of Japan’s discount window the amount that they want at any time they wish, as long as collateral is properly set against the borrowing and the borrower meets the conditions pre-specified with respect to eligibility of collateral and other technical aspects. From a viewpoint of financial institutions, this is a means of funding available any time. The most important function that this supplementary lending facility performs is to stabilize interest rates in the market. Under usual circumstances, the overnight call rate fluctuates below the official discount rate because the former is the rate of which the Bank of Japan sets such a target level. When end-of-fiscal year pressures mount or a shock arises in the market, e.g., steep declines in stock prices or rumors of a large bankruptcy, interest rates tend to go up in the market. Even in that case, overnight market rates will be kept below the official discount rate because financial institutions are able to borrow at the Bank of Japan’s discount window at their discretion. Moreover, because financial institutions are freer from anxiety over funding capabilities, this will have a stabilizing effect on not only the overnight call rate but also other short-term interest rates across the board. This effect has been strengthened further by two reductions in the official discount rate amounting to 0.25 percentage points in February 2001. Now let me say a few words about the roles that the official discount rate plays. In the past, the Bank’s decision as to the official discount rate was a basic tool of monetary policy. Therefore, change in that rate had an announcement effect since it embodied change in the basic stance of monetary policy. In 1994, however, deregulation of interest rates was complete, and the institutional linkage between the official discount rate and bank deposit rates disappeared. In 1996, the Bank of Japan made it clear that the Bank would no longer use the discount window lending, to which the official discount rate was applied, as a means of monetary operations. Consequently, the role of the discount rate as a policy variable was played down, whereas the target level of the overnight call rate began to assume that role. By the introduction of the Lombard-type lending facility, however, the official discount rate is given a new function of setting a ceiling on call rates and thereby ensuring stability of short-term interest rates in the market. The Bank of Japan will continue to guide the call rate at an intended level by daily market operations, but at the same time it will begin to use the new function of the discount rate as a means to supplement the effects of market operations. Timely and flexible implementation of monetary policy Having explained the policy decisions made at the two Monetary Policy Meetings in February 2001, allow me to elaborate on their background. First of all, we have taken these policy measures on the basis of our understanding of economic and financial developments at present and in the future. As I said a few minutes ago, economic recovery is weakening in Japan and uncertainty over economic prospects have intensified under the influence of overseas economic slowdown and declines in stock prices. In part of money and capital markets, there was a certain degree of instability, reflecting concerns over the future. Under these circumstances, we decided on the policy measures with a view to ensuring both smooth functioning and stability of the financial market as well as to strengthening monetary support for economic recovery. Subsequently, not only the overnight call rate but also interest rates of longer maturities, e.g., those maturing beyond the fiscal year end and even long-term interest rates, declined by a considerable degree. Another point I would like to emphasize is the fact that the Bank of Japan continues to conduct monetary policy in a timely and flexible manner, in view of changes in economic conditions. As I said earlier, Japan’s economic recovery has decelerated further against the background of sudden slowdown of US economic growth and other elements. In light of these developments, we believe we have taken appropriate policy actions in a timely manner, and will continue to do so in the future. At the same time, the Bank of Japan hopes that the policy measures that it took in February 2001 will contribute to autonomous economic recovery led by private demand. b. Monetary policy stance in the future Now let me leave aside the discussion of a series of policy measures the Bank of Japan decided in February and take up something else. There continue to be a variety of arguments about monetary policy in Japan. For example, we sometimes hear the views that the present monetary ease is insufficient, and therefore, the Bank of Japan should resort to so-called “quantitative easing” or return to the zero interest rate policy. I would like to explain the basic thought about monetary policy on the basis of the discussions held at the Policy Board of the Bank of Japan. First of all, I would like to emphasize the fact that the Bank of Japan has implemented aggressive monetary easing to a degree unprecedented in the history of central banking in the world in terms of both interest rates and volume. Under the influence of this monetary easing, both short and long term interest rates have been kept extremely low. The Bank has also provided the market with ample liquidity and consequently, the monetary base, which consists of money that the Bank directly provides the system with, has shown a considerable growth, to which I will come back later. A second point I would like to make is whether or not the Bank should resort to additional measures such as “quantitative easing” hinges crucially upon conjectural analysis of growth and price performance of the economy. The word “quantitative easing” is meant differently across people who use this term. For example, there is an argument for stepped up outright purchases of long-term government bonds. The Bank of Japan has been buying such bonds in line with a trend growth in banknotes in circulation. This purchase amounts to \5 trillion per year. If the Bank increased its purchase dramatically, that would have some positive effects but at the same time it might be accompanied by negative side effects. Therefore, a careful examination of both positive effects and side effects must be in place before that policy is implemented. The possible effects of the stepped up bond purchases include a decline in long-term interest rates or a rise in expected rate of inflation. In light of the serious budget situation of today, however, the possibility that such a bold measure would damage credibility of fiscal discipline and in turn raise long-term interest rates cannot be ruled out. A policy to induce a massive depreciation of the yen’s exchange rate is another drastic, unconventional policy. In the present legal framework, it is the Ministry of Finance that has the authority for exchange market intervention. Leaving this issue aside, it is uncertain how effective official intervention can be in affecting exchange rates. Neither is it certain how to cope with terms-oftrade losses stemming from rises in import prices and adverse influences over Asian economies. After all, before the Bank embarks on unconventional policies like the ones categorized by quantitative easing and the zero interest rate policy, it has to judge that the conditions of the economy and prices warrant such policies. In this regard, the Bank of Japan will continue to examine and analyze the situation with its full force and on that basis it will seek the most appropriate policy that the central bank can take. A third point I would like to emphasize is we all have to face the reality that during the past decade both monetary and fiscal policies have been eased dramatically and yet they have failed to meet with robust economic growth. There are reasons for it. Let me mention three numbers here. During the past five years the monetary base expanded at an annual rate of 7.3 percent, the money stock at 3.3 percent, and nominal GDP at 0.4 percent. In contrast to the 1970s and 1980s, when all three indicators grew pari passu, what large differences exist between them in recent years. The difference between the growth rate of monetary base and that of money stock can be interpreted in the following. The monetary base consists of all banknotes and all current deposits that banks and other financial intermediaries hold at the Bank of Japan. A textbook of monetary economics tells you that the Bank of Japan supplies the monetary base, on which basis banks extend credit so that the monetary base creates a multiple increase in the money stock. In the course of discussions about monetary policy at present, an argument is sometimes made as if the monetary base were in shortage. As I pointed out a minute ago, the monetary base has been expanding at a relatively high rate. Despite this, however, the money stock failed to increase as much. It is mainly credit extension of financial institutions through which the money stock is supplied, but bank lending, which constitutes the core of credit extension, has decreased at an annual rate of 1.4 percent during the past five years. In contrast, bank holding of government bonds expanded at a remarkable rate of 15.7 percent. In other words, financial intermediation took place during this period in the way that government bond issues increased, financing government expenditure, through which channel money circulated to a greater extent. There is another discrepancy, i.e., the money stock and nominal GDP. The money stock grew at a modest rate of 3.3 percent per annum. This amounts to as much as \20 trillion every year, but nominal GDP stayed virtually unchanged notwithstanding. In sum, despite relatively ample supply of monetary base, economic growth remains lackluster. All this suggests the significance of structural obstacles in Japan’s economy, e.g., problems of the financial system, and on the flip side of the coin, corporate restructuring. Resolution of these problems will prepare a foundation on which the effectiveness of monetary policy can be enhanced. I plan to come back to this issue before closing my remarks today in conjunction with a topic of non-performing assets. c. Price stability and monetary policy Allow me to turn to another topic: the relationship between price stability and monetary policy. I hear often that it is nothing but monetary policy that can prevent deflation as well as inflation. Indeed, the Bank of Japan Law stipulates that the Bank’s purpose is the maintenance of price stability, and the Bank in fact conducts monetary policy in accordance with that idea. In terms of practical implementation of monetary policy, however, the relationship between the objective of price stability and monetary policy is somewhat more complex. This complexity is mentioned in the report that the Bank of Japan published last year with respect to price stability. For one thing, the relationship differs, depending on the length of time you envision about price stability. For example, during a very long period, say ten or twenty years, excess supply of money in many cases corresponds to rises in prices while short supply does to price declines. This is quite natural in light of the fact that prices are the rate of exchange between goods/services and money. Based on this long-term relationship between prices and money, price fluctuations are referred to as essentially monetary phenomenon and price stability is considered to be the objective of monetary policy. During a shorter period, say a few months or a few years, however, price fluctuations are influenced by not only money but also a variety of other variables. Output gap of the whole economy, inflation expectation, international commodities prices, exchange rates are interrelated in a complex fashion. In such a complex world, it is no easy task to decide on how precisely monetary policy can control prices, and also on how far it should do. Suppose an oil price shock gives rise to inflation pressures. If we are to contain them in a short period, it will take a very tight monetary policy. The upshot may be a steep decline in economic activity. This is inconsistent with sustainable price stability in the long run. Conversely, at a time when prices decline on account of productivity gains based on rapid technological innovation, a forceful reduction in interest rates with a view to raising prices may amplify economic swings. I firmly believe that monetary policy is an important determinant that ultimately influences price developments, but in order to fulfill its responsibility in the long run, we must first analyze not only superficial movements in price indices but also a variety of underlying developments, and see if the ongoing price developments are consistent with sustainable economic growth. I believe that this is indeed what the Bank of Japan Law means by its clause that the Bank’s currency and monetary control shall be aimed at, "through the pursuit of price stability, contributing to the sound development of the national economy." 4. Concluding remarks Having discussed monetary policy issues, allow me to close my speech today by touching on structural problems of Japan’s economy. In my view, efforts to enhance productivity by addressing the supply side structure of the economy are essential for Japan’s economy to achieve strong growth. The fact that US and UK economies revived strongly in the 1990s can be attributed to such efforts. From this viewpoint, it is of utmost importance that Japan speed up reform on the basis of common understanding of the following issues. First, economic growth stems from the innovative strength of the private sector. Creativity and knowledge of the private sector are the key to bring the economy to its maximum potential. Excessive dependence on the public sector is not the answer. Second, strength of the private sector will materialize when the market mechanism functions fully. Productivity of the private sector will improve when the resources of capital and labor are reallocated and repositioned between the business area of high growth potential, efficiency, and profitability and that otherwise. This process goes on most efficiently through the market mechanism. Third, such reform is inevitably accompanied by a certain degree of pains. In the course of structural reform, negative influences may arise to the economy, albeit temporarily, e.g., corporate bankruptcies and restructuring. Opportunities must be accorded to those firms and workers who are defeated amidst structural reform so that they can make a new attempt in the area they can take advantage of their own competitiveness. There are a variety of views with respect to specific forms of reform, but today I would like to say a few words about my ideas that I have always been turning in my mind. The first issue concerns the resolution of non-performing assets of banks. During the past three years of my term as Governor of the Bank of Japan, Chairman Greenspan of the Federal Reserve and other eminent people in the international circles have said to me that from the S&L problem and banking crises in the United States, they had learned a lesson about the importance of removing nonperforming assets off the balance sheet of the banks. On Japan’s side, too, we have maintained that mere provisioning against non-performing assets would not solve the problem and that it is essential to remove them from the balance sheet. During the past several years, the aggregate non-performing assets remained virtually unchanged in the magnitude of \30 trillion. This is a regrettable fact. Under these circumstances, Minister for the Financial Services, Mr. Yanagisawa expressed his view that banks should step up write off. We are of the same opinion. I consider his remark to be both appropriate and timely. I believe that increase in write off will facilitate structural reform. To promote write off, there are some specific means. For example, a company be split into good and bad parts, and the bad part, or nonperforming part be written off. Loan sales markets be also enhanced. It is to be hoped that such specific actions be announced and put in practice soon. At the same time, I strongly hope that management of banks will determine to embark on an enhanced write off. As for the assets classified under the category of “special mention,” the importance of sufficient provisions cannot be overemphasized. While such stepped up write off will contribute to the resolution of the non-performing problem, it might accelerate bankruptcies and have an adverse influence over employment. The Bank of Japan is prepared to conduct monetary policy to relieve the negative impact of this painful friction on the economy. The second issue I would like to mention is that it is absolutely necessary to invite the personal sector to stock and bond markets in order to help resolve the problem of banks’ non-performing asset as well as to promote structural reform. At present, the aggregate financial assets in the personal sector amount to \1,380 trillion, 54 percent of which is held in the form of cash and deposits. In Germany a shift from indirect financing to direct financing has been going on successfully in recent years, and as a result risk capital has increased. Between the early 1990s and 1998, the law has been enacted three times to promote financial and capital markets, by which several reforms of the stock market and investment trusts have proceeded. Specific measures include a reduction in the minimum denomination of stock, lifting of a ban on Fund of Funds, improvement in product design of investment trusts, promotion of senior citizens’ fund. As a result, the proportion of cash and deposits within total financial assets of the personal sector declined from 45.8 to 35.2 percent in Germany between 1991 and 1999, while in Japan it went up from 50.8 to 54.0 percent. The proportion of stocks and investment trusts went up dramatically in Germany from 14.6 to 27.3 percent while in Japan from 10.9 to 10.4 percent. Growth of investment trusts and mutual funds are expected to happen also in Japan. In this regard, improvements in product design of investment trusts are an urgent task. In particular, a wide variety of investment trusts should be marketed to meet a variety of demand of the personal sector, and at the same time sound market practices should also be established. Furthermore, establishment of investment funds can contribute to increasing flow of funds into risk capital. Private Investment Funds Ripplewood, which established Shinsei Bank after acquiring the Long Term Credit Bank of Japan, and Lone Star, which bought Tokyo Sowa Bank, are both equity funds whose shareholders consist of mutual funds, pension funds, university endowments. In Japan measures to promote the establishment of a large number of such funds should be taken. If the financial assets of the personal sector that are currently held predominantly in cash and deposits are to be invested more in financial and capital markets through a variety of channels, that would, I hope, contribute to ensuring stability in the financial system through prompter resolution of the nonperforming asset problem as well as to facilitating structural reform in Japan.
|
bank of japan
| 2,001 | 3 |
Bank of Japan's March report of recent economic and financial developments
|
Bank of Japan’s March report of recent economic and financial developments1 Bank of Japan, 21 March 2001. * * * The Bank’s view2 The recovery in Japan’s economy has recently come to a pause, reflecting a decrease in exports. With regard to domestic demand, business fixed investment is increasing. The recovery in private consumption continues to be weak as a whole, but there are somewhat positive signs in some indicators. Housing investment is virtually unchanged. Public investment is bottoming out. While domestic demand remains steady, net exports (real exports minus real imports) are plummeting reflecting a sharp slowdown in overseas economies such as in the U.S. and East Asia. Mainly due to these developments, industrial production is starting to decline, and inventories of some materials and electronics parts are becoming excessive. Corporate profits continue to improve but the pace is thought to be slowing significantly, particularly in the manufacturing industries, as exports and production are recently weakening. Income conditions of households have not deteriorated but the effects of the decline in production are starting to be observed in new job offers and overtime working hours. As for the outlook, public investment is expected to start increasing with the advance in the implementation of the supplementary budget for fiscal 2000. Net exports, however, are likely to continue decreasing for a while, as adjustments in overseas economies will take some time. Leading indicators suggest that business fixed investment is likely to peak out gradually, although there will be a backlog of orders to be implemented for a while. In addition, the need for inventory adjustments, although not to a large extent, is heightening for some goods. Thus, industrial production is expected to follow a declining trend. In these circumstances, the increase in corporate profits is likely to be subdued, and recoveries in household income and consumption are projected to be sluggish. Overall, the economy will likely remain stagnant for some time. Meanwhile, it is generally thought that overseas economies, particularly the U.S., will follow a gradual recovery trend from the latter half of 2001. In this case, together with the effects from the depreciation of the yen, exports are expected to underpin the economy once again. However, attention should still be paid to the possibility of a prolonging deceleration of overseas economies and risks of a negative impact on the economy induced by developments in foreign and domestic capital markets through corporate and household confidence. With regard to prices, import prices are rising, mainly reflecting the depreciation of the yen. Domestic wholesale prices are declining somewhat mainly due to the decrease in prices of electrical machinery. Consumer prices continue to be somewhat weak owing to the decline in prices of imported products and their substitutes. Corporate service prices are falling slowly. As for the conditions surrounding price developments, the recent yen depreciation is exerting upward pressures on prices. However, given the pausing economy as well as the heightening excessiveness of inventories, albeit the latter is observed only for some goods, the balance between supply and demand in the domestic market is likely to exert downward pressures on prices. In addition, the declining trend of machinery prices caused by technological innovations, the decrease in prices of consumer goods arising from the streamlining of distribution channels, and the reduction in communications fees aided by deregulation will continue to restrain price developments. Overall, prices are expected to be somewhat weak for the time being. Moreover, given the high uncertainties This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on March 19, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on March 19 as the basis for monetary policy decisions. regarding future economic developments, possibilities that weak demand will intensify downward pressures on prices warrant careful monitoring. In the financial market, the overnight call rate generally moved around 0.25 percent in February, and is moving around 0.15 percent from March in response to the decision at the Monetary Policy Meeting held on February 28 to change the guideline of money market operations. Interest rates on term instruments are declining substantially due to the announcement of the improvements in the way of liquidity provision and monetary easing by the Bank. The Japan premium remains negligible. Yields on long-term government bonds have declined to 1.1-1.2 percent due to the even more cautious view of market participants towards the economic outlook. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or expanding somewhat. Stock prices dropped substantially reflecting the decline in U.S. stock prices and the downward revision of the outlook on firms’ profits. In the foreign exchange market, the yen depreciated again from the end of February. The yen is currently being traded in the range of 122-124 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. There seem to be no significant changes in the fund-raising conditions of firms in the markets for such instruments as corporate bonds and CP. On the other hand, credit demand of private firms continues to lack momentum as corporate demand for external funds is subdued, since firms’ cash flow is at a high level. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish, although the year-onyear rate of decrease moderated somewhat in January and February. Meanwhile, the amount outstanding of corporate bonds issued continues to be slightly above the previous year’s level. The amount outstanding of CP issued remains at a high level. Recently, the growth rate of money stock (M2 + CDs) is increasing reflecting the inflow from postal savings. As for funding costs for firms, both short- and long-term funding rates are declining reflecting the decrease in market interest rates. In this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy. However, the effects of the decline in stock prices on the behavior of financial institutions and the fund-raising conditions of firms need to be carefully monitored. “The Bank of Japan will encourage the uncollateralized overnight call rate to move on average around 0.15 percent.”
|
bank of japan
| 2,001 | 3 |
Bank of Japan's April report of recent economic and financial developments
|
Bank of Japan’s April report of recent economic and financial developments1 Bank of Japan, 16 April 2001. * * * The Bank’s view2 Adjustments in economic activities have been under way, as production is declining reflecting a fall in exports. With regard to domestic demand, business fixed investment is increasing. The recovery in private consumption continues to be weak as a whole, but there are somewhat positive signs in some indicators. Housing investment is declining slightly. On the other hand, public investment is starting an upturn. While domestic demand remains steady, net exports (real exports minus real imports) are falling rapidly reflecting a sharp slowdown in overseas economies such as in the U.S. and East Asia. Mainly due to these developments, industrial production is declining more sharply, and excessive inventories of electronic parts and some materials are building up. The pace of improvement in corporate profits seems to be slowing significantly as exports and production are recently declining, and business sentiment of firms are worsening particularly in the manufacturing industries. Income conditions of households have not yet deteriorated but the effects of the decline in production are starting to be observed in new job offers and overtime working hours. As for the outlook, public investment is expected to continue increasing for the time being. Net exports, however, are likely to continue decreasing for a while, reflecting the ongoing adjustments in overseas economies. Leading indicators suggest that business fixed investment is likely to peak out gradually, although the implementation of a backlog of orders is expected to sustain investment. In addition, the need for inventory adjustments, although not to a large extent, is intensifying for some goods. Thus, industrial production is expected to follow a declining trend. In these circumstances, the increase in corporate profits is likely to be subdued, and recoveries in household income and consumption are projected to be sluggish. Overall, the adjustments are expected to continue for some time, mainly in production. Meanwhile, it is generally thought that overseas economies, particularly the U.S., will follow a gradual recovery trend from the latter half of 2001. In this case, helped also by the depreciation of the yen, exports are expected to underpin the economy once again. However, attention should still be paid to the possibility of a prolonged deceleration of overseas economies and risks of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. With regard to prices, import prices are rising, mainly reflecting the depreciation of the yen. Domestic wholesale prices are declining mainly due to the decrease in prices of electrical machinery. Consumer prices continue to be somewhat weak owing to the decline in prices of imported products and their substitutes. Corporate service prices are falling slowly. As for the conditions surrounding price developments, the recent yen depreciation is exerting upward pressure on prices. However, with the ongoing adjustments, the balance between supply and demand in the domestic market is likely to exert downward pressure on prices. In addition, the declining trend of machinery prices caused by technological innovations, the decrease in prices of consumer goods arising from the streamlining of distribution channels, and the reduction in communications charges aided by deregulation will continue to restrain price developments. Overall, prices are expected to be weak for the time being. Moreover, given the high degree of uncertainty regarding future economic This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on April 12 and 13, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on April 12 and 13 as the basis for monetary policy decisions. developments, the possibility that weak demand will intensify downward pressures on prices warrants careful monitoring. In the financial market, the overnight call rate has declined reflecting the increase in the currentaccount balance at the Bank of Japan to around 5 trillion yen, following the decision at the Monetary Policy Meeting held on March 19 to adopt new procedures for money market operations, and is currently moving around zero percent. Interest rates on term instruments are declining further mainly due to the monetary easing by the Bank. The Japan premium remains negligible. Yields on long-term government bonds increased to 1.4-1.5 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or expanding somewhat. Stock prices are rising reflecting the above-mentioned monetary easing and expectations toward the progress in disposal of non-performing bank assets. In the foreign exchange market, the yen has depreciated and is currently being traded in the range of 123-126 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. There seem to be no significant changes in firms’ perception on the lending attitude of financial institutions and the fundraising conditions of firms in the markets for such instruments as corporate bonds and CP. On the other hand, credit demand of private firms continues to lack momentum as corporate demand for external funds is subdued, since firms’ cash flow is at a high level. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. The amount outstanding of corporate bonds issued continues to be above the previous year’s level but the growth rate is slowing somewhat. Meanwhile, the amount outstanding of CP issued remains at a high level. Recently, the growth rate of money stock (M2 + CDs) is increasing reflecting the inflow from postal savings. Funding costs for firms continue to decline as both short- and long-term prime lending rates were lowered, reflecting the decrease in market interest rates. In this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy. For the time being, attention should be paid to the effects of the additional monetary easing measures taken by the Bank, while careful monitoring is still required for the effects of stock price developments on the behavior of financial institutions and the fund-raising conditions of firms.
|
bank of japan
| 2,001 | 4 |
Bank of Japan's May report of recent economic and financial developments
|
Bank of Japan’s May report of recent economic and financial developments1 Bank of Japan, May 21, 2001. * The Bank’s view * * Adjustments in economic activities have been under way, as production is declining reflecting a fall in exports. With regard to final demand, the recovery in private consumption continues to be weak as a whole, but there are somewhat positive signs in some indicators. Housing investment is declining slightly. Public investment is increasing. On the other hand, net exports (real exports minus real imports) continue to decrease reflecting a slowdown in overseas economies such as those of the U.S. and East Asia. Business fixed investment seems to be leveling off while the exporting conditions continue to deteriorate. Industrial production is declining sharply, reflecting such developments in final demand and as excessive inventories of electronic parts and some materials are building up. The environment surrounding corporate profits is becoming more severe in line with the decline in exports and production, and business sentiment of firms is worsening particularly in manufacturing. Income conditions of households have not yet deteriorated, but the decline in production is starting to affect the household sector mainly through the decrease in hours worked. As for the outlook, public investment is expected to continue increasing for the time being. Net exports, however, are likely to continue decreasing for a while, reflecting the ongoing adjustments in overseas economies. Business fixed investment is projected to peak out and then to start a downturn, as the effects from the implementation of a backlog of orders sustaining investment dissipates. In addition, inventory adjustments in goods such as electronic parts and materials will continue for the time being. Industrial production, therefore, is expected to follow a declining trend. In these circumstances, corporate profits are likely to start decreasing and thus household income is expected to weaken gradually. Overall, the adjustments are likely to continue for some time, mainly in production. Meanwhile, it is generally thought that overseas economies, particularly the U.S., will follow a gradual recovery trend from the latter half of 2001. In this case, exports, helped also by the depreciation of the yen, are expected to underpin the economy once again. However, attention should still be paid to the possibility of a prolonged deceleration of overseas economies and the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. With regard to prices, import prices are rising, mainly reflecting the depreciation of the yen. Domestic wholesale prices are declining mainly due to the decrease in prices of electrical machinery. Consumer prices continue to be somewhat weak owing to the decline in prices of imported products and their substitutes. The rate of decrease in corporate service prices is accelerating somewhat owing to the reduction in communications charges. As for the conditions surrounding price developments, the prior yen depreciation is exerting upward pressure on prices. However, with the ongoing adjustments, the balance between supply and demand in the domestic market is likely to exert downward pressure on prices. In addition, the declining trend of machinery prices caused by technological innovations, the decrease in prices of consumer goods arising from the streamlining of distribution channels, and the reduction in communications charges aided by deregulation will continue to restrain price developments. Overall, prices are expected to be weak for the time being. Moreover, given the high degree of uncertainty regarding future economic This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on May 17 and 18, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on May 17 and 18 as the basis for monetary policy decisions. developments, the possibility that weak demand will intensify downward pressure on prices warrants careful monitoring. In the financial market, the overnight call rate is currently moving at about 0.01 percent, reflecting the guideline for money market operations to maintain the current-account balance at the Bank of Japan at around 5 trillion yen. Interest rates on term instruments are declining further. The Japan premium remains negligible. Yields on long-term government bonds recently decreased to around 1.3 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or contracting somewhat. Stock prices rose until early May reflecting the recovery in U.S. stocks, but are decreasing slightly thereafter. In the foreign exchange market, the yen has appreciated slightly and is currently being traded in the range of 122-124 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. There seem to be no significant changes in firms’ perception on the lending attitude of financial institutions. The fund-raising conditions of firms in the markets for such instruments as corporate bonds and CP are improving further owing to the decline in market interest rates and the more active stance of investors to take credit risks. On the other hand, credit demand of private firms continues to lack momentum as the level of corporate expenditures such as business fixed investment remains below firms’ cash flow. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. The amount outstanding of corporate bonds issued continues to be above the previous year’s level but the growth rate is slowing. Meanwhile, the amount outstanding of CP issued is well above that of the previous year marking the highest level to date. The year-to-year growth rate of money stock (M2 + CDs) is around 2.5 percent. Funding costs for firms are declining reflecting developments in market interest rates. In this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy. For the time being, attention should be paid to the effects of the additional monetary easing measures taken by the Bank, while careful monitoring is required for the effects of stock price developments and corporate profit conditions on the behavior of financial institutions and the fund-raising conditions of firms.
|
bank of japan
| 2,001 | 5 |
Bank of Japan's June report of recent economic and financial developments
|
Bank of Japan’s June report of recent economic and financial developments1 Bank of Japan, 18 June 2001 *** The Bank’s view Adjustments in economic activities are gradually intensifying, as production is declining substantially reflecting a fall in exports. With regard to final demand, the recovery in private consumption continues to be weak as a whole, but there are somewhat positive signs in some indicators. Housing investment is declining. Public investment is increasing. On the other hand, net exports (real exports minus real imports) continue to decrease, reflecting not only a slowdown in overseas economies such as those of the United States and East Asia but also sluggish demand for information technology (IT) related goods. Business fixed investment is starting to decrease while exporting conditions continue to deteriorate. Industrial production continues to decline sharply, reflecting such developments in final demand and a further buildup of excess inventories of electronic parts and some materials. The environment surrounding corporate profits is becoming more severe in line with the substantial decline in exports and production, and business sentiment is worsening particularly in manufacturing. Income conditions of households have not yet deteriorated, but the decline in production is starting to affect the household sector mainly through the decrease in hours worked. As for the outlook, public investment is likely to continue increasing for the time being but is expected to start declining in the near future. Net exports, however, are likely to continue decreasing for a while amid the deceleration in overseas economies and ongoing inventory adjustments in IT-related goods worldwide. Judged from leading indicators and investment plans of firms, business fixed investment is projected to follow a downward trend. In addition, inventory adjustments in goods such as electronic parts and materials will continue for the time being. Industrial production is, therefore, expected to follow a declining trend. In these circumstances, corporate profits are likely to start decreasing and thus household income is expected to weaken gradually. Overall, the adjustments, mainly in production, are likely to continue for some time. Among factors affecting exports, it is generally thought that inventory adjustments in IT-related goods are expected to finish by early fall and overseas economies, particularly the United States, will follow a gradual recovery trend from around the end of this year. In this case, exports are expected to underpin the economy once again. However, a prolonged deceleration of overseas economies could yield the risk of economic adjustments spreading further. Also, attention should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. With regard to prices, import prices are rising, mainly reflecting the rebound in crude oil prices in addition to the prior depreciation of the yen. Domestic wholesale prices are declining mainly due to the decrease in prices of electrical machinery. Consumer prices continue to be somewhat weak owing to the decline in prices of imported products and their substitutes. Corporate service prices continue to decrease. As for the conditions surrounding price developments, the prior yen depreciation is exerting upward pressure on prices. However, with the ongoing adjustments in economic activities, the balance between supply and demand in the domestic market is likely to exert downward pressure on prices. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to be weak for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will intensify downward pressure on prices warrants careful monitoring. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on June 14 and 15, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on June 14 and 15 as the basis for monetary policy decisions. In the financial market, the overnight call rate is basically moving at about 0.01 percent under the guideline for money market operations to maintain the current-account balance at the Bank of Japan at around 5 trillion yen. Interest rates on term instruments are level on the whole. The Japan premium remains negligible. Yields on long-term government bonds recently decreased to 1.1-1.2 percent after remaining flat at 1.2-1.3 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or contracting somewhat. Stock prices continue to be weak, reflecting the somewhat more cautious views of market participants toward future corporate profits. In the foreign exchange market, the yen appreciated against the U.S. dollar toward early June, but has weakened thereafter and is currently being traded in the range of 120-123 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. However, there are some signs indicating that the lending attitude of financial institutions perceived by small firms is becoming slightly more cautious. Meanwhile, the fund-raising conditions of firms in the markets for such instruments as corporate bonds and CP are improving further owing to the decline in market interest rates and the more active stance of investors to take credit risks. On the other hand, credit demand of private firms continues to lack momentum as the level of corporate expenditures such as business fixed investment remains below firms’ cash flow. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. The growth rate of amount outstanding of corporate bonds issued is slightly below 2 percent year-on-year. The amount outstanding of CP issued is well above that of the previous year and marking the highest level to date, reflecting the favorable environment for issuing CP. The growth rate of money stock (M2 + CDs) in May was higher than that of the previous month due mainly to the inflow from postal savings. Funding costs for firms are on a declining trend reflecting developments in market interest rates. In this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy as a whole. For the time being, attention should be paid to the effects of the monetary easing measures taken by the Bank, while careful monitoring is required for the effects of stock price developments and corporate profit conditions on the behavior of financial institutions and the fund-raising conditions of firms.
|
bank of japan
| 2,001 | 6 |
Bank of Japan's July report of recent economic and financial developments
|
Bank of Japan’s July report of recent economic and financial developments1 Bank of Japan, 16 July 2001 * The Bank’s view * * Adjustments in economic activities are intensifying, as production is declining substantially reflecting a fall in exports. With regard to final demand, private consumption remains flat on the whole. Housing investment is declining and public investment is also about to decrease since the implementation of the supplementary budget for fiscal 2000 has peaked out. Net exports (real exports minus real imports) continue to decrease, reflecting not only a slowdown in overseas economies but also sluggish demand for IT-related goods. Business fixed investment has started to decrease while exporting conditions continue to deteriorate. Industrial production continues to decline sharply, reflecting such developments in final demand and a further buildup of excess inventories of electronic parts and some materials. Corporate profits and business sentiment are also worsening particularly in manufacturing. Income conditions of households have not yet deteriorated, but the decline in production is starting to affect the household sector mainly through the decrease in hours worked. As for the outlook, public investment is expected to follow a declining trend. Net exports are likely to continue decreasing for a while amid the deceleration in overseas economies and ongoing inventory adjustments in IT-related goods worldwide. Judged from leading indicators and investment plans of firms, business fixed investment is projected to follow a downward trend. In addition, inventory adjustments in goods such as electronic parts and materials will continue for the time being. Industrial production is, therefore, expected to follow a declining trend. In these circumstances, a decline in corporate profits seems inevitable for the time being and thus household income is expected to weaken gradually. Overall, the adjustments, mainly in production, are likely to continue for some time. Among factors affecting exports, it is generally thought that inventory adjustments in IT-related goods will have come to an end by early fall and overseas economies, particularly the United States, will follow a gradual recovery trend from around the end of this year. In this case, exports are expected to underpin the economy once again. However, a prolonged deceleration of overseas economies could yield the risk of economic adjustments spreading further. Also, attention should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. With regard to prices, import prices are mostly unchanged. Domestic wholesale prices are weak mainly due to the decrease in prices of electrical machinery. Consumer prices continue to be somewhat weak owing to the decline in prices of imported products and their substitutes. Corporate service prices continue to decrease. As for the conditions surrounding price developments, the past yen depreciation is exerting upward pressure on prices. However, with the ongoing adjustments in economic activities, the balance between supply and demand in the domestic market is likely to exert downward pressure on prices. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to be weak for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will intensify downward pressure on prices warrants careful monitoring. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on July 12 and 13, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on July 12 and 13 as the basis for monetary policy decisions. In the financial market, the overnight call rate is basically moving around zero percent under the guideline for money market operations to maintain the current-account balance at the Bank of Japan at around 5 trillion yen. Interest rates on term instruments are basically level on the whole. The Japan premium remains negligible. Yields on long-term government bonds rose after moving at around 1.15-1.2 percent until the end of June and are recently moving around 1.3 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged or contracting somewhat. Stock prices are declining due mainly to the decrease in U.S. stocks. In the foreign exchange market, the yen is depreciating against the U.S. dollar and is currently being traded in the range of 124-126 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. However, there are some signs indicating that the lending attitude of financial institutions perceived by small firms is becoming slightly more cautious. Meanwhile, the fund-raising conditions of firms in the markets for such instruments as corporate bonds and CP continue to improve owing to the decline in market interest rates and the more active stance of investors to take credit risks. On the other hand, credit demand of private firms continues to lack momentum as the level of corporate expenditures such as business fixed investment remains below firms’ cash flow. Moreover, firms continue to reduce their debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant. In view of this, the underlying tone of private banks’ lending remains sluggish. Meanwhile, the growth rate of amount outstanding of corporate bonds issued is recently rising slightly. The amount outstanding of CP issued is well above that of the previous year and marking the highest level to date, reflecting the favorable environment for issuing CP. The growth rate of money stock (M2 + CDs) in June was higher than that of the previous month due mainly to the inflow from postal savings. Funding costs for firms are on a declining trend reflecting developments in market interest rates. In this financial environment, the lending attitudes of financial institutions and corporate financing conditions remain easy as a whole. For the time being, attention should be paid to the effects of the monetary easing measures taken by the Bank, while careful monitoring is required for the effects of stock price developments and corporate profit conditions on the behavior of financial institutions and the fund-raising conditions of firms.
|
bank of japan
| 2,001 | 7 |
Remarks by Mr Sakuya Fujiwara, Deputy Governor of the Bank of Japan, at the Foreign Correspondents' Club of Japan, Tokyo, 25 July 2001
|
Sakuya Fujiwara: Challenges for Japan’s economy and monetary policy Remarks by Mr Sakuya Fujiwara, Deputy Governor of the Bank of Japan, at the Foreign Correspondents’ Club of Japan, Tokyo, 25 July 2001. * * * Introduction I am honored and grateful to have been given this opportunity to address members of the Foreign Correspondents’ Club of Japan. Given the present economic situation and that members of this esteemed Club are well known for their barrage of sharp questions you may think it brave of me to address you. But I immediately accepted the Club’s invitation without any hesitation because I saw it as a golden opportunity to candidly explain the difficulties the Bank of Japan is facing under the current severe economic situation. As you are no doubt aware, there are various arguments in Japan regarding the management of macroeconomic policy and how to promote structural reform. Until the first quarter of this year, further monetary easing and how to promote the disposal of non-performing loans had been actively discussed almost every day. Indeed, many held that Japan’s economy could only get out of the stagnant state if monetary easing were effected or if non-performing loans were disposed of. Since late April, following the formation of the Koizumi government, structural reform has taken center stage and a ‘basic plan’ which proposes wide-ranging reform agenda was determined by the cabinet at the end of June. Looking back at all the numerous discussions within only the past six months, the central issue has been whether to first effect macroeconomic policies such as monetary policy and fiscal policy or implement structural reform measures which include the disposal of non-performing loans, deregulation, and review of roles between the public and private sectors. However, these points have been repeatedly discussed since the bursting of the bubble and thus are not new. The question of what kind of policy measures are desirable in order to bring Japan’s economy back to a sustainable growth path is not one that can be easily answered, especially when taking account of the political economy. The difficulty lies in that you simply cannot make a clear-cut decision and choose either macroeconomic policy or structural reform. Today, I will explain my views on the roles monetary policy and structural reform should play under the current harsh circumstances. 1. Current monetary easing measures As a starting point, I will explain current monetary easing measures. Current monetary policy management As you all know, the Bank of Japan took successive monetary easing measures during February to March this year, and the March decision was a decisive one. There are three points which characterize this series of monetary easing measures. First, the Bank changed the main operating target of monetary policy operations from the uncollateralized overnight call rate to the outstanding balance of current accounts held at the Bank of Japan. In addition, the Bank increased the average outstanding amount of such accounts by about 25% from some 4 trillion yen to 5 trillion yen. In response to this ample provision of funds, nominal short-term market interest rates declined to virtually zero percent. In addition, if considered necessary for the smooth provision of liquidity, the Bank will increase its outright purchase of long-term government bonds from the previous 400 billion yen per month subject to certain conditions. Second, the Bank has clearly stated that it will continue to pursue the new monetary policy framework until the Consumer Price Index registers stably a zero percent or an increase year on year. This aims at guiding longer term interest rates to decline by promising the continuation of monetary easing into the future, and is thus often called the ‘commitment effect’ or ‘policy duration effect’. Third, the Bank introduced a ‘Lombard-type lending facility’, through which the Bank extends loans at the request of counterparties under certain conditions at the official discount rate. Thanks to this facility, even when there is turmoil in the market, counterparties can flexibly borrow funds from the Bank as long as they have eligible collateral. As a result, the official discount rate shoulders a new role of setting a ceiling to the short-term money market rate. This facility plays a big role in nurturing a sense of security among market participants with respect to their financing and also stabilizes interest rates, thus strengthening the effects of monetary easing. Effects of monetary easing These monetary easing measures, unprecedented in central bank history both at home and abroad, were received with considerable surprise when announced. Though such initial surprise tends to fade, these monetary easing measures have potentially powerful effects as is evidenced by the initial surprise. At the same time, however, it is also true that there are limits to the effects. We hope that all concerned will correctly and with balanced judgement recognize both the favorable effects and the limits of current monetary easing measures. Let me begin with the favorable effects of the current measures. Since monetary easing in March, various interest rates have substantially declined to levels below the lowest levels seen during the zero interest rate policy period. For example, the overnight call rate is 0.01%, the yield on 1-year government bonds 0.01-0.02%, and that on 5-year government bonds once declined to 0.3% and has recently been just over the 0.4% mark. Yields on 10-year government bonds have been moving at the low level of 1.1-1.4%. In addition, the difference between the yield on corporate bonds or CP and yields on government securities, namely the ‘credit spread’, has also been narrowing, implying a continual improvement in fund raising through the market. As such, there is abundant liquidity in financial markets. What typically reflects such abundant liquidity is the phenomenon of ‘under-subscription’ for Bank of Japan operations to provide liquidity to the market. For example, in competitive yield auctions on May 21st to provide liquidity, while the Bank offered one trillion yen, financial institutions’ bids were less than 400 billion yen even at a rate of 0.01%, virtually zero percent. In other words, under-subscription is an expression of financial institutions’ views that “liquidity has already been provided sufficiently so that there is no need for additional liquidity even at the rate of 0.01%.” Under-subscription was frequently observed from the beginning to the middle of May, and the Bank responded to such situations by reducing the unit for every bid to 0.001%. As a consequence, the lowest interest rate the Bank would accept was also reduced to 0.001%, and, thanks to such efforts which some market participants have termed ‘nano-technology’, under-subscription ceased thereafter. However, this does not guarantee that under-subscription will not occur again in the future. In any event, liquidity is being amply provided to markets and discussion is now geared toward focusing on the marginal difference between 0.01% and 0.001%. Limits to monetary easing measures Such experience also implies that there might be a practical limit such that a central bank cannot unlimitedly provide liquidity beyond the demands of financial institutions. Despite such a practical limit, there would be no problem if liquidity reached corporations which reside outside the financial markets and contributed to rejuvenating economic activity, but regrettably this has not been the case so far. Let me quote some plain numbers which typically illustrate this. In the last five years, current account deposits which private financial institutions hold with the Bank of Japan increased 12% on an annualized basis. The expectation here is that developments in such accounts affect the credit creation function of financial institutions. Monetary base, which is the sum of Bank of Japan current accounts and banknotes issued, increased as high as 8% a year. However, despite such extremely ample liquidity provision from the Bank, the lending of commercial banks declined by half a percent a year and money supply grew only 3%. The decline of bank loans compared with the increase in money supply means, on the part of financial institutions, that assets other than loans have been increasing, which turned out to be mainly government bonds. Despite the increased provision of liquidity by the Bank of Japan to the money market, financial institutions only increased investment in credit risk-free government bonds and lending to firms rather declined. As such, under the circumstances where the credit creation function of financial institutions is inactive, economic activity cannot be robust, as evidenced by nominal GDP growth of only 0.6% a year and the Consumer Price Index being almost flat. Such figures illustrate the fact that even if the Bank of Japan provides ample liquidity to the market and guides nominal interest rates to an extremely low level of virtually zero percent, such action itself cannot lift economic activity. Keynes once used the term ‘liquidity trap’ to point out the possibility that the effectiveness of monetary policy might be hampered, and the current state of Japan’s economy is quite close to such a situation. Policy duration and quantitative easing However, even though Japan’s economy is in a situation close to a liquidity trap, a central bank cannot be a bystander when the economy is anticipated to deteriorate further. Against this backdrop, the Bank thus took decisive monetary easing measures in March. In this regard, let me bring your attention to two points. First is the rationale behind having the outstanding balance of Bank of Japan current accounts as the main operating target and increasing it. The target of increasing the outstanding balance of current accounts to around 5 trillion yen is substantially more than required reserves of around 4 trillion yen. As previously mentioned, under such ample provision of liquidity, short-term interest rates will move close to zero percent under normal circumstances. In addition to a decline in interest rates, it is hoped that the quantitative increase in Bank of Japan current accounts itself will have positive effects. If financial institutions hold excess no-risk no-return current account balances, an incentive will emerge to increase the holding of such assets as loans, corporate bonds, stocks, and foreign currency-denominated assets which generate some returns even though accompanied by some risk. In addition, the quantitative increase itself might affect expectations of the public. Of course, under a situation where both long- and short-term interest rates are quite low and the credit intermediation function of financial institutions is also hampered, such effects might not be large. However, under the circumstances where room for a further decline in interest rates is almost exhausted, and bearing in mind the severe outlook for the economy, the Bank judged it necessary to dare decide to take such measures. Second is the commitment effect. As I previously mentioned, the Bank of Japan adopted a policy which incorporated a so-called ‘policy duration effect’ in that the Bank is committed to continuing monetary easing into the future. This should be regarded as best efforts in a situation where the central bank is trying to hammer out further monetary easing effects despite conventional monetary policy instruments having almost been mobilized to their limit. With such a commitment in place, the public’s expectations with respect to when prices will start to rise will be adjusted if the economy further deteriorates. In such a case, the public will anticipate that monetary easing will surely be protracted, leading to a more flattened yield curve, thereby strengthening monetary easing effects. As such the current commitment can be said to have a sort of automatic adjustment function against changes in economic conditions. 2. Role of structural reform As such, while potentially powerful monetary easing has been in place both in terms of interest rates and quantity, it is essential to resolve structural problems facing the financial system and industry in order to allow such monetary easing to permeate the real economy to the fullest extent possible. Structural reform is, put simply, to establish a function which more effectively allocates resources such as labor and both physical and financial capital, and raises productivity of the economy as a whole. The content of structural reform will be shaped from now on and at this juncture points of emphasis differ. Here, I will not go into specific measures in any depth but take up two points with respect to the basic thrust of structural reform. Importance of expectations The first point is what are the conditions for successful structural reform. There could be various ways of looking at this, but my view is that the key for successful structural reform is how to positively affect the expectations of economic agents. At present, the expectations of firms and households are bearish. When I say we have to work on such expectations and change them I mean we have to restore a situation in which economic agents can hold such a normal expectation that the economy will grow in the future. However, the expectations of private economic agents are far from being in a normal state. Making a rough back-ofthe-envelope calculation, if the expenditure of firms and households increased an additional 2%, then nominal GDP growth would be 2% higher. According to a household survey, the monthly consumption expenditures of the average Japanese household in fiscal 2000 was 317,000 yen, so a 2% increase would be about 6,000 yen. And, taking account of the multiplier effect, the expenditure necessary would be less. But things are not so simple. How expectations are formed is a difficult question. For example, while it was realized that the IT boom in the US would eventually come to an end, relatively bullish views were still dominant until last autumn. In fact, at the last November meeting of the FOMC, which is responsible for setting the shortterm interest rate, inflationary concern was pointed out as a potential risk factor for the US economy rather than economic weakness, and it was in November that private forecasters revised their forecasts downward. Subsequently, the FOMC has on successive occasions since January substantially reduced its target FF rate, though it has not yet succeeded in revitalizing the activities of IT-related firms which once drove bullish expectations. Looking back at the experience of Japan during the bubble period, the expectations of economic agents became extremely bullish, to an extent which seems incredible in hindsight, and now we are facing a completely opposite situation. Then, how do the expectations of firms and households become bullish? At this moment, I do not have a clear answer. But if one believes bullish expectations naturally emerge when an economy grows, then I think the key is simply to make efforts to raise productivity. Measures to this end were outlined in the cabinet’s ‘basic plan’ for structural reform which was announced this June. What is important is to make clear that emphasis will be on market mechanisms, that the public understand that the government is directing its efforts toward increasing productivity of the economy as a whole through such mechanisms, and implementing policy measures consistent with such a direction. Speed of structural reform The second point concerns the speed of structural reform. In this regard, economists abroad have voiced concern that if various structural reforms are implemented simultaneously, there would be a substantial deflationary impact on the economy in the short run and the deflationary gap in Japan’s economy, which is already suffering from lack of demand, might become wider. We can certainly understand the background to such concern. Indeed, looking at examples of structural reform overseas, there seem to be many cases where there was a deflationary impact in the short term. And, in contrast with the US and UK, the economy cannot expect to receive additional ‘dividends’ such as a substantial decline in long-term interest rates accompanying fiscal consolidation, since in Japan there is little room for any further decline in interest rates. However, the bond market is not the only market which assesses structural reform. If the stock market favorably evaluates specific efforts toward the resolution of structural problems, there might be positive effects on the economy from this channel even in the short run. Moreover, it should be noted that, in the case of Japan, delay in effecting structural reform has made the problem of weak demand all the more serious. In this context, I would like to refer to the fact that private consumption has been very slow to increase. Of course, various factors might be behind this, one being uncertainty with respect to pensions and the tax burden in the future because of the rapidly aging population. Therefore, in order to stimulate private consumption, it is essential to reduce future uncertainty as much as possible. According to textbook Keynesian economics, the expansion of fiscal expenditure financed by the issuance of government bonds will stimulate an economy unless taxpayers hold back consumption reflecting expectations of a future increase in the tax burden. However, if public investment generated by a fiscal deficit is inefficient, production capacity of the economy as a whole will not increase and the ‘wealth’ which generates future income and consumption will not accumulate. And, if such investment clearly suggests an increase in the future tax burden and delay in structural adjustment, then it would have an adverse impact on current consumption. From this viewpoint, once it became clear that the content of fiscal expenditure was going to be shifted from less efficient to more efficient objectives, resulting prospects of an increase in future ‘wealth’ might have a favorable effect on the economy. Compared with a situation where there is little room to mobilize conventional monetary policy instruments, room for effecting policies which focus more on the ‘quality’ of fiscal expenditure seems to be significantly large, as mentioned in the ‘basic plan’. Nevertheless, what I have just said does not mean that I am optimistic enough to consider that the promotion of structural reform will immediately ignite an improvement in the economy. Presumably, in the process of reform, we cannot deny that there might be ‘pains’ such as increased bankruptcies and heightened unemployment in the short run. However, at the same time, it is not appropriate to single out and emphasize only the short-term deflationary impact on the economy from among the various macroeconomic effects of structural reform. In short, as long as protracted stagnation of Japan’s economy is rooted in structural problems, we are now at a stage where it is not so productive to discuss in general terms whether structural reform is deflationary or not. What is important is, based on specific structural reform measures which will be presented in the future, to make a well-balanced assessment with respect to the economic consequences of such measures. 3. Relationship between structural reform and monetary policy I have explained the roles of monetary policy and structural policy, but what is the relationship between these roles? Some would say that pains stemming from the adverse impact on the economy as structural reform progresses should be mitigated by further monetary easing, or emphasize that in the process of pursuing structural reform it is mainly the role of monetary policy to ensure economic stability. Bearing these views in mind I will now explain how I see the relationship between monetary policy and structural reform. At the start I would like to say that the monetary easing policy currently being pursued by the Bank will, because of effects I have previously explained in detail, also give considerable support to structural reform. First, the current monetary policy framework was determined by taking into account a scenario that the economy might substantially deteriorate, including a short-term deflationary impact stemming from structural reform. In the process of discussion to reach the monetary easing decision in March, because of cyclical adjustment in IT-related areas worldwide coinciding with Japan’s structural adjustment, I could not help but forecast that the economy would worsen considerably in the future. Based on this recognition, I felt strongly, from the viewpoint of forward-looking policy making, that it was necessary to make moves ahead of the foreseeable economic developments and to vote for decisive monetary easing. Second, even if deflationary pressure intensifies in the short run as a result of structural reform, current monetary policy has an automatic adjustment function such that the easing effects strengthen through the policy duration effect. Third, in the process of structural reform, liquidity concerns might increase in financial markets when non-performing loans are disposed of. In this regard, the previously mentioned Lombard-type lending facility will have the effect of driving structural reform by containing such liquidity concerns. And fourth, when corporate and household confidence with respect to the future strengthens and economic activity picks up parallel with the progress of structural reform, current monetary easing will provide very strong support. Put differently, the benefits of recent decisive monetary easing will surface in full when the private sector decides to take advantage of the opportunities. While the relation of the current monetary policy framework with structural reform is such as I have just mentioned, if I dare to add one more thing, it is that when I voted for monetary easing in March, I did so with the strong hope that since we are stretching ourselves almost to the limit in adopting such decisive monetary easing measures, structural reform ought to be implemented expeditiously. I had a strong feeling such that we should exert some leadership in promoting structural reform efforts in various areas. Looking back, it seems that this desire for structural reform was, and is, also held by the public. Viewed from conventional monetary policy thinking, such a view might be regarded as unconventional, but I have no doubt that decisive monetary easing has contributed to the progress of structural reform. 4. Central bank responsibility So far I have discussed the roles played by monetary policy and structural reform. In the last part of my speech, I would like to address the issue of central bank responsibility by considering the argument that since Japan’s economy is in such a worrisome state the Bank of Japan should mobilize all measures at its disposal even if they might not be the choice in normal times. When we consider the outlook for the economy, as shown in our April Outlook and Risk Assessment of the Economy and Prices, there are various risk factors. Bearing in mind every possible eventuality, including these risk factors, the Bank of Japan will carefully examine, without any presumptions, the economic outlook and pursue appropriate monetary policy. This is the responsibility that a central bank should discharge. At the same time, in terms of monetary policy management, it is also a responsibility of a central bank to underline the fact that it has almost exhausted such conventional monetary easing measures as reducing nominal interest rates. The reason I say this is because when listening to debate concerning monetary policy, we are somewhat puzzled that many seem to consider that interest rates can be further substantially lowered. Of course, even at the current level where nominal interest rates are virtually zero percent, we have managed to devise ways to create monetary easing effects. However, such efforts have obvious limits. Among various monetary policy options proposed, some argue that the Bank can freely increase money supply at its discretion as if raining money from the sky. However, as evidenced by figures I have previously introduced, this is not the reality. Then, how should we address the assertion that since both inflation and deflation are monetary phenomenon, it is only the Bank of Japan which can prevent a price decline. As one who considers how actual monetary policy should be conducted by watching actual economic developments, I have a very mixed feeling when I hear such a view. For sure, if one takes an extremely long period of time, the relationship between goods and services, and the quantity of money will be a major factor in determining the price level. The fact that price stability is the goal of the Bank of Japan’s monetary policy is based on such an understanding. However, at the same time, it is also true that the price level will be considerably affected in the short and medium term by various factors such as costs and changes in productivity. In fact, the Bank of Japan has eased monetary conditions to the utmost both in terms of interest rates and quantity such as current accounts at the Bank of Japan and monetary base. In addition, as noted in our March statement, current monetary easing was determined to illustrate the Bank’s firm determination to prevent prices from declining continuously. However, as figures I previously mentioned show, so far the effects of monetary easing have not been able to lift economic activity and prices continue soft. Our agony as monetary policymakers lies exactly here. Now, if we focus solely on raising prices and pursuing monetary operations such as buying any type of asset, then prices will eventually start to rise, though we cannot say when for sure. However, it is uncertain whether such a price rise would lead to sustainable economic growth. The questions we have to answer are: Would such extraordinary measures be desirable for Japan’s economy as a whole? Would they be consistent with the pursuit of price stability that contributes to the sound development of the national economy, which is the Bank’s mission as stated in the Bank of Japan Law? Of course a central bank always has to be open-minded in examining new policy measures. In fact, both at the time of adopting the zero interest rate policy and decisive monetary easing in March, I believe the Bank adopted an innovative posture. At the same time, however, we cannot make a quick decision to pursue extreme policy when the effects are uncertain simply because some think it is better to do something than nothing. For example, while an increase in the outright purchase of government bonds by a central bank might have some effects, if it induced market uncertainty with respect to future fiscal discipline, it would lead to an interest rate rise by way of increase in risk premiums and thus entail a risk of having an adverse impact on the economy. In fact, when looking at the recent development of long-term interest rates, they often sensitively responded to views concerning the future issuance of government bonds such that they rose recently reflecting budget discussions. Of course, such a recent rise in interest rates can be regarded as within the range of extremely low interest rates and thus we do not have to worry about any adverse impact on economic activity. However, it is necessary for a policymaker to remember that market participants are sensitive to uncertainty over future fiscal management and resulting bond supply and demand conditions. In March, the Bank decided to increase its outright purchase of long-term government bonds if deemed necessary for the smooth provision of liquidity, on the condition that the outstanding amount of long-term government bonds held by the Bank be kept below the outstanding balance of banknotes issued. And this decision was arrived at by taking full account of what I have so far mentioned. In sum, it is because monetary policy has entered uncharted territory that responsible policymakers are required to conduct a careful examination of all the possible favorable effects and side-effects of all likely policy responses. In doing so, it is important to recognize that, with increasingly globalized financial markets, policy in Japan is exposed to harsh assessment by market participants both at home and abroad. In this sense, in conducting monetary policy, not only policy action such as individual policy measures but also the principle behind every policy action becomes important. In a way, such principles might constitute policy. At present, as production is declining substantially reflecting a fall in exports, economic adjustments are intensifying. Needless to say, the Bank of Japan will continue to carefully examine overall developments in the economy, including adjustments in IT-related areas and the effects of structural reform, and conduct appropriate monetary policy. At the same time, I would like to emphasize that, during such process, ensuring monetary policy credibility as a whole becomes critical for realizing sustainable economic growth. Thank you for your attention.
|
bank of japan
| 2,001 | 7 |
Bank of Japan's August report of recent economic and financial developments
|
Bank of Japan’s August report of recent economic and financial developments1 Bank of Japan, 15 August 2001 * * * The Bank’s view Adjustments in economic activities are intensifying further, reflecting a substantial decline in exports and production. With regard to final demand, private consumption remains flat on the whole. Housing investment is declining and public investment is also starting to decrease since the implementation of the supplementary budget for fiscal 2000 has peaked out. Net exports (real exports minus real imports) continue to decline, reflecting not only a slowdown in overseas economies but also sluggish demand for IT-related goods. Business fixed investment is also decreasing while exporting conditions continue to deteriorate. Industrial production continues to decline sharply, reflecting such developments in final demand and strong excessiveness in inventories of electronic parts and some materials. Corporate profits and business sentiment are also worsening particularly in manufacturing. Affected by such developments, household income seems to be weakening gradually. As for the outlook, public investment is expected to follow a declining trend. Net exports are likely to continue decreasing for a while amid the deceleration in overseas economies and ongoing inventory adjustments in IT-related goods worldwide. Judged from leading indicators and investment plans of firms, business fixed investment is projected to follow a downward trend. In addition, inventory adjustments in goods such as electronic parts and materials will continue for the time being. Industrial production is, therefore, expected to follow a declining trend. There still exist such general views that around the end of this year, ongoing inventory adjustments in IT-related goods worldwide are likely to peak out and overseas economies, particularly the United States, will start to recover. Based on these preconditions, exports are expected to pick up sometime in the future and thus underpin industrial production. However, cautious views on global demand in IT-related goods and developments in overseas economies for both their timing and pace of recovery are recently growing. At home, under the prolonged adjustments in economic activities particularly in production, household income, which is the basis of private consumption, is likely to be weakening gradually along with the decline in corporate profits. Overall, it seems to be inevitable that adjustments in economic activities, starting from the decrease in exports, will continue for the time being. Moreover, the substantial decline in production would cause domestic demand to decrease and in turn generate the risk of adjustments in economic activities to spread even further. Also, attention should be paid to the risk a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. With regard to prices, import prices are mostly unchanged. Domestic wholesale prices are weak mainly due to the decrease in prices of electrical machinery and materials. Consumer prices continue to be somewhat weak owing to the decline in prices of imported products and their substitutes. Corporate service prices continue to decrease. As for the conditions surrounding price developments, the past yen depreciation is exerting upward pressure on prices. However, with the ongoing adjustments in economic activities, the balance between supply and demand in the domestic market is likely to exert downward pressure on prices. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to be weak for the time being. Moreover, given the high degree of uncertainty regarding This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on August 13 and 14, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on August 13 and 14 as the basis for monetary policy decisions. future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. In the financial market, the overnight call rate is basically moving around zero percent under the guideline for money market operations to maintain the current-account balance at the Bank of Japan at around 5 trillion yen. Interest rates on term instruments are basically level on the whole. The Japan premium remains negligible. Yields on long-term government bonds rose temporarily to 1.40-1.45 percent, but are recently moving around the range of 1.30-1.35 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are contracting somewhat. Stock prices are declining around the lowest level since the start of the year. In the foreign exchange market, the yen is currently being traded in the range of 121-124 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. However, there are some signs indicating that the lending attitudes of financial institutions perceived by small firms are becoming slightly more cautious. Meanwhile, the fund-raising conditions of firms in the markets for such instruments as corporate bonds and CP continue to improve owing to a decline in market interest rates and the more active stance of investors to take credit risks. On the other hand, credit demand in the private sector seems to be declining slightly faster due to a decrease in business fixed investment while firms continue to reduce their debts. In view of this, private banks’ lending remains sluggish. Meanwhile, the growth rate of amount outstanding of corporate bonds issued is on the gradually rising trend, reflecting the favorable environment for issuing corporate bonds. The amount outstanding of CP issued is well above that of the previous year and marking the highest level to date. The growth rate of money stock (M2 + CDs) in July was slightly higher than that of the previous month due mainly to the inflow from postal savings. Funding costs for firms continue to be at extremely low levels. In this financial environment, the lending attitudes of financial institutions and corporate financing conditions remain easy as a whole. For the time being, attention should be paid to the effects of the monetary easing measures taken by the Bank, while careful monitoring is required for the effects of stock price developments and corporate profit conditions on the behavior of financial institutions and the fund-raising conditions of firms.
|
bank of japan
| 2,001 | 8 |
Bank of Japan, 20 September 2001
|
Bank of Japan’s September report of recent economic and financial developments1 Bank of Japan, 20 September 2001 * The Bank’s View * * Adjustments in economic activity are becoming more severe, as the substantial decline in production, starting from a fall in exports, is beginning to have a negative influence on employment and income conditions. With regard to final demand, net exports (real exports minus real imports) continue to decline, reflecting not only a slowdown in overseas economies but also sluggish demand for IT-related goods. Business fixed investment is also decreasing noticeably while exporting conditions continue to deteriorate. Housing investment remains sluggish and public investment is declining. Meanwhile, private consumption remains flat on the whole, although there are some weak indicators. Industrial production continues to decline considerably, reflecting these developments in final demand and strong excessiveness in inventories of electronic parts and materials. Corporate profits and business sentiment are also worsening, particularly in manufacturing. Affected by such developments, household income is weakening gradually. Turning to the outlook, public investment is expected to follow a declining trend. Net exports are likely to continue decreasing for a while amid the deceleration in overseas economies and ongoing inventory adjustments in IT-related goods worldwide. Based on the developments in leading indicators and judged from the successive downward revisions of firms’ investment plans in the information and communications sector, business fixed investment is also expected to follow a downward trend. Private consumption is likely to become weak gradually while employment and income conditions continue to deteriorate. In addition to such developments in final demand, inventory adjustments in goods such as electronic parts and materials will continue for the time being. Industrial production is, therefore, expected to follow a declining trend. As for IT-related goods, although the sluggish final demand of these goods worldwide has been preventing the progress in inventory adjustments, the view that the adjustments are likely to finish by around next spring is prevailing. Therefore, the decline production in this sector is expected to cease some time in the future. However, uncertainty regarding the outlook for the recovery of overseas economies, particularly for the U.S., is growing further while the global economy continues to decelerate concurrently. At home, while the income-generating mechanism from corporate profits to employment and wages is starting to work adversely, government spending is projected to follow a downward trend. Under these circumstances, it may take some time for overall production activity to stop declining. Overall, adjustments in economic activity, starting from the decline in exports, are expected to have a negative influence on domestic demand gradually and this in turn will possibly prolong the ongoing adjustments. Moreover, while the economy continues to be in a fragile state, attention should be paid to the growing risks of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. With regard to prices, import prices are declining mainly reflecting the softening of international commodity prices. Domestic wholesale prices are also declining somewhat faster because the effects from the past high crude oil prices and the prior depreciation of the yen have abated, while prices of electrical machinery and materials continue to decrease. Consumer prices are weakening owing mainly to the decline in prices of imported products and their substitutes. Corporate service prices continue to decrease. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on September 18, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on September 18 as the basis for monetary policy decisions. As for the conditions surrounding price developments, with the ongoing adjustments in economic activity, the balance between supply and demand in the domestic market is likely to exert downward pressure on prices. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to follow a gradual declining trend for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. In the financial market, the overnight call rate declined further and is moving around zero percent as the current-account balances at the Bank of Japan were increased to around 6 trillion yen due to the changes in the guideline for money market operations decided at the Monetary Policy Meeting held on August 14. Interest rates on term instruments are declining further owing to the monetary easing by the Bank. The Japan premium remains negligible. Yields on long-term government bonds are recently moving around 1.35 percent. The yield spreads between private bonds (bank debentures and corporate bonds) and government bonds are mostly unchanged. Stock prices are plunging reflecting the drop in U.S. stocks. In the foreign exchange market, the yen is currently being traded in the range of 116-119 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. However, the lending attitudes of financial institutions perceived by small firms are becoming slightly more cautious. Meanwhile, the fund-raising conditions of firms in the markets for such instruments as corporate bonds and CP continue to be favorable owing to a decline in market interest rates and the more active stance of investors to take credit risks. On the other hand, credit demand in the private sector is declining faster mainly due to a decrease in business fixed investment while firms continue to reduce their debts. In view of this, the year-on-year rate of decline in private banks’ lending is expanding slightly. The growth rate of amount outstanding of corporate bonds issued is about 2 percent on a year-on-year basis. Meanwhile, the amount outstanding of CP issued continues to be at a high level, significantly exceeding that of the previous year due to the favorable environment for issuing CP. The growth rate of money stock (M2 + CDs) in August was slightly higher than that of the previous month due mainly to the inflow from postal savings. Funding costs for firms continue to be at extremely low levels. With respect to the recent financial environment, the effects of monetary easing are permeating through the economy. This can be observed such as in the additional easing in the money market conditions, further decline in short-term interest rates, higher growth in monetary indicators, and the improvement in the fund-raising conditions of firms through the markets. However, against the background of deteriorating corporate earnings and the more cautious lending attitudes of financial institutions, fund-raising conditions of small firms seem to be becoming more severe. Hence, the developments in the behavior of financial institutions and corporate financing need careful monitoring. In addition, it is necessary to carefully monitor the effects of the terrorist attacks in the U.S. on global financial markets and economic activity.
|
bank of japan
| 2,001 | 9 |
Bank of Japan, 15 October 2001
|
Bank of Japan’s October report of recent economic and financial developments1 Bank of Japan, 15 October 2001 * The Bank’s View * * Adjustments in economic activity are becoming more severe, as the substantial decline in production has a negative influence on employment and income conditions. In addition, the terrorist attacks in the U.S. have further heightened uncertainty in Japan’s economy. With regard to final demand, net exports (real exports minus real imports) continue to decline, reflecting not only a slowdown in overseas economies but also sluggish demand for IT-related goods. Business fixed investment is also decreasing noticeably while exporting conditions continue to deteriorate. Housing investment remains sluggish and public investment is declining. Meanwhile, private consumption remains almost flat on the whole, although somewhat weak indicators are increasing recently. Industrial production continues to decline considerably, reflecting these developments in final demand and also strong excessiveness in inventories of electronic parts and materials. The decrease in corporate profits, particularly in manufacturing, has become evident and household income weakens gradually. Moreover, while such perception is becoming widespread that a further deceleration in overseas economies is inevitable due to the terrorist attacks in the U.S., precautions against the business outlook are intensifying among Japanese exporting firms. Turning to the outlook, as for exporting conditions, although inventory adjustments in IT-related goods worldwide are expected to continue for the time being, the prevailing view is that the adjustments will be basically completed by around next spring. However, there exists a risk that the prolonged downturn in U.S. private consumption affected by the terrorist attacks would induce another round of adjustments in the Japanese economy, starting from the decline in exports such as of consumer goods. Under these circumstances for exports, uncertainty toward the economy is growing further. Meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downward trend judged not only from the continuous decline in corporate profits, but also from the successive downward revisions of firms’ investment plans in the IT-related sector. Private consumption is likely to weaken gradually along with the deteriorating employment and income conditions. Thus, the income-generating mechanism from corporate profits to employment and wages is starting to work adversely, and at the same time government spending is projected to follow a downward trend. Consequently, it may take quite a while for overall production activity to stop declining, although the decrease in the production of IT-related goods may eventually come to an end. Overall, adjustments in economic activity, starting from the decline in exports since the beginning of this year, will surely affect domestic demand gradually. At the same time, concern that another substantial decline in exports will exert downward pressure on the economy is growing. Moreover, while the economy continues to be in a fragile state, continuous attention should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. With regard to prices, import prices are declining mainly reflecting the softening of international commodity prices. Domestic wholesale prices are also declining somewhat faster because the effects from high crude oil prices and the depreciation of the yen in the past have dissipated, while prices of electrical machinery and materials continue to decrease. Consumer prices are weakening owing mainly to the decline in prices of imported products and their substitutes. Corporate service prices continue to decrease. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on October 11 and 12, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on October 11 and 12 as the basis for monetary policy decisions. As for the conditions surrounding price developments, with the prolonged adjustments in economic activity, the balance between supply and demand in the domestic market will exert downward pressure on prices gradually. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to follow a gradual declining trend for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. In the financial market, the overnight call rate is moving around zero percent as the Bank of Japan provided ample liquidity to the money market by aiming at maintaining the current account balances held at the Bank at above 6 trillion yen due to the changes in the guideline for money market operations decided at the Monetary Policy Meeting held on September 18. Interest rates on term instruments are basically level on the whole. The Japan premium remains negligible. Yields on long-term government bonds are recently moving around 1.35-1.40 percent. As for the yield spreads between private bonds (bank debentures and corporate bonds) and government bonds, while spreads between bonds with relatively high credit ratings and government bonds remain mostly unchanged, those between bonds with low credit ratings and government bonds seem to be expanding somewhat. Stock prices are recently starting to recover slightly. In the foreign exchange market, the yen is currently being traded in the range of 120-122 yen to the U.S. dollar. With regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue-chip companies, while carefully evaluating the credit risks involved. However, the lending attitudes of financial institutions as perceived by small firms are becoming slightly more cautious. In corporate bonds and CP markets, the fund-raising conditions for firms continue to be generally favorable. On the other hand, credit demand in the private sector is declining faster mainly because firms are decreasing their business fixed investment while continuously reducing their debts. In view of this, private banks’ lending is following a downward trend. The amount outstanding of corporate bonds issued is growing at about 2 percent on a year-on-year basis. Meanwhile, the amount outstanding of CP issued continues to be at a high level, significantly exceeding that of the previous year, due to the favorable environment for issuing CP. The growth rate of money stock (M2 + CDs) in September was higher than that of the previous month. Funding costs for firms continue to be at extremely low levels. Overall, the recent financial environment remains extremely easy: witness the permeation of easiness in money market conditions, stably low interest rates, higher growth in monetary indicators, and the generally favorable conditions in corporate bonds and CP markets. However, against the background of deteriorating corporate earnings and the more cautious lending attitudes of financial institutions, fund-raising conditions of small firms are apparently becoming more severe. Hence, the developments in the behavior of financial institutions and corporate financing need closer monitoring. In addition, it is necessary to carefully monitor the effects of the terrorist attacks in the U.S. and the subsequent developments on global financial markets and economic activity.
|
bank of japan
| 2,001 | 10 |
Remarks by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the JCIF International Finance Seminar, Bank of Japan, 17 October 2001.
|
Yutaka Yamaguchi: The current state of the Japanese economy Remarks by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the JCIF International Finance Seminar, Bank of Japan, 17 October 2001. * * * It is my great honor to be here at this JCIF seminar. Taking this opportunity, I would like to explain the state of Japan's economy and the nature of confronting problems. I would also like to share my thoughts on how to address the current difficult situation and, in particular, how the Bank of Japan could contribute in such a process. 1. Global economic developments I would like to start with the state of the global economy, in particular that of the United States, which forms the basis of my assessment of Japan's economy. Currently, discussion about the prospect for the US economy focuses on two issues. The first is the duration of the ongoing economic adjustment process, which started in the IT-related areas, as well as the pace of the subsequent recovery. The second is the economic impact of the tragic terrorist attacks in September. The impact of the terrorist attacks in the US Regarding the impact of the terrorist attacks, given great multi-faceted uncertainties, it is premature to make informed judgement even if we narrowly focus on the economic areas. It is however safe to say that we have succeeded in dealing with the most immediate challenge after the attacks, which was to avoid market disruption and to maintain the well-functioning of financial markets with respect to liquidity and settlements. Soon after the attacks, central banks including the Bank of Japan, Finance Ministries, and financial regulatory bodies in the world made a swift move while maintaining a close contact among each other. In the area of central banking, central banks in major countries swiftly provided significant amount of liquidity to money markets and declared their determination to secure the well-functioning of financial markets and settlement systems. I think that these central bank actions exactly followed a textbook of crisis management. At the same time, participants of financial markets also made their best efforts to preserve the functioning of markets and to execute transactions smoothly. As such, thanks to the coordinated efforts by the financial authorities, both at home and abroad, and market participants, we successfully avoided disruption in financial markets, which could have extended subsequent negative effects to the economy as a whole. Currently, our focus has shifted to how the attacks and the subsequent developments will affect the global economy especially that of the United States. On this point, as stated by the other financial authorities abroad, we are confident that the attacks will not threaten a basis for economic growth in the medium and long term. At the same time, however, we cannot deny greater uncertainties and a loss of risk appetite in the near term. Looking at the US financial markets, for example, the stock price has almost recovered the level recorded before the terrorist attacks, but still continues nervous movements. In the meantime, credit spreads have remained widened. If such market situation persists, it may affect corporate financing accordingly. In fact, downward revision of earnings involving restructuring is spreading in the corporate sector and there is a risk that capital spending will be depressed further. Economic adjustment starting from the IT sector In trying to assess the impact of the terrorist attacks, we should note that the adjustment in the IT sector had already dragged down the US economic growth before the terrorist attacks. Therefore, more fundamental issue for the prospect of the US economy is when the IT sector adjustment will end and how rapidly the subsequent recovery will proceed. Let me turn the clock back for a moment and review how the prospect for the US economy has changed since the end of the last year. As you may recall, at the time of the FOMC meeting in November last year, risks were weighted towards inflation rather than economic weakness. It was early January that the FED started to lower the federal funds rate. Until this spring, however, prevailing view was that the US economy would see recovery in the second half of this year, with the main issue being the shape of the recovery: i.e. V or U or others. According to the Blue Chip Economic Indicators, an average forecast for the US economic growth in 2001 was 2.6 percent in January, which was lower than four percent-plus in 2000 but not a significant slowdown. The forecast has now markedly declined to 1.1 percent, which is 2.4 percent point lower than the forecast made a year ago. In retrospect, we can point out two pillars supporting the prevailing view until spring that the recovery would take place in the second half of the year. The first pillar was the expectation that the IT-related demand would recover relatively soon. Another was the belief that significant room for expansionary macroeconomic policies, both monetary and fiscal, would be effectively used to prevent the economy from falling into a serious recession. In addition, it was often pointed out as a favorable financial condition that, unlike the post-bubble period in Japan, the US financial system did not have a serious balance sheet problem. Regarding the IT-related demand, as shown in the forecast by the industry, optimistic view on the recovery has receded in terms of its timing as well as its pace. On the policy front, the FED has reduced the federal funds rate from 6.5 percent at the beginning of the year to the current 2.5 percent in early October. It is very unusual to reduce the rate by 4 percent point in just nine months. Tax reduction of totaling $1,350 billion in the next ten years was decided and refunding started in July. Additional fiscal measures are currently being discussed. Such decisive policy measures both in the monetary and fiscal areas notwithstanding, the risks foreseen by the FOMC are still mainly on the downside. In the corporate sector, adjustment in production and stocks has not managed to catch up with a decline in demand especially in the IT-related sectors. It seems difficult to expect an early recovery in fixed investment given a decline in a capacity utilization rate and deterioration in corporate profits. Although consumption has so far shown resiliency, deterioration in employment and income environment, together with adverse wealth effect caused by a fall in stock prices, have heightened uncertainty. All in all, while significant uncertainty remains, more cautious views are warranted regarding the near term prospect of the US economy. Adjustment caused by a significant change in expectation Observation of the significant change in expectation and the consequent pressure for economic adjustment in the US prompts me to share a question with you. When bull expectation collapses, how much can monetary policy alleviate the consequent economic adjustment? Since the mid-90s, the US technology and telecom sectors have led the IT-related demand as they experienced an investment boom with massive new entry to the market. The boom reflected a rise in the expected rate of growth based on the good prospect for the Internet business. It also reflected the unique characteristics of the information industry such as the economy of scale and the network externality. The significant development in the IT areas has also raised the expected rate of growth for the US economy as a whole. However, as economic slowdown becomes more evident, cautious views are apparently growing with respect to the IT-led increase in productivity. In this regard, the new GDP series show that growth rate of output and productivity for the period since 1998 have been significantly lower than the previous estimate. The data revision made it necessary for us to re-evaluate the rise in productivity growth in the second half of the 1990s, which has invited heated discussion under the title of "the rise of the new economy." What I would like to discuss here, however, is not whether and to what extent productivity growth accelerated during the period. Rather, I would like to ask how effectively monetary policy can adjust an extreme swing in expectation and the resultant effects on activity. In this regard, Chairman Greenspan stressed in his congressional testimony in July that monetary and fiscal policy could not eliminate booms and busts in economic activity. He argued that often people were prone to recurring bouts of optimism and pessimism and there was no tool to change such human nature. As a central banker, with the current state of Japan's economy in mind, I read the Chairman's statement with great interest as well as sympathy. 2. The state of Japan's economy I have reviewed the global economic developments focusing on the US economy, which would certainly affect Japan's economy in a significant manner. In the October monthly report, the Bank of Japan disclosed its views on recent economic and financial development that was "adjustments in economic activity are becoming more severe, as the substantial decline in production has a negative influence on employment and income conditions." In April, the Bank published a half-yearly report called "Outlook and Risk Assessment of the Economy and Prices" which showed relatively harsh outlook at that point. But our views today are even more cautious than in April. The "baseline scenario" we had in April was as follows. First of all, in the first half of this fiscal year, the economy was likely to remain sluggish as a result of a decline in exports and production against the background of a global economic slowdown. Second, in the latter half of this fiscal year, progress in the adjustment in the US economy would lessen the downward pressure on Japan's economy. Third, it would nonetheless take time for the economy to exhibit a clear recovery because of persistent pressure on the economy arising from various structural problems. Fourth, it seemed likely that the output gap would continue widening and prices would remain weak throughout this fiscal year. Against this "baseline scenario", we identified four major risks: developments in overseas economies, especially that of the United States, and in the IT-related areas; developments in asset prices such as stock prices; the effects of structural adjustments including disposal of non-performing loans; uncertainties felt by the public with respect to the future. Reviewing the economic developments in the past six months, the negative effects of the first two risks has proved to be evident. On the first risk, overseas economies have slowed down much faster than expected. Consequently, exports and production continue to decline sharply and fixed investment started to decrease against the background of deterioration in corporate profits. Such adjustment in the corporate sector is now affecting household income through softening employment and wages. Consumption has held up relatively well but we are now seeing weaker indicators there. The negative impact of the second risk, i.e. weaker asset prices, is also becoming evident. In particular, a fall in stock prices has not only hurt the business and household sentiment but also weakened the capacity of financial institutions. Under the circumstances, prices continue to decline. As often discussed, we cannot ignore the supply-side factors in explaining the current price decline in Japan. As global competition intensifies, firms are increasingly utilizing low cost imports. Supply-side factors also include rationalization of distribution system and the effects of deregulation. The price development this year, however, appears to be affected equally or even more by weak demand rather than the supply-side factors. 3. Monetary easing measures since March Against the background of such severe economic developments, the Bank adopted in March strong monetary easing measures with firm determination to prevent a continuous price decline and to form a basis for a sustainable growth. In August, the Bank took further easing steps based on the framework adopted in March. Furthermore, after the terrorist attacks in September, the Bank took every necessary measure in monetary operations in order to secure smooth fund settlement and financial market stability. The current monetary easing measures consist of four components. First, the main operating target for monetary operations was changed from the overnight call rate to the outstanding balance of current accounts held at the Bank of Japan. The new target was raised from about four trillion yen to five trillion yen in March and further to six trillion yen in August. As I will discuss a moment later, the Bank did not simply raise the target regardless of demand. The Bank decided the level of the target such as five trillion or six trillion based on a judgement that it was the maximum demand for the current account balance at the time. In September, the Bank swiftly responded to a surge in demand for liquidity following the terrorist attacks. At the subsequent Monetary Policy Meeting, the Bank decided to provide ample liquidity aiming at above six trillion yen, without specifying the limit. In practice, the outstanding balance of the current accounts increased toward the end of September going beyond twelve trillion yen. In October, as money market conditions relaxed after successfully passing the September-end, the half-year book closing, the outstanding balance has declined from its peak but still stays at far above six trillion yen, the level before the terrorist attacks. As such, the call rates stay at effectively zero, reflecting the fact that ample liquidity has been provided to the market far exceeding the required level under the reserve requirement system, about four trillion yen. Second, the Bank committed itself that the new monetary policy framework would continue until the CPI inflation rate will stably stay at or above zero percent. This is the clear commitment on the continuation of monetary easing in the future which is expected to extend easing effect to interest rates with longer terms. This effect is often called "commitment effect" or "duration effect." Third, the Bank decided that, while setting an upper limit, it would increase the outright purchase of long-term government bonds if it deemed necessary for providing liquidity smoothly. Based on this decision, in August, the Bank increased the outright purchase from 400 billion yen per month to 600 billion yen per month in terms of volume and from twice a month to three times a month in terms of frequency. Fourth, the Bank established the so-called Lombard-type lending facility. Using this facility, financial institutions with collateral can always borrow funds from the Bank at the official discount rate under the conditions pre-specified by the Bank. The facility strengthens the monetary easing effect by reducing concerns over available liquidity and stabilizing market rates. The official discount rate, which is applied to the Lombard-type facility, was reduced twice in February and September and is currently at 0.1 percent. 4. The effect of monetary easing The Bank believes that the current easing measures are very strong in nature. In fact, the policy to induce short-term interest rates to effectively zero and to make commitment about future policy based on CPI is an unusual step into uncharted territory. Nonetheless, in view of the worsening economic conditions, we decided to take such an unusual step into uncharted waters as long as some effects were thought to exist at least theoretically. The textbook of economics does not give us any guidance regarding the uncharted territory we have stepped in. At best, the theoretical concept of "liquidity trap" presented by Keynes is close to the current situation of Japan's economy. Still, Keynes did not provide monetary policy prescription to exit "liquidity trap," for he simply argued that monetary policy would be ineffective and fiscal expansion was necessary in such a situation. In conducting monetary policy, therefore, we have endeavored to carefully avoid the risk of being caught by dogmatic views regarding the effects and limits of our entrusted policy tools. As a result, as time passes, we have accumulated more knowledge about the effects and limits of monetary easing measures in the uncharted territory. Based on the experience in the past six months, I would like to provide tentative answers to the questions and hypothesis that I had before the adoption of the current easing measures. The outstanding balance of current accounts The first question was whether a central bank could increase the outstanding balance of current accounts even after short-term rates had reached zero. Given the fact that we experienced a shortfall in bids, or "under-subscription," for open market operations under the previous zero interest rates policy, we were not so certain whether we could increase the current account balance smoothly. On this point, our tentative conclusion, to no surprise, is, "with little room left for a rate decline, the current account balance can be increased only when there is demand for it and cannot be increased without demand." In fact, in May, the Bank frequently experienced a shortfall in bids even at 0.01 percent. To cope with the situation, the Bank decided to change the unit of bidding rates for open market operations from 0.01 percent to 0.001 percent, which enabled the market operation rate to decline further. As a result of this change, we have not experienced a shortfall in bids so far. If such a shortfall happens again for some reasons, however, can we cope with the situation by simply reducing the unit of bidding rates further to 0.0001 percent? This is an interesting theme for economics but I remain skeptical. In any case, however, the Bank can increase the current account balance flexibly as long as demand for liquidity increases. Demand for liquidity could rise for variety of reasons such as concern for smooth operation of settlement system or financial system instability. In sum, the current account balance can be increased when a certain stress gives incentives for financial institutions to hold larger amount of liquidity in the current account from a precautionary motive. In practice, the balance was raised substantially in response to such a precautionary motive in the end of 1999 in preparations for the Y2K problem and in early 2001 during the process of introducing the Real Time Gross Settlement system. We could raise the current account balance above 12 trillion yen in September because of a surge in demand for liquidity caused by the terrorist attacks, the collapse of a large retailer, and a fall in stock prices. The effects of those factors were also amplified in the period approaching the end of September. The rising demand for liquidity also reflected waning incentives of financial institutions to invest their funds in money markets. Investing 10 billion yen overnight earns merely 273 yen, which is not sufficient to cover various transaction costs. When interest rates significantly decline, financial institutions prefer to hold funds with the Bank of Japan even without any interest earnings. Once such movement spreads among financial institutions, funding in money markets becomes more difficult which will force the borrowers to build up the current account balance from a precautionary motive. What is important therefore is not whether we can increase the current account balance under the effectively zero interest rate but what effects such an increase may have. The surge in demand for liquidity after the terrorist attacks is not a favorable development as it reflects rising concern in the financial markets. It may not stimulate economic activities. Having said this, increasing the current account balance in response to rising demand for liquidity is one of significant contribution that a central bank could make because it relieves concern in the markets. Interest rates, foreign exchange rates, and stock prices The second issue was whether a substantial increase in the current account balance would affect the asset prices such as interest rates, foreign exchange rates and stock prices. The effect of monetary policy permeates to the real economy through significant changes in these asset prices. Needless to say, an increase in the current account balance results in a decline in overnight interest rates. Once overnight interest rates reach zero percent, however, we can no longer expect a change in interest rates to promote portfolio rebalancing. Therefore, if an additional supply of current account balance results in a change in the prices of financial assets, it could be achieved either through a) reallocation of money from no-risk-no-return current accounts to higher-return-higher-risk assets, or b) effects on inflation expectation for the future. Such effects through these routes could exist at least theoretically and qualitatively. Let me review the financial market developments since March from the above viewpoints. Not surprisingly, short-term interest rates declined to effectively zero thanks to ample liquidity provision. The Lombard-type facility also helped to stabilize interest rates. Interest rates in the medium-term zones also went below the level experienced under the previous zero interest rate period as the "duration effect" worked strongly. In contrast, long-term rates have risen somewhat compared to the level recorded before the March easing measures. They did not decline even after an increase in the outright purchase of the long-term government bonds in August. Rather, in these days, the JGB market is becoming sensitive to the news implying a possible increase in JGB issuance such as the prospect for the supplementary budget. On the other hand, stock prices once rose soon after the monetary easing in March but have continuously declined after May, reflecting deterioration in economic activities in general and corporate profits in particular. Stock prices did not respond to the monetary policy change in August. Looking at foreign exchange rates, against the background of the more than expected slowdown of the US economy, the yen has not depreciated in comparison to the March level. Corporate financing in capital markets The third issue is the effect of a current account balance increase on the corporate financing environment in capital markets such as the CP and corporate bond markets. Facing the weakening role of banks as financial intermediaries, enhancing the function of capital markets could be an important route of monetary easing. In this regard, the environment for corporate financing has improved after the easing measures in March. In particular, the outstanding balance of CPs has maintained the historical high and the outstanding balance of corporate bonds has been showing a two to three percent growth on a year-on-year basis. Credit spreads of CPs and bonds have been narrowing, indicating more risk appetite of investors. Against this background, corporations are more willing to issue CPs and bonds. It should be noted, however, that those firms capable of issuing CPs and bonds often enjoy relatively high credit ratings and, therefore, such monetary easing effect has not benefited those businesses without access to capital markets. Bank lending The fourth issue is the impact on bank lending. In this regard, the easing measures since March have not apparently changed banks' lending behavior. In practice, the declining trend in bank lending has mildly accelerated. On the other hand, growth in money supply, deposits held by households and corporations, has changed little at an annual rate of around three percent. The decline in bank lending and moderate growth in deposits should result in an increase in some other investment. In the past year, banks increased investment in the government bonds and the current accounts with the Bank of Japan, both assets free of credit risks. Then, why doesn't bank lending increase? I will try to give an answer to this question by focusing on financial institutions' lending behavior against the background of the relatively weak credit demand. At the time of an economic downturn, creditworthiness of corporations generally deteriorates and banks have to widen spreads for lending; otherwise they lose profits. However, with deteriorating corporate profits, banks face a decline in the number of projects with sufficient profits to cover wider spreads. In ordinary financial environment, even with the widening of spreads, monetary easing brings lending rates down by lowering banks' funding costs and, consequently, can eventually promote an increase in lending. In the current situation, banks' funding costs cannot go down further because interest rates are effectively at zero. To make matters worse, banks hold a large amount of non-performing assets and unprofitable loans in their portfolio built up in the past. By holding such unprofitable loans for a long time, it will become more difficult for banks to cover by operating profits the necessary cost to deal with the non-performing assets. Needless to say, banks are making efforts to improve profitability of their lending activities by enhancing the credit quality of unprofitable but viable companies through various supports. Nevertheless, there are a substantial number of non-viable companies. Furthermore, making progress in structural reforms in the economy and industries means, looking from the other side, a reduction of banks' unprofitable loans and non-performing assets. Therefore, from a macro perspective, it is inevitable to a certain degree that banks' lending and balance sheet shrink in the process of structural reforms in the economy and industries. Also, for the purpose of restoring sound financial system, it is a necessary condition that banks put emphasis on profitability. To sum up, the Bank of Japan's abundant liquidity provision has induced desirable impact on the CP and corporate bond markets but the overall effect has not sufficiently transmitted to agents outside the financial system. As a result, we have not seen improvement in economic and price developments. How can we change such a situation? That is the big challenge for Japan's economy and for the conduct of monetary policy. 5. Inflation targeting I would like to offer some of my thoughts on this difficult challenge in the final part of my speech. But before doing that, I would like to touch upon inflation or price level targeting, which has been frequently discussed. Can it be a prescription for the current problems confronting Japan's economy? I will start by explaining what I think inflation targeting exactly is. In my understanding, inflation targeting has been introduced as a mechanism to improve the transparency of monetary policy. But I do not think that inflation targeting is the only way to increase transparency. I believe that the way to increase transparency should be judged based on the unique situation of each country. For example, in the United States, interest rates have been cut substantially in a short period of time this year but the CPI inflation rate changed little during the course staying at around three percent. If inflation targeting were adopted during this period, should there be any difference in the conduct of monetary policy or subsequent developments in the US economy? Or could we expect more transparency regarding monetary policy? I have to say that I am skeptical. Price development is one of very important economic indictors and many central banks including the Bank of Japan carry price stability as a policy objective. Still, I think it difficult to make monetary policy judgment solely based on the development of a single price index. Having said this, I do not deny the benefit of inflation targeting. Main reason the Bank of Japan thinks it inappropriate to adopt inflation targeting is that, in the current economic and financial situation, monetary policy alone cannot prevent a price decline. As I have already discussed, even after exhausting orthodox policy measures, the Bank of Japan has been engaged in monetary operations to significantly increase the current account balance as well as making use of the "duration effect". Despite such dedicated efforts, however, economic activities have not been stimulated and prices have not stopped declining. In that sense, it is indispensable to bring the economy back to an "ordinary" state first. As stated in the Bank's report on price stability published in autumn last year, we think that the adoption of inflation targeting is one of the issues to be examined when the economy goes back to an "ordinary" state. Since this spring, the Bank has held the Workshop on Price Stability for three times in order to promote the mutual understanding of the issues related to prices between academics and the Bank staff. Making use of the outputs of such a workshop, the Bank will continue studying the meaning of price stability and inflation targeting in the context of the conduct of monetary policy. 6. Should the Bank buy any kind of assets? But I think the ongoing discussion on inflation targeting here in Japan is somewhat different from the discussion abroad which places inflation targeting as a tool to increase transparency. I dare say that many argue that "the Bank of Japan should meet an inflation target by purchasing any kind of assets" and claim that such policy is inflation targeting. In practice, those who call for the adoption of inflation targeting argue that we can cause inflation if the Bank purchases all kinds of assets. Should the Bank increase the outright purchase of long-term government bonds aggressively? Should the Bank purchase foreign currency denominated assets or private debts? Discussions over these issues have been widely covered in the minutes of the Monetary Policy Meetings, speeches by my fellow board members, or papers written by the Bank staff. Therefore, I would like to touch upon the following two issues from somewhat different perspective. The first issue is the purpose of adopting such measures. By and large, it might be true that, if a central bank continues purchasing all kinds of assets, almost by definition, inflation can be created in the end. However, our goal is not to cause inflation but to realize a sustainable growth. As can been seen in the past experience of Japan's economy, it is not correct to assume that inflation comes first followed by an economic upturn or an increase in growth rate. What happened in the past was opposite: an economic upturn and a rise in growth rate came first and inflation followed with a lag. Therefore, the focus should be how to stimulate economic activities or, in other words, how to make corporations invest more and households spend more. The second issue is the governance of a central bank in a democratic society. The only explicit constraint for the choice of assets to be purchased by a central bank is a legal one. The Bank of Japan Law stipulates the type of assets to be purchased for the purpose of monetary operations. For example, the Bank can and does purchase government bonds and commercial bills but cannot purchase stocks. Real estates can be purchased for business use but not for the purpose of monetary operations. Then, leaving such legal constraint aside, what kind of assets should a central bank purchase? Central banks in industrial countries usually do not purchase stocks or corporate bonds for the purpose of monetary operations. It seems that there are probably two reasons. The first reason is that stocks and corporate bonds have more credit risk compared to government bonds or the short-term commercial bills with plural good names, meaning they are protected by the credit of a bank and a company. If a central bank increases purchasing of stocks and corporate bonds, it may earn profits but, with a certain probability, may incur a loss. A central bank itself does not directly feel a pain because it can issue liabilities without interest rate cost. But taxpayers eventually incur the loss as transfer from a central bank to the Treasury decreases. This is the very reason a central bank is required to issue banknotes by purchasing safe assets. As a second reason, a central bank needs to decide the specific names of stocks and corporate bonds to be purchased. Given the fact that a central bank does not have any advantage over commercial banks in making judgment on the quality of individual companies, it is a natural conclusion that a central bank's market operations should be as neutral as possible to resource allocations. If a central bank purchases variety of assets aggressively, although it takes a form of monetary policy, it is effectively stepping into the territory of fiscal policy. The reason is that the bank has to incur a loss, which will be transferred to taxpayers in the end, and engages in micro policy regarding resource allocation. Is a central bank allowed to engage in such policy? As a general rule in a democratic state, an independent central bank is entrusted monetary policy function that is to provide liquidity. On the other hand, the use of tax revenue should be decided as fiscal policy by elected representatives in the form of the budget approval process in the Diet. Admittedly, there is no absolute standard for the type of assets held by a central bank and it cannot be free from the state of the economy and financial markets. For instance, fiscal surplus in recent years has prompted the US authorities study the type of assets to be purchased by a central bank assuming that the Treasury securities will diminish in coming years. However, when requiring a central bank to purchase all kinds of assets, especially on a large scale, it should be clearly noted that such purchase effectively has a nature of fiscal policy, which must be decided by voting in the Diet. This point should be recognized first before discussing the type of assets to be purchased in light of the state of the economy. In this connection, there is an argument that "independence on monetary policy granted to a central bank is operational independence and its objective should be decided by the government." In such an argument, an inflation target appears to be assumed as the objective that should be decided by the government. Looking at central banks overseas, however, the objectives of monetary policy are clearly stipulated by law; no central bank decides its objectives by itself. The Bank of Japan is no exception and the Bank of Japan Law sets its objective as "contributing to the sound development of the national economy through the pursuit of price stability." Although many central banks carry price stability as their primary objective of monetary policy, whether such an objective is defined in the form of a specific numerical target depends on each country. The Federal Reserve and the European Central Bank do not employ inflation targeting. On the other hand, in the case of the United Kingdom, inflation target was set at 2.5 percent by the government in 1997 and has been maintained thereafter. Even in this case, however, the Bank of England does not conduct monetary policy mechanically but rather in a flexible manner: It has sometimes lowered the policy interest rate when inflation was above the target and tightened when inflation was below the target. What is important here is that the UK government itself assumes significant responsibility in setting the inflation target. The mandates of the UK Treasury require fiscal policy to ensure sound public finances over the medium term and, at the same time, to support monetary policy over the short term. In the case of Japan, to discuss the issue of whether the government should decide the objective of monetary policy beyond those stipulated in the Bank of Japan Law, we believe that the following points should be examined: the objective itself; consistency between the target and necessary policies to achieve it; cooperation from the government, including fiscal policy, to achieve the target. 7. Conclusion I have covered various issues today. Before finishing my remarks, as a conclusion, I would like to briefly summarize my view on what the government and the Bank of Japan should do in order to overcome the current severe economic situation. The first point I would like to make here is that the government and the Bank of Japan completely share the policy objective: needs to prevent a continuous decline in prices and to bring the economy back to a sustainable growth path as soon as possible. The Bank of Japan commits itself that the current procedures for monetary operations will be maintained until the annual CPI inflation rate restores the level at or above zero percent in a stable manner. Second, the Bank of Japan has already established a framework to provide sufficient liquidity to the economy. Under the framework, the Bank provides far more current account balance than required to achieve zero short rates. Therefore, lack of liquidity should not be a cause for difficulties in financing economic activity as a whole. Although it is rarely pointed out, the current pace of growth in the monetary base is significantly exceeding that in the period after the initiation of the aggressive fiscal policy under Finance Minister Takahashi in 1931. Furthermore, if demand begins to rise for the current account balance going forward, the Bank of Japan can easily accommodate it. I believe, and strongly hope, that the current policy by the Bank of Japan will make a significant contribution from the monetary side to the structural reforms led by the government and to the consequent creation of private demand. Then, what should be done to create demand? This point is discussed in the interim report of the Advanced-Reform Program and the Reform Schedule approved by the Council on Economic and Fiscal Policy. Among them, I myself would like to stress the following points. To nurture competitive and attractive business environment to promote investment. Important steps for that purpose are decisive deregulation measures, revision of tax system, and reform of special government entities. To promote private consumption by alleviating households' concern for future through the overhaul of social security system including the pension scheme. To deal with the associated problems of excessive debts in the business sector and the non-performing loans in the banking system. It is not realistic to expect an instant economic upturn simply by eliminating the non-performing loans. At the same time, however, with a large amount of non-performing loans left, financial intermediaries cannot function properly. Under malfunctioning financial system, it is difficult to expect a sustainable economic growth. Progress has to be made in dealing with the non-performing loans based on the policy stated in the interim report of the Advanced-Reform Program approved by the Council on Economic and Fiscal Policy. Finally, I would like to touch upon the possible role of fiscal policy. Keynes claimed that, when the economy fell into a liquidity trap, monetary policy was no longer effective and fiscal policy was required to play its role. At the same time, however, given the high level of government debts in Japan, it is also true that only limited room is left for fiscal policy. Such limited room calls for decisive new measures. According to the minutes of the Council on Economic and Fiscal Policy, members argue that it is dispensable that the components of fiscal expenditure be reviewed with a view to creating private demand. We hope that analysis will be made on the way spending reallocation can stimulate private demand and that decisive actions will follow accordingly. I would also like to add that, looking at the globally prevailing view about fiscal policy, standard prescription for an economic downturn is to leave room for the built-in stabilizers to work. How should we think about this point? In order to form a basis for a stable and sustainable growth of Japan's economy, the Bank of Japan is determined to continue making every effort as a central bank including those efforts to deal with the non-performing problems. Thank you very much for your attention.
|
bank of japan
| 2,001 | 10 |
Bank of Japan, 19 November 2001
|
Bank of Japan’s November report of recent economic and financial developments1 Bank of Japan, 19 November 2001 * The Bank’s View * * Adjustments in economic activity are becoming more severe, as the substantial decline in production is beginning to have an adverse effect on private consumption through decreases in employment and income. With regard to final demand, net exports (real exports minus real imports) continue to decline, reflecting not only a slowdown in overseas economies but also sluggish demand for IT-related goods. Business fixed investment also continues to decrease while the deterioration in exporting conditions persists. Housing investment remains sluggish and public investment is on a downward trend. Moreover, private consumption seems to be weakening gradually. Industrial production continues to decline considerably, reflecting these developments in final demand and also strong excessiveness in inventories of electronic parts and materials. Corporate profits are deteriorating, particularly in manufacturing, and the weakness in household income is becoming evident amid the decrease in the hours worked and the rise in unemployment. Turning to the outlook, as for exporting conditions, the prevailing view is that inventory adjustments in IT-related goods worldwide are expected to be mostly completed by around next spring. However, while the world economy has decelerated further since the terrorist attacks in the U.S., final demand of IT-related goods is likely to be stagnant for the time being. Moreover, if the downturn in U.S. private consumption persists, it may induce another round of adjustments in the Japanese economy, starting from the decline in exports such as of consumer goods. Meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downward trend, particularly in the IT-related sector, amid the decline in corporate profits. Private consumption will also continue to be weak along with deteriorating employment and income conditions and the more cautious consumer sentiment. Government spending is projected to follow a downtrend at the time when the substantial decline in exports and production is negatively affecting private consumption through the decrease in household income. Consequently, it may take quite a while for overall production activity to stop declining, although the decrease in the production of IT-related goods may eventually come to an end. Overall, adjustments in economic activity, starting from the decline in exports since the beginning of this year, will surely dampen domestic demand further. At the same time, concern that another substantial decline in exports will exert downward pressure on the economy is growing. Moreover, while the economy continues to be in a fragile state, continuous attention should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. With regard to prices, import prices continue to decline mainly reflecting the softening of international commodity prices. Domestic wholesale prices are also declining faster from the effects of the decline in crude oil prices in addition to the continuous decreases in prices of electrical machinery and materials. Consumer prices are weakening owing mainly to the decline in prices of imported products and their substitutes. Corporate service prices continue to decrease. As for the conditions surrounding price developments, international commodity prices such as of crude oil and nonferrous metals remain weak. Also, with the prolonged adjustments in economic activity, the balance between supply and demand in the domestic market will increasingly exert downward pressure on prices. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on November 15 and 16, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on November 15 and 16 as the basis for monetary policy decisions. and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to follow a gradual declining trend for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. In the financial market, the overnight call rate is moving around zero percent as the Bank of Japan provided ample liquidity to the money market by aiming at maintaining the current account balances held at the Bank at above 6 trillion yen. Interest rates on term instruments basically continue to be level. The Japan premium remains negligible. Yields on long-term government bonds dipped and are recently moving around 1.35 percent. As for the yield spreads between private bonds (bank debentures and corporate bonds) and government bonds, while spreads between bonds with relatively high credit ratings and government bonds remain mostly unchanged, those between bonds with low credit ratings and government bonds continue to expand slightly. Stock prices continued to be weak, but are recently rebounding. In the foreign exchange market, the yen is currently being traded in the range of 121 -123 yen to the U.S. dollar. With regard to corporate finance, private banks appear to be more cautious in extending loans to firms with higher credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by small firms are becoming more cautious. In corporate bonds and CP markets, the fund-raising conditions for firms continue to be generally favorable, although the issuing environment for firms with low credit ratings is deteriorating slightly. Credit demand in the private sector is declining faster mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline at about 2 percent on a yearon-year basis. As for the amount outstanding of corporate bonds issued, the year-on-year growth rate is slowing due to the decrease in the issuance of corporate bonds with low credit ratings. Meanwhile, the amount outstanding of CP issued continues to be at a high level, significantly exceeding that of the previous year, due to the generally favorable environment for issuing CP. The growth rate of money stock (M2 + CDs) in October remained relatively high while the rate declined slightly from the previous month. Funding costs for firms continue to be at extremely low levels on the whole. Overall, the recent financial environment remains extremely easy in terms of money market conditions and interest rate levels. However, as private banks and investors are becoming slightly cautious in taking credit risks, the fund-raising conditions of firms with higher credit risks and small firms are apparently becoming severe. Hence, the developments in the behavior of financial institutions and corporate financing need closer monitoring.
|
bank of japan
| 2,001 | 11 |
Speech by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Economic Seminar of the Japan Research Institute, Tokyo, 26 November 2001.
|
Yutaka Yamaguchi: The economic situation and monetary policy in Japan1 Speech by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Economic Seminar of the Japan Research Institute, Tokyo, 26 November 2001. * * * I am honored to have been given the opportunity to talk before this distinguished audience. My topic today is the economic situation and monetary policy in Japan. There are many issues I would like to talk about related to this topic, but as my time is limited, I would like to focus on the current issue in the economy, the continuous decline in prices. The phenomenon had long been forgotten, as it last emerged just after the war, but it has caught the attention of many and has been actively discussed in recent years. I would therefore like to share my thoughts with you on policy actions that might be taken to stop the decline in prices, which naturally include monetary policy. I. The Economy: The Present Situation and the Outlook I would first like to explain the Bank’s assessment of the current economic situation based on the Bank’s semi-annual report, Outlook and Risk Assessment of the Economy and Prices, “the outlook report” for short, published on October 29. The Bank started publishing outlook reports last year, and the report is released twice a year in April and October. The aim of publication is to promote public understanding by enhancing the transparency of the conduct of monetary policy by comprehensive disclosure of the views of the Bank’s Policy Board members on the outlook for the economy. The October 2001 report covered fiscal years 2001 and 2002, the period from April 2001 through March 2003, and assessed the most likely scenario, or a baseline scenario, for economic and price developments during the period, and the upside and downside risk factors involved. There is only time today to give a brief summary of the conclusions of the outlook report. It concluded that, as a baseline scenario, Japan’s economy would go through a severe adjustment in fiscal years 2001 and 2002. At the same time, however, the report asserted that the economy would stop deteriorating in fiscal 2002 if overseas economies started to recover in fiscal 2002. Even in that case, more time will be needed before clear signs of recovery can be confirmed and prices are expected to continue declining gradually in fiscal years 2001 and 2002. This outlook clearly involves a high degree of uncertainty and there exist both upside and downside risks to the baseline scenario. Among the risk factors that need to be watched closely are 1) developments in overseas economies, especially those in the U.S., and in IT-related industries; 2) developments in the financial markets at home and abroad, especially stock prices; and 3) the impact of structural reform of the economy, fiscal consolidation, and the NPL disposal. II. Problems of the Price Decline If the consumer price index falls, albeit modestly, in fiscal years 2001 and 2002, this will be a post-war record of a continuous decline for three years. To consider the relation between prices and monetary policy, we need to examine the factors behind the price decline. The projected continuous decline in prices is caused by two factors. The first is the downward pressures on prices brought about by weak demand. Given the baseline scenario that I mentioned earlier, the output gap in the economy will be likely to widen into fiscal 2002. The second is the downward pressures from the supply side, for example, imports of low-priced goods, deregulation, and streamlining of distribution channels. These two kinds of pressures are both important as factors behind the price decline. But in relation to the short-term economic outlook, it is more of a concern that the downward pressures generated by weak demand will gradually intensify. English translation prepared by the Bank’s staff based on the Japanese original. This analysis of the price decline does not mean that the Bank is worried only about the pressures due to weak demand and not about those from the supply side. The Bank is well aware of the necessity of stopping the continuous price decline in view of the severe economic situation, and is taking strong monetary easing measures unprecedented in the history of central banking. Then, what are the problems with the current continuous price decline? A loss of price stability, regardless of whether this is due to deflation or inflation, could cause the following problems. Firstly, when prices are not stable, the signaling function of prices does not work properly and efficient resource allocation is hampered; and secondly, uncertainty heightens which makes it difficult for economic agents to take decisions for the future. In other words, fluctuations in prices interfere with the most important function of a market mechanism: resource allocation. We should examine whether the ongoing gradual price decline could cause these problems. However, the Bank’s recent concern is more about the danger that a vicious circle might be generated by the price decline: a deflationary spiral emerges when a price decline leads to a recession and this in turn triggers a further fall in prices. A deflationary spiral can develop for various reasons but the background common to all is that various contracts for economic transactions are mostly agreed at a fixed nominal value which cannot be adjusted flexibly for price declines. I will explain this focusing on three economic variables: interest rates, debts, and wages. The first point concerns interest rates, the so-called “zero interest rate constraint.” Currently, not all the market interest rates are zero, but short-term rates, which the Bank can control through its policy, are virtually zero and cannot decline further. Once nominal interest rates decline to zero, there will be no room left for monetary policy to affect aggregate demand or the level of prices by lowering nominal interest rates and, consequently, real interest rates. The second point concerns debts. Debts held by firms and households are usually fixed at a nominal value, and cannot be adjusted for price declines. Hence, repayment of debts becomes more difficult as prices decline and corporate sales and/or household income decrease. To make matters worse, Japan now faces the associated problems of excessive debts in the corporate sector and the large amount of the NPLs in the banking sector. The gravity of these debt problems aggravated by the heavier debt burden due to price declines is hampering the recovery of our economy. In the past, there were some cases where credit contracted substantially when the economy was in a deflationary spiral, and this was due to a vicious circle in which an increase in debt burden interacted with a price decline. The third point concerns wages. Nominal wages have a downward rigidity. In general, corporate profits decrease in cases where nominal wages remain rigid while sales decrease due to a price decline. In Japan, nominal wages have been adjusted with a certain amount of flexibility and careful analysis is needed to examine whether or not wage rigidity is exerting downward pressures on corporate profits and heightening the risk of falling into a deflationary spiral. From what I have said it is clear that developments in nominal income, including corporate profits and employee’s income, are important yardsticks to judge whether or not the economy will fall into a deflationary spiral. For example, in 2000, despite some negative inflation rates, the profits of firms marked an increase of 34 percent, and that of employee’s income was one percent. Therefore, the probability of the economy falling into a deflationary spiral was low. After the turn of the year, the situation changed and began to give cause for concern, as corporate profits started to decrease and the year-on-year increase in wages has remained negative since summer 2001. Thus, although the pace of price decline was almost the same in calendar years 2000 and 2001, the implications are different this year. Is there a high probability of Japan’s economy falling into a deflationary spiral in the future? In the outlook report in October, the Policy Board members’ assessment was that, for fiscal 2002, economic growth will remain negative and prices will continue to decline. However, this assessment did not include the emergence of a deflationary spiral and we assumed that the deterioration of the economy would stop in the second half of fiscal 2002 if overseas economies started to recover. That was our baseline scenario and the associated downside risk factors should not be forgotten. If you recall my earlier explanation of deflationary spirals, I do have a deep concern about developments in corporate profits and financial system problems in a situation where nominal short-term interest rates reach zero. In this sense, we cannot totally rule out the possibility that the economy will fall into a deflationary spiral, and the situation warrants vigilant monitoring. III. Effects and Limits of Current Monetary Easing Measures A. Outline of Current Monetary Easing Measures The Bank of Japan has taken strong monetary easing measures which no other central bank has ever adopted before, against the background of the Bank’s severe economic outlook. The framework of the current monetary easing measures can be summarized in the following four points. First, the main target of market operations was changed from the overnight call rate to the amount outstanding of the current accounts at the Bank. In addition, the new target was raised from four trillion yen to five trillion yen in March, to six trillion yen in August. Since September, in response to a surge in liquidity demand triggered by the terrorist attacks in the U.S., the Bank has provided the market with ample liquidity “aiming at above six trillion yen” without setting an upper limit. As a result, the amount outstanding of the current accounts at the Bank averaged 9.2 trillion yen for the September and 8.8 trillion yen for the October reserve maintenance period. Second, the Bank has committed itself to continuing the above mentioned framework of monetary operations until the rate of increase of the CPI rises to and remains stably at or above zero percent. This commitment aims to drive down interest rates of longer maturity by clearly stating that the Bank will continue the current monetary easing measures in the future. This monetary easing effect is often called “the commitment effect” or “the duration effect.” Third, the Bank decided that it could increase its outright purchase of long-term Japanese Government Bonds (JGBs) when the Bank found it necessary to smoothly provide ample liquidity to the market, on the condition that the amount outstanding of long-term JGB holdings be within the amount outstanding of banknotes issued. In accordance with this framework, in August the Bank increased the amount and frequency of JGB outright purchase from twice a month amounting to 400 billion yen to three times a month amounting to 600 billion yen. Fourth, the Bank has established the so-called Lombard-type lending facility. By utilizing this scheme, financial institutions, under certain conditions, are now able to borrow funds from the Bank at the official discount rate as long as they have eligible collateral. This measure has strengthened the monetary easing effect in the sense that financial institutions have been ensured access to ample liquidity and that money market interest rates have been stabilized. The official discount rate, which is applied to this Lombard-type lending facility, has been lowered twice in 2001, in February and in September, and is currently at 0.1 percent. B. The Strong Monetary Easing Effects in Financial Markets Current monetary policy has achieved extremely easy conditions in the financial markets. In the money markets, short-term interest rates, including longer ones on term instruments, have declined to a lower level than in the zero-interest-rate period of 1999-2000. Since the unit for transactions of the overnight call rate was changed from 0.01 percent to 0.001 percent in early September, the rate has declined to as low as 0.001 percent to 0.004 percent, a microscopic world indeed. In the bond markets, the interest rates on JGBs continued to move at levels close to the historical low although they did not decline below the level marked in March this year. Furthermore, medium-term interest rates, such as that of JGBs with five years remaining to maturity, are moving at 0.4-0.5 percent, which is lower than the level in March. In the CP and corporate bond markets, credit spreads have narrowed with the decline in short- to medium-term interest rates and investors have become more willing to take risks. Therefore, the demand for issuance of new securities in firms with relatively high credit ratings has increased and the amount outstanding of issuance of CP and corporate bonds has maintained a high level. In Japan, the share of corporate financing through the capital markets is still relatively small. However, it has become important as a channel by which the monetary easing measures have permeated through the economy because the credit intermediation function of banks is weakened. By contrast, the effect of the current policy on asset prices such as stock prices and foreign exchange rates has been relatively limited. Although stock prices rose somewhat after the announcement of the monetary easing measures in March this year, they declined steadily from May onward reflecting a deterioration in business conditions and successive downward revisions of the outlook for corporate profits. Stock prices have not shown a positive response to the increase in the outstanding balance of current accounts at the Bank since August. Foreign exchange rate of the yen also did not depreciate compared to levels in March, as the U.S. economy showed a faster-than-expected slowdown. C. Easing Effects on the Corporate and the Household Sectors The crucial point in assessing current monetary policy is whether the ample provision of liquidity by the Bank and consequent easing in the financial markets are affecting the economic entities outside the financial markets such as the corporate and household sectors. Regrettably, the easing effects have not fully permeated to the economy. The monetary base, the sum of banknotes and current accounts at the Bank, is increasing by 14 percent on a year-on-year basis. However, the growth rate of money supply is only 3.6 percent on the same basis, somewhat higher than at the beginning of this year, mainly due to a shift of funds from maturing postal savings. More serious is the fact that bank lending is contracting at 1.9 percent year-on-year and the pace of this decline has been accelerating somewhat. GDP and price conditions also have not shown any improvement. Business capital spending and housing construction do not seem to be stimulated by the historically low interest rates. IV. The Monetary Policy and Prices A. Is Deflation a Monetary Phenomenon? I will return to the reasons behind the weak response of the economy to the strong monetary easing policy. Instead, here, I would like to pose a question: Is it fair to say that the insufficient monetary easing is causing continuous price declines and stagnant economic growth? For example, we often hear the argument that “both inflation and deflation are monetary phenomena and price declines can be stopped only by increasing money supply,” a simplified form of the quantitative theory of money. Is this kind of argument correct? A part of the above argument that “both inflation and deflation are monetary phenomena” does hold as a long-term economic relationship when the amount of money changes significantly. In fact, the policy objective of many central banks including the Bank, that is to attain “price stability,” is based on the understanding of this relationship. However, this relationship holds only over a sufficiently long period of time and can be interpreted as a sort of definitional or identical relationship. Therefore, at a practical level, it cannot be applied to the conduct of monetary policy. The first problem with the argument is that, as I mentioned above, it does not make a clear distinction between the relationship in the long term and in the short term. For example, if we look at the relation between money and prices, a close relationship emerges when the amount of money increases or decreases on an extremely large scale and has a dominant impact: The hyper-inflation experienced in Germany after World War I is one example. When the amount of money increases or decreases to a certain extent but not on an extremely large scale, a loose relationship is observed only if we look in the sufficiently long term. However, over a period of one year to a couple of years, unless the amount of money increases or decreases on an extremely large scale as I have just explained, the relationship between money and prices is not stable. The second problem is that at present the underlying mechanism in the argument will not work as theoretically assumed: a central bank’s efforts to expand liquidity, the current account balance at the Bank or the monetary base, will increase money supply in a broader sense, that is liquidity held by the corporate and household sectors, and, consequently, will push up prices and the level of business activity. Needless to say, monetary policy cannot actually resort to dropping banknotes from the sky-this kind of policy is called “helicopter money” in economics textbooks. If such a policy is implemented, people will rush to purchase goods and services after they receive the cash, and prices can be expected to rise immediately. However, in actual monetary policy, money in a broad sense is provided through a series of “transactions”: a central bank purchases financial assets such as government bonds from financial institutions, in turn creating money in a narrow sense, that is the current account balance at the central bank, and then financial institutions make lending and securities investment. However, what is happening currently in Japan’s economy is that, although funds are abundant in the financial markets, they do not permeate outside those markets, that is, to the corporate and household sectors and money supply has not increased sufficiently. This has been both the cause and result of the stagnant growth in expenditures and the decline in prices. Given that the mechanism to increase money is not working properly, I think it is not following logical steps or is ignoring reality to argue that increasing money could solve all the problems. As I mentioned, while various factors affect the movement of prices, the most fundamental factor determining price developments is the balance between aggregate demand and supply for goods and services. As the supply capacity changes only slowly, it is the movement of demand that mainly determines the short-term supply-demand balance. In fact, in the time-series data on the Japanese economy, prices begin to rise only after the economic growth rate recovers and the output gap narrows. Statistical analysis of the dynamic correlation between the economic growth rate and the rate of increase in prices shows that the correlation coefficient is the highest when the economic growth is one to two years ahead of a consumer price increase. On the other hand, the rate of increase in prices does not seem to lead the economic growth rate. In the above discussion, it is clear that in order to halt the continuous decline of prices, it is most important to promote a sustainable, not temporary, growth in aggregate demand. The implementation of monetary policy by the Bank so far has been aimed at halting the decline in prices by providing ample liquidity to the markets to lower interest rates thereby stimulating aggregate demand. The current difficulty in the conduct of monetary policy is that it cannot stimulate aggregate demand even with all the measures employed. We need to face up to this fact. B. Inflation Targeting Currently in Japan, we often hear the argument calling for the adoption of inflation targeting. However, this argument is peculiar in the sense that it focuses on first raising prices using every measure. I believe we should devise ways to stimulate economic activity first because prices in nature are the result of economic activity. With this understanding of the environments surrounding price developments and monetary policy, the Bank is currently reluctant to accept the recent argument for inflation targeting. More fundamentally, inflation targeting should be regarded not as a short-term policy tool but as a framework for improving the transparency of the conduct of monetary policy. As a possible tool for improving the transparency, the Bank considers that inflation targeting is worth examining as one of the options in the future. However, currently, as the short-term interest rate has already reached zero percent, the Bank has very few options for further monetary easing. In addition, the effect of the current monetary easing policy is limited because of the NPL problem. In such circumstances, it is unlikely that the adoption of a too ambitious a target will improve confidence in monetary policy. At this point, I would expect a counter-argument that however limited the room available for additional monetary easing, adoption of an inflation target will of itself directly affect the “expectation” of economic agents and will produce inflation expectations. I would admit that “expectation” is one of the important channels by which the effects of monetary policy can permeate through the economy. However, controlling “expectation” solely by announcing a policy is unlikely to succeed. I think the Bank can affect people’s expectation only if the announcement is accompanied by effective policy measures. The Bank is in fact already strongly affecting people’s expectation by promising to continue the current monetary easing framework until the year-on-year increase in CPI rises and remains stably above zero percent. In fact, as I mentioned, the interest rate on the JGB with five years remaining to maturity is currently at 0.4-0.5 percent. This interest rate level clearly indicates that market participants are expecting the current historically low interest rates will continue for an extended period of time. In spite of this market development, the actual and expected inflation rates do not show any signs of upward movement. I understand that some argue that the Bank can cause inflation by purchasing any kind of assets. I will touch upon this issue later. As an example of successful introduction of inflation targeting, some cite the price level targeting adopted in Sweden in the first half of the 1930s. We at the Bank are also interested in the Swedish experience and have studied it. What we found was a great similarity between the Swedish policy and the Bank’s current policy framework. The most important similarity is that, while both the Swedish authorities and the Bank of Japan declared their firm determination to prevent price declines, neither adopted a numerical target. In the Swedish comprehensive program for price stability, it was stated that “Monetary policy should not be tied systematically to a particular index figure. A formal and simple rule for monetary policy did not appear feasible.” More specifically, the Riksbank, the Swedish central bank, stressed the importance of carefully monitoring various price indices while taking into account other economic variables such as inventory figures and productivity data. It stated that implementation of the policy should not depend on a specific price index such as the CPI. Therefore, a clear distinction should be made between the Swedish policy and the idea of overcoming deflation by adopting a rigid price targeting scheme using a specific price index. When comparing Sweden in the 1930s and Japan’s current situation, we should be careful because there are critical differences between the two regarding economic and financial environments. The significant differences are the following: (1) in the Swedish economy at the time, the level of nominal interest rates was relatively high so that there was sufficient room for interest rate cuts, (2) the Swedish financial system did not face a serious problem, (3) as a relatively small open economy, the depreciation of the currency in the foreign exchange market contributed to the prevention of price falls. In sum, there is a difficulty in applying the specific measures used in Sweden in the 1930s to the current situation in Japan. V. Why Japan’s Economy is not able to Exit from the Deflation Now, I would like to raise a question: What kind of economic policies are required to exit from the ongoing deflation, and why is Japan’s economy unable to do so? As I have already mentioned, three factors in particular stand out as important: the constraints imposed by zero nominal interest rates, the NPL problem, and the weakening sentiment. A. Constraints of Zero Nominal Interest Rates First let us consider the constraints imposed by zero nominal interest rates. Short-term interest rates are already virtually zero, five-year interest rates have also declined very close to zero--the term of debt financing by Japanese firms is in many cases five years or less. A standard mechanism of monetary easing is: (1) inducing a decline in short-term interest rates by providing ample liquidity to the money market, (2) thereby influencing financial variables such as the medium- to long-term interest rates, stock prices, and foreign exchange rates, (3) consequently, expecting such changes in financial variables will affect the behavior of financial institutions, firms and households. Now that nominal interest rates have reached the point where no further decline is possible, monetary easing has also reached the point where little additional effect can be expected. Moreover, real interest rates could rise if a price decline continues in this economic setting. By the way, facing the limits of further monetary easing with the zero interest rate constraints, what kind of meaning does the massive amount of liquidity provision to the financial markets have? It is premature to give a definite answer to this question. The current policy adopted by the Bank is unique and has not been tried in other countries. The effects of such policy, especially in a situation where serious problems exist in the financial sector, should be assessed empirically but we have not accumulated sufficient experience and data to draw concrete conclusions. At the same time, this does not mean that we have no clues. One example is the surge in liquidity demand in the financial markets and the associated increase in the outstanding balance of the current accounts at the Bank after the terrorist attacks in the US. The surge in liquidity demand itself took place not only in the U.S. but also in other countries and major central banks including the Bank provided a huge amount of liquidity in order to secure stability in the financial markets. While the Federal Reserve and the European Central Bank returned to normality in terms of liquidity provision within a week, in Japan, by contrast, liquidity demand has continued to be high. It appears that there are two factors at work here. The first factor is waning incentive to invest or lend funds in the markets with the decline in the uncollateralized overnight call rate to 0.001 percent. Thus, financial institutions that hold excess funds would prefer to deposit them in their current accounts at the Bank even if it does not bear interest. Once such behavior spreads to other market participants, borrowers feel worried that they might not be able to borrow funds in the markets, and subsequently, an increasing number of financial institutions will start to defensively accumulate funds in their current accounts at the Bank. The second factor is the fact that the cost of yen funding through yen-U.S. dollar swaps has become negative for foreign banks. Foreign banks capable of funding yen at negative interest rates can earn an interest margin without worrying about credit risk by depositing the funds in their current accounts at the Bank. In this case, the negative yen funding rate works as a “sweetener” giving an incentive to foreign banks providing Japanese banks with dollar funds. These two factors, a disincentive to invest in the money markets and negative yen funding costs, give us an interesting insight into the meaning of current market operations in which ample liquidity is provided with the current account balance as an operating target. That is to say, the disincentive to lend funds in the market was largely caused by the ample liquidity provision by the Bank. At the same time, the major reason why the Bank can provide ample liquidity without facing under-subscription in open market operations is that there is demand from foreign banks for excess reserves, and this itself is not expected to lead to a revitalization of economic activity. Of course, we still cannot deny the possibility that the demand for excess reserves will lead to a change in the portfolio of economic entities and ultimately stimulate economic activity in the long run. The Bank is now closely examining this possibility while continuing the current massive provision of liquidity. B. The NPL Problem The second reason why Japan’s economy is unable to exit from the ongoing deflation is the NPL problem. It is not the case that once the NPLs are disposed of, the deflation will end, and the economy will recover right away. I think that it is now widely understood that the disposal of the NPLs will rather be associated with short-term pain. It is also true, however, that once the economy recovers, the NPLs will decrease. Sustainable economic growth cannot be expected in a situation where a large amount of the NPLs remain and credit intermediation does not function fully, for the following reasons. First of all, in such a case, financial institutions are facing the risk of their capital being impaired by external factors such as a decline in stock prices and emergence of new NPLs following a downturn in the economy. Capital is the last line of defense against unexpected risks and losses. It is difficult for the management of the financial institutions to take risks when they are concerned about their capital position. From a macroeconomic point of view, sustainable economic growth may only be achieved with continuously favorable external conditions which will require delicate policy management. Secondly, until the NPL disposal is completed, it is difficult to adjust lending rates to levels adequately reflecting risk and return. Currently Japanese banks are competing with one another to lend to blue-chip companies and credit spreads have become extremely narrow. On the other hand, the Japanese banks are cautious about extending new loans to firms with low credit ratings and the banks have not increased credit spreads adequately on their lending to existing less creditworthy borrowers. In the current situation, if the banks drastically increase credit spreads, their borrowers are likely to go bankrupt and the banks will have to pay the price in the end. However, from the long-term perspective, unless the lending rates are set in an economically rational manner, the lending attitude of financial institutions cannot be aggressive and consequently it is hard to achieve a sustainable economic growth. C. Weakening Sentiment The third reason for the deflationary trend in Japan is weakening sentiment. Looking at households, their expenditure has been restrained reflecting their anxieties about the future including the viability of social security systems and employment concerns. In the corporate sector, investment appetite has receded partly because the economic stagnation itself has lowered the expected rate of growth. I understand that listing weakening sentiment as part of the background of deflation sounds like talking about the two sides of the same coin. But I think that the current weak demand cannot be fully explained by the zero interest rate constraint and the NPL problem and there remain some kind of residual factors which should be explained as weakening sentiment. Such a decline in demand caused by weakening sentiment can hardly be solved unless people become confident that the economy has returned to a clear recovery path. At the same time, considering the state of typical households and firms, I think it is difficult to deny that, together with the stagnated economy, various institutional barriers are hampering their challenging spirit. For example, in the corporate sector, public corporations are depriving private institutions of their business, and reviewing legal, taxation, and regulation systems to cope with the era of globalization is lagging behind. As for the household sector, consumption seems to be stagnating due to uncertainty about the future caused by the problems related to the social security system such as pension benefits and the health care system. VI. Conduct of Monetary Policy I have talked about various issues, focusing on the decline in prices. Finally, based on above discussion, I would like to talk about what the Bank of Japan can do, and what I expect from the government, which is responsible for economic policy other than monetary policy. A. The Role that the Bank of Japan Should Play First, the role the Bank of Japan should play. I would like to reemphasize that the Bank and the government share the same goal of preventing a further decline in prices and of bringing the economy back to a sustainable growth path as soon as possible. Based on the preceding discussion, I would like to express my thinking on what role the Bank should play. First of all, although it may sound like something which goes without saying, the current monetary easing policy should be tenaciously continued. The effects of the current strong monetary easy measures have not fully permeated to the real economy. But once there is a positive movement in accordance with the progress of structural reforms such as the NPL disposal and improvement of productivity in the economy, it can be expected that the monetary easing policy will support such movement and have powerful effects. It is extremely important to be tenacious in maintaining the current monetary easing conditions, so that they could support any positive movement in the economy when it appears. The second role is the provision of liquidity in a swift and timely manner. Should there be uncertainty or concern in the financial markets for one reason or another, liquidity has to be provided in a swift and timely manner, so that such uncertainty or concern will not disrupt the markets. It is one of the central bank’s most important roles to maintain the stability of the financial markets and the financial system through liquidity provision. Maintaining that stability is also important in making the effect of the monetary easing continuously permeate through the economy. Now, what could monetary policy do, if economic conditions deteriorate further and the risk of a deflationary spiral is heightened as a result? The Bank is aware of the argument that the Bank should not only increase the outright purchase of long-term JGBs but also purchase any assets such as foreign-currency denominated assets, stocks and even the NPLs to prevent deflation. As I have already expressed my thoughts on this issue on a different occasion, I will reiterate the conclusion in the following three points. First, given that just increasing the amount of liquidity gives only limited stimulus to the economy, the major benefit of purchasing such assets is mainly to influence their prices. If, however, one expects to influence these assets through a change in the supply-demand balance and thereby produce the effect of monetary easing, the purchase must be done on a large scale. Second, taxpayers may ultimately have to pay the price of possible loss resulting from this large-scale purchase and this will also affect the microeconomic resource allocation. And third, such a policy implies that a central bank would be conducting an activity which is close to entering the domain of fiscal policy. The basic rule in a democratic society is that fiscal policy using taxpayer’s money needs to be approved as part of a budget by a parliament composed of members elected by the people. I am not worrying about inflation when deflation is a concern, but claiming that such a policy of purchasing various assets should be discussed publicly in the context of governance in a democratic society. B. The Role that the Government Should Play As I mentioned earlier, the government and the Bank share a common goal of preventing further price declines and bringing the economy back to the path of sustainable growth as soon as possible. The role that the government should play in this is also quite large. The first role is to foster business conditions that are competitive and attractive in order to induce business fixed investment. To do this, it is important to deregulate, to review the taxation system drastically, and to ensure that reform of public corporations progresses steadily. Another important challenge is to relieve the anxiety of households about the future by reviewing the social security system, including pension benefits. Furthermore, I would like to reemphasize the importance of ensuring that the NPL disposal proceeds as expeditiously and smoothly as possible. The following point needs to be borne in mind. Progress in the economic and fiscal structural reform and NPL disposal is likely to lead to a decline in demand and to exert downward pressure on price levels in the short term. On the other hand, if a positive outcome of the structural reform bears fruit which leads to an increase in the productivity of the economy as a whole, it will have a significant meaning to prevent further price declines through a revitalization of economic activity. When we consider economic issues, we should always check from the viewpoint of aggregate demand and productivity. Of course, aggregate demand and the productivity are not independent of each other. Even if the growth rate recovers as a result of inefficient public investment, productivity could fall and consumption expenditure could be reduced due to concern about the future tax burden. On the other hand, if the growth rate declines substantially, firms reduce business fixed investment and the R&D expenditures necessary for improving productivity in the future. Whether to put emphasis on aggregate demand or on productivity needs to be judged objectively based on the economic conditions. No matter where the emphasis is put, the economic consequences need to be objectively recognized and shared among the people. Given that the price decline will inevitably continue to some extent while the structural reform proceeds, policy initiatives will be focused on preventing the decline in prices leading to a deflationary spiral. Monetary policy, it goes without saying, must play an important role in these efforts. On the other hand, there is a limit to what can be achieved by monetary policy alone. Improvement of the social safety net through measures to secure employment is necessary to prevent a sharp decline in consumption. It is essential that the stability of the financial system as a whole be secured when the NPL disposal is pushed forward. Finally, one of the important issues is the role that fiscal policy should play. John Maynard Keynes asserted that in a liquidity trap, monetary policy loses effectiveness and fiscal policy is necessary. However, the scope for mobilizing fiscal policy is limited in Japan given the high level of public debt. I would like to expect that, given the capacity for additional fiscal outlays is limited, the government will review the components of expenditures drastically. It is widely accepted internationally that the function of built-in stabilizer should be utilized during a recession. Given the current economic situation of our country, I think it is worth examining, leaving some room for this function to work. In concluding my speech today, I would like to add that, we at the Bank will continue to do our utmost as the nation’s central bank to provide the foundation for a stable and sustainable growth of Japan’s economy. Thank you for your attention.
|
bank of japan
| 2,001 | 11 |
Bank of Japan, January report of recent economic and financial developments 17 January 2002
|
Bank of Japan’s January report of recent economic and financial developments1 Bank of Japan, 17 January 2002 * The Bank’s View * * Japan’s economy is deteriorating broadly, as private consumption is weakening in addition to a decline in exports and business fixed investment. With regard to final demand, net exports (real exports minus real imports) keep on a declining trend and business fixed investment is also decreasing. Housing investment remains sluggish and public investment is on a downward trend. Moreover, private consumption is weakening. As for inventories, although the adjustment is progressing in many industries including electronic parts, a strong excessiveness in inventories still exists, mainly in materials. Under this situation, industrial production continues to decline considerably. Corporate profits are falling and business sentiment keeps on worsening. The weakness in household income is becoming noticeable amid the decrease in the hours worked and the rise in unemployment, and consumers are becoming cautious. Turning to the outlook, as for exporting conditions, even though final demand for IT-related goods still remains stagnant, the view that inventory adjustments in IT-related goods worldwide will be mostly completed around this spring has become dominant. Furthermore, the yen’s depreciation is expected to underpin exports. Still, the world economy continues to decelerate and there is considerable uncertainty about future economic developments especially in the U.S. Therefore, such concern still exists that downward pressure may be exerted on Japan’s exports and production once again depending on the developments in overseas economies such as the U.S. Meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downtrend amid the fall in corporate profits. Private consumption will also continue to be weak with deteriorating employment and income conditions and the more cautious consumer sentiment. Government spending is basically projected to follow a downward trend while domestic private demand generally weakens on top of the strong uncertainty about exporting conditions. Consequently, it may take quite a while for economic activity as a whole to stop declining, even though the decrease in industrial production may moderate somewhat in line with the progress in inventory adjustments such as of IT-related goods. Overall, Japan’s economy will inevitably continue to deteriorate for a while. In this situation, continuous attention should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic financial markets. With regard to prices, import prices are starting to rise with the decline in international commodity prices coming to an end and the yen weakening. Domestic wholesale prices continue to decline as a whole mainly in machinery and chemical products, although the decrease in the prices such as of electronic parts seems to have ceased. Consumer prices are weakening reflecting the decline in prices of imported products and their substitutes. Corporate service prices continue to decrease. As for the conditions surrounding price developments, the effects of the past decline in crude oil prices are likely to continue for a time. On the other hand, the recent yen’s depreciation is regarded as a factor to support prices in the period ahead. However, as the economy continues to deteriorate, the balance between supply and demand in the domestic market will increasingly exert downward pressure on prices. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to follow a gradual declining trend for the time being. Moreover, given the high This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on January 15 and 16, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on January 15 and 16 as the basis for monetary policy decisions. degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. In the financial market, the overnight call rate continues to move around zero percent as the Bank of Japan provided further ample liquidity to the money market by aiming at maintaining the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen due to the changes in the guideline for money market operations decided at the Monetary Policy Meeting held on December 19. Interest rates on term instruments are declining on the whole reflecting additional monetary easing measures. The Japan premium remains negligible. Yields on long-term government bonds rose slightly and are mainly moving around 1.40-1.45 percent recently. As for the yield spreads between private bonds (bank debentures and corporate bonds) and government bonds, while spreads between bonds with relatively high credit ratings and government bonds remain mostly unchanged, those between bonds with low credit ratings and government bonds tend to expand. Stock prices rebounded somewhat towards the start of the year, but are weakening recently. In the foreign exchange market, the yen depreciated further towards the start of the year, and is currently being traded above 130 yen to the U.S. dollar. With regard to corporate finance, private banks appear to be more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are gradually becoming more severe. In corporate bonds and CP markets, the fund-raising conditions continue to be generally favorable particularly for firms with high credit ratings as seen in a slight decline in CP issuance rates, but the issuing environment for those with low credit ratings is deteriorating on the whole. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline at about 2 percent on a yearon-year basis. As for the amount outstanding of corporate bonds issued, the year-on-year growth rate has been slowing due to a decrease in the issuance of corporate bonds with low credit ratings. The year-on-year growth rate of the amount outstanding of CP issued is declining recently, although the amount is still well above the previous year’s level. The year-on-year growth rate of money stock (M2 + CDs) continues to be around three to four percent. Funding costs for firms continue to be at extremely low levels on the whole, although market funding costs for some firms and the long-term prime lending rate are rising somewhat. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions and interest rate levels: additional monetary easing measures by the Bank have increased liquidity in the money market and prompted declines in interest rates on term instruments and the issuance rate of CP with high credit ratings. However, the fund-raising conditions of firms with high credit risks, especially of small firms, are becoming severe as private banks and investors are becoming more cautious in taking credit risks against the background of a growing number of corporate bankruptcies. Hence, the developments in the behavior of financial institutions and corporate financing need closer monitoring.
|
bank of japan
| 2,002 | 1 |
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Keizai (Economic) Club, Tokyo, 29 January 2002.
|
Masaru Hayami: Toward Revitalization of Japan's Economy Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Keizai (Economic) Club, Tokyo, 29 January 2002. * * * Introduction I am grateful to have the opportunity to talk to this meeting. Japan's economy will enter a critical phase this year to establish a basis for sustainable growth by pushing forward with structural reforms in the economy and by restoring a sound financial system. Today I would like to express my views frankly from the standpoint of the central bank on what needs to be done for Japan's economy to revitalize it in the rather longer term. I. Economic and Financial Developments in 2001 A. Economic Developments in and outside Japan First, I would like to look back briefly on economic developments in and outside Japan in 2001, a year in which Japan and the global economy were in a very severe situation. When I made a speech last time to this Club in December 2000, I pointed to two downside risks to Japan's economy that needed careful monitoring: first, developments in overseas economies, the U.S. economy in particular; and second, the volatile movements in stock markets. What I emphasized was that due attention should be paid to a possible downswing of the economy arising from these risks especially when the economy had structural problems and was vulnerable to external shocks. Unfortunately, these downside risks actually materialized in 2001. The most notable feature of economic developments in 2001 was a simultaneous slowdown of economies worldwide against the background of global adjustments in information and communications technology (ICT)-related industries. And in September 2001, the tragic terrorist attacks occurred in the United States. The authorities responsible for macroeconomic policy were compelled to deal with both economic deceleration and the negative shocks to their economies. The worldwide decline in demand for ICT-related goods caused a significant fall in exports and production in Japan from early 2001. This led to adjustments in the corporate sector, as seen in a decrease in corporate profits and business fixed investment. These adjustments then spread to affect employment and income conditions in the household sector, and recently they have been exerting downward pressure on private consumption. However, some positive signs have been observed very recently. Global inventory adjustments in ICT-related industries have made progress gradually. Accordingly, shipments of semiconductors worldwide are showing signs of bottoming out, and some semiconductor prices are recovering. Exports of East Asian countries, which had declined earlier than those of other areas, are starting to show signs of bottoming out. In financial markets overseas, stock prices and long-term interest rates generally indicate an expectation of economic recovery in the near future. It is, however, still uncertain whether the progress of inventory adjustments in ICT-related goods will be followed by a recovery of final demand overseas. Thus, we need to monitor carefully whether overseas economies, especially the United States, will recover steadily. In Japan, weakness in final demand such as business fixed investment and private consumption has become conspicuous, and the severe adjustment phase will inevitably continue for some time. On the other hand, conditions for exports are showing some positive signs. In addition, inventory adjustments, especially those in ICT-related goods, have been making progress gradually. Accordingly, downward pressure on production arising from inventories is expected to be fading. Given the positive factors such as the subsiding downward pressure on exports and production together with the negative factors such as intensified adjustments spreading to the household sector, Japan's economy will enter a critical phase in the near future in terms of finding a way to recover. B. Adoption of the New Monetary Easing Framework Next, I will outline the Bank's conduct of monetary policy since the beginning of last year. In early 2001, we forecasted that Japan's economy would have to undergo severe adjustments, given the simultaneous slowdown of economies worldwide. In addition to the severe economic outlook, we were in a very difficult position in regard to room for further policy actions. There was almost no room for further rate reduction because the call rate, which was our operational target, was as low as 0.25 percent at the beginning of 2001 due to the series of drastic monetary easing measures taken in the 1990s. In this situation, we adopted a new policy framework for monetary easing in March 2001. We changed the main operating target from call rates to a quantitative indicator of liquidity, that is, the outstanding balance of current accounts at the Bank of Japan, and we have substantially increased the balance. Because this was a very drastic easing measure and was unprecedented in the history of central banking worldwide, we had to consider various issues very carefully before deciding it. Above all, it was uncertain whether and how expansion of liquidity provision in a situation where the rate is virtually zero percent would influence the economy. Needless to say, the mechanism through which such an expansion affects the economy has not been demonstrated either theoretically or empirically. It is particularly important to gain public confidence to make monetary policy effective. Public confidence in economic policy is hard to gain in the short term. First of all, the authorities should faithfully explain to the public the expected effects and risks of each policy measure to be taken. Then, people will monitor the effects achieved and how the risks turn out, and verify whether they have been in line with the authorities' explanation. Public confidence can be gained only through continuous efforts to fulfil the requirement to be accountable. Thus, the authorities should be careful not to introduce measures in a piecemeal manner based on the shortsighted idea that "it is better to do something than nothing." When the new framework of monetary easing was adopted in March 2001, I believed that the Bank should continue to faithfully fulfil its duty of accountability. In other words, the Bank should explain the necessity of entering uncharted territory by taking unprecedented measures given the severe economic outlook, together with the fact that the effects were uncertain to some extent, and try to gain the public's understanding. Monetary policy cannot directly generate demand nor can it be a substitute for measures to advance structural reforms. Also, its stimulative effects on the economy will be very limited in the quantitative sense in the situation where interest rates, both on short- and long-term instruments, are at their lowest possible levels and cannot decline further. When the Bank decided the new frameworks in March 2001, I believed that the Bank should continue to make best efforts on its part, and should continue to call strongly for the structural reforms that are indispensable and also one of the prerequisites to make monetary easing effective. In other words, the Bank decided to take such drastic and unprecedented easing measures ahead of structural reforms, in the hope that other measures would follow to advance structural reforms significantly. The Bank of Japan had already taken easing measures twice in February 2001. Since March 2001, the Bank has decided on as many as four further easing measures, under the new framework of monetary easing. In view of further deterioration of the economy and financial conditions, we decided, in December 2001, to expand the balance of current accounts at the Bank and utilize new financial instruments such as asset-backed securities as tools for the Bank's market operations and as eligible collateral. C. Experiences in the Course of the Unprecedented Monetary Easing As the Bank has continued its unprecedented monetary easing, it has accumulated experience with regard to its effects. A series of monetary easing measures since 2001 has been effective to a certain degree in reducing short-term interest rates and in alleviating anxiety about liquidity. The overnight call rate is currently as low as 0.001-0.003 percent. This is lower than the level of 0.02-0.03 percent under the "zero interest rate policy." Moreover, the Bank's ample provision of funds and its strong commitment in terms of policy duration that the Bank would continue the new monetary easing framework until the inflation rate registers stably zero percent or above have led to a decline in longer-term interest rates. For example, the interest rate on one-year Japanese government securities is also very close to zero, at 0.001 percent recently. In the aftermath of the terrorist attacks, liquidity problems did not arise in Tokyo markets, due to the Bank's ample provision of funds. Also, there was no serious disruption in trading and settlement at the end of 2001 when concerns over the financial system heightened reflecting the failure of several large firms. And currently, there is no liquidity shortage in sight as we move toward the end of the fiscal year in March 2002. However, expanding the quantity of liquidity provision as seen in the balance of current accounts has not yet markedly affected economic activity, prices, or people's expectations. Under the new monetary easing framework, monetary base has expanded drastically by as much as 15 percent or more year on year. This is the largest growth since the hyperinflation period at the first oil crisis in the 1970s, except for the period when there was the irregular factor of the "Year 2000 Problem." Private banks' lending, however, remained sluggish, and economic growth and prices have continued to be on a downtrend. Strong monetary easing and large-scale fiscal spending were employed continuously during the 1990s. Reflecting such monetary easing, monetary base and money stock continued to increase at a fairly rapid pace compared to the level of economic activity. Japan's economy, however, failed to return to a sustainable growth path. This clearly demonstrates that monetary easing cannot change banks' lending attitude, economic activity, and prices when there are various structural problems, such as the nonperforming-loan (NPL) problem, in the economy. These experiences under the unprecedented monetary easing highlight how grave Japan's structural problems are. I believe it is necessary to accept this fact and have a constructive debate about what should be done to change this situation. Based on such thoughts, the Bank of Japan has been emphasizing that the primary tasks to be accomplished for revitalization of Japan's economy are advancing structural reforms in the economy and industry, and restoring the soundness of Japan's financial system. I now would like to move on to these two issues of structural reforms and the financial system. II. Structural Reforms and Japan's Economy A. Goals of Structural Reforms Japan and other industrialized countries are facing intense international competition arising from rapid industrialization of emerging economies such as those in East Asia. As a country develops and grows wealthier and accordingly the level of people's income rises, it will constantly be exposed to stronger competition from countries with lower wages. This is a natural development for industrialized countries, and they must accept it as inevitable challenges. They need to continue adapting flexibly to change by industrial restructuring and fostering high value-added industries to lead the economy. Moreover, if industrialized countries can continue to foster such promising industries, this will bring about an expanding equilibrium in the global economy through, for example, development of new markets and establishment of an efficient international division of labor. Japanese manufacturers have increased the share of production carried out overseas, and this has recently become a matter of concern, being viewed as a hollowing-out of Japanese industry. However, the share for Japanese manufacturers stands at around 15 percent, which is lower than U.S. and European manufacturers' share of around 20-30 percent. Manufacturers' shifts to overseas production could adversely affect certain regions or industries in the short term. However, we cannot stop firms' moves to utilize an international division of labor more efficiently amid globalization. Furthermore, these movements could bring benefits to the economy as a whole, in the medium to long term. In fact, in the 1990s the United States and Europe achieved fair growth using innovations in ICT-related areas. I would like to point out that the United States and the United Kingdom had advanced reforms since the 1980s to realize small and efficient government. The Continental European countries had also made efforts to address structural reforms toward monetary union. In contrast, grave problems including the NPL problem had mounted in Japan's economy, in the course of the emergence of the "bubble" economy of the 1980s and its bursting in the early 1990s, and Japan fell behind other industrialized countries in dealing with structural problems. The key to a brighter economic outlook for the medium to long term is whether a sufficient number of high-productivity industries or projects that can point a direction for the economy will emerge in the private sector. To revitalize Japan's economy, it is essential to create the conditions where private initiatives and vigor are fully encouraged. The Council on Economic and Fiscal Policy, of which I am a member, drafted blueprints of structural reforms last year, such as the Solid Policy Framework and the Medium-Term Economic and Fiscal Perspectives. Detailed measures as well as progress in their implementation will be discussed further. I believe that the most fundamental yardstick to be applied to evaluate each policy measure will be whether it could work to stimulate private demand. This year, issues concerning the taxation system and government financial institutions will be discussed in the council. In the discussion regarding the tax system, the conventional principles of taxation, that it should be fair, neutral, and simple, will continue to apply. In addition, new perspectives will be vital in deciding on its reforms, for example, whether the tax reform can stimulate free and creative economic activity in the private sector, and whether the new system would comply with globalization of economies and corporate activities. Since the beginning of the 1990s, government financial institutions have increased their share in the total lending to the private sector, especially loans extended to large firms, and it has now reached around 20 percent. If their share of lending is too large, the market mechanism may not work properly in the setting of lending rates. Moreover, the developments of capital markets can be held back because large firms will likely rely on government lending. In vitalizing the economy utilizing the market mechanism, the reform of government financial institutions is also one of the essential tasks. I think such reform should be advanced by letting the private sector do what it can do. In this regard, one reasonable way to do this would be to change the functions of government financial institutions to focus mainly on guarantee and refinancing. B. "Pain" Accompanying Structural Reforms There are those who, while acknowledging the need to undertake structural reforms, ask whether some policy measures could "alleviate the pain" accompanying structural reforms in the short term. We fully understand the background to such opinions given the current severe economic situation and the negative impact of structural reforms in the short term. Many people talk about "alleviating the pain of structural reforms," but the meaning is often unclear because it gives scope for various interpretations. It is sometimes used to mean stopping structural reforms or simply postponing facing the "pain." In evaluating various policy measures proposed for alleviating the "pain" of structural reforms, I feel it is necessary to examine them from the viewpoint of whether they are consistent with the ideal socioeconomy to be achieved by structural reforms. For example, in the process of consolidating firms and restoring the soundness of Japan's financial system, bank lending is likely to decrease and lending spreads will expand reflecting credit risk. Under these circumstances, calls for financial institutions to increase their lending volumes are likely to emerge. We also sometimes hear extreme requests to the central bank to lend directly to firms. However, in the process of restoring the soundness of Japan's banking system, lending rates must be adjusted to appropriate levels according to the risks on loans, and loans to inefficient firms must be reduced. Needless to say, any contraction of corporate financing must not go so far as to make it difficult for viable firms to obtain financing. In viewing these points, I believe the following measures are very important. First, it is necessary to encourage the entry of new firms into the market as well as increase the pace of industrial restructuring, which will be accompanied by withdrawal of nonviable firms from the market. Second, it is also useful to foster new ways of financial intermediation, in addition to indirect financing. For this reason, the Bank of Japan is making efforts to develop financial markets to improve funds intermediation by utilizing new financial instruments, such as asset-backed securities, as tools for market operations and as eligible collateral. On the other hand, direct financing of firms by a central bank is an apparent deviation from its designated role. Moreover, such operations are not consistent with the objective of structural reforms, which is reviewing financing through government financial institutions in order to ensure full utilization of the market mechanism and private initiatives. As a measure to alleviate the "pain" of structural reforms, there are also calls for artificially controlling the exchange rate of the yen so that it depreciates. Since the end of December 2001, the yen has depreciated to around 130-135 yen against the U.S. dollar. In the short term, such movements of the exchange rate reflect the view of market participants who are increasingly expecting a recovery of the U.S. economy while becoming more concerned about the structural problems of Japan's economy. One concern is that some insist that the currency authority should cause the yen to depreciate by artificial means. However, it is not at all feasible to control exchange rates artificially where the flow of foreign exchange transactions and capital movements are liberalized. Moreover, if Japan with its large economy were to artificially lower the value of its currency in order to resolve its own economic problems, the credibility overseas of its overall economic policies and currency could be damaged. Foreign exchange rates reflect the market's evaluations of the economic performance of each country in the medium or long term. If Japan were not able to foster high value-added industries, or if foreign exchange markets believed Japan unable to do so, market forces would work in the direction of yen depreciation. However, this means that economic adjustments would take place by diminishing Japan's purchasing power. Structural reforms are not at all intended to cause adjustments in this pessimistic way. It is therefore desirable that foreign exchange rates move stably reflecting fundamentals of the economy. A depreciation of the yen will not solve the problems of Japan's economy that must be overcome. We have sometimes been asked whether there is a way to stop the downtrend of prices during the structural reforms. We have also received suggestions that prices should be made to increase so that structural reforms can be implemented smoothly. First of all, I want to stress that we have already made a strong commitment to continue the current framework of monetary easing until the inflation rate registers stably zero percent or above, and we have been implementing drastic easing measures unprecedented in the history of central banking. Therefore, criticism that the Bank is tolerating price falls or deflation is a complete misunderstanding. At the same time, the basic relationships between structural reforms and prices must be correctly understood. The recent price decline is attributable to various factors such as technological innovation, deregulation, and an increase in low-priced imports. But above all, the major factor is that Japan's economy was not able to achieve a full-scale recovery in the 1990s and that the negative output gap expanded due to lack of demand. Needless to say, there is a strong correlation between economic activity and prices. First, the level of economic activity and the balance of supply and demand change, and then prices respond to these changes. In short, prices rise after economic recovery begins, and not vice versa. Structural reforms aim to directly tackle the problems that have long prevented a sustained growth of the economy and improvement in productivity, and thus boost private demand. Needless to say, structural reforms are chosen and supported by the people, and they are indispensable for Japan's economy to return to a sustainable growth path in the medium to long term. In the short term, however, downward pressures on prices are inevitable if the economy must endure a low growth rate temporarily in the course of structural reforms and fiscal consolidation, because the negative output gap would widen as a result. An increase in prices, if it were the sole objective, could be achieved by a significant fiscal expansion that could tighten in the balance of supply and demand. However, this would be inconsistent with the objective of structural reforms. It may seem contradictory, but I believe that the most effective and credible prescription to alleviate the pain accompanying structural reforms is to steadily implement reform measures and to gain the confidence of economic entities and the markets regarding the objective and the direction of the reforms. If, by undertaking solid structural reform measures, households' concerns about future pension and social security systems are reduced, and if firms foresee an increase in productivity in the future, spending activities of firms and households will be stimulated. And furthermore, if Japan's efforts in tackling structural reforms are received favorably by financial markets, we can expect some positive effects of structural reforms to appear much earlier, for example, via a rise in Japanese stock prices. For this reason, I attach great importance to clearly explaining the schedules of concrete reform measures and visibly demonstrating their expected effects so that people can have confidence in them. III. Issues concerning Japan's Financial System A. Current Condition of Japan's Financial System I would like to move on to discuss Japan's financial system, another important part of structural reform of Japan's economy. First, let us take a look at overall stock prices. Until September 11 last year, the U.S. and Japanese stock markets had trended the same way. However, Japanese stocks have become weaker since October, and the two markets started to trend in a different direction. In the meantime, the structure of stock markets has been changing. The presence of foreign investors in Japanese stock markets has been increasing. For example, the volume of stock transactions by foreign investors has been increasing year on year at the Tokyo Stock Exchange (TSE), while the daily turnover of transactions at the TSE has maintained a considerable amount of some 600 to 800 million shares. Amid weakening stock prices and the changing structure of stock markets, I hope that Japanese stock markets will become more transparent and fair through various measures such as the recently tightened regulations on short sales of stocks. Now, if we take a look at stock prices by industry, we see a clear trend. While stock prices of firms in electrical appliances and transportation equipment industries are rising, stock prices of those in construction, real estate, and banking industries are falling. The trend shows that market participants are taking a harsher view of Japan's financial system. Three factors seem to determine the weakness of bank stocks. First, the banking sector is suffering from the NPL problem. Second, there has been a series of failures of borrower firms and there are concerns that such failures might continue. It should also be noted that more time is required for restructuring of borrower firms amid business reorganization in the banking industries. And third, unwinding of cross-shareholding is progressing due to introduction of mark-to-market accounting. The biggest concern is the NPL problem of Japanese financial institutions, which places a heavy burden on Japan's economy overall. Japanese financial institutions have been making efforts in various ways to resolve this problem. In the past decade, many have disposed of an amount of NPLs exceeding their annual operating profits each year. However, the amount outstanding of NPLs has not declined as the amount of new NPLs has been more than that of ones disposed of. For some time after the bursting of the "bubble," a large majority of NPLs were loans extended to nonbanks and firms in the real estate and construction industries. Recently, however, NPLs are increasingly emerging from loans extended to firms in service industries such as retail, as well as some in manufacturing industries. It seems that new NPLs are emerging in the industries challenged by structural adjustments. The emergence of NPLs implies progress in structural adjustments. In this regard, not only financial institutions, the lenders, but also borrower firms are required to implement major reforms of their business management for the resolution of the NPL problem. B. Financial Institutions' Measures to Address the NPL Problem The NPL problem, which is related to both financial institutions and borrowers, should be addressed primarily by the former. In fact, large banks announced the major steps they would take to achieve the projected results of disposal of NPLs for fiscal 2001 in autumn 2001 when announcing their financial results for the first half of fiscal 2001. The major steps include (1) larger disposal of NPLs than planned for before the start of fiscal 2001, further cost-cutting, (3) review of their lending conditions, especially interest rates, in light of different credit qualities of borrowers, and (4) improvement of profitability by way of these steps. These steps are highly welcome, and I hope that they will be elaborated into concrete measures and implemented promptly so that the markets' confidence in Japanese financial institutions will be restored. In the last phase of the resolution of the NPL problem, the removal of NPLs from financial institutions' balance sheets is necessary in addition to loan-loss provisioning. Financial institutions are increasingly promoting liquidation of their loans by selling them to third parties while instituting reconstruction proceedings against distressed firms under the Civil Rehabilitation Law. For example, some Japanese banks are making use of the "investment funds for corporate reconstruction," which also includes foreign investment funds, for financial resources and expertise on how to liquidate their NPLs. Moreover, it is expected that methods that have not been common in Japan, such as debt equity swaps, will be used. It is also expected that the Resolution and Collection Corporation (RCC) will be utilized more, as its functions to reconstruct firms have been strengthened, and its terms and conditions for purchases of loans have been made more flexible through recent amendments to the Financial Reconstruction Law. I hope that the use of various measures will speed up the disposal of NPLs. There is a view that if banks were to speed up their disposal of NPLs too much, the economy could be negatively affected. To some extent, NPLs are simply the result of an economic slump. But, as I mentioned earlier, many are loans extended to firms in industries facing structural adjustments. If banks postpone the disposal of their NPLs, this could delay the structural adjustments, and ultimately delay the revitalization of the overall economy. Further, the resolution of the NPL problem, which has been placing a burden on financial institutions' business, could have great significance in that it would contribute to restoring the financial intermediary function, an essential part of the infrastructure of the economy. If, however, the disposal of NPLs is delayed, this might threaten the stability of the entire financial system through a further decline in markets' confidence in the soundness of Japanese banks. C. The Importance of Strengthening Profitability Next, I would like to share with you another important task that Japanese financial institutions are working at, that of improving their profitability. As financial institutions have been required to dispose of NPLs amounting to more than their annual operating profits, their financial strength has been weakened. To recover their financial strength, the disposal of NPLs--a legacy of the past--alone is not sufficient. They need to improve their profitability. To improve financial institutions' profitability in the long run, the financial institutions themselves need to establish new business models. I understand that this is easier said than done, but there seems to be room for further improvement. Financial institutions should first identify areas where they have an advantage over other competitors, and develop a business strategy taking full advantage of their strong areas, and reallocate their business resources. Business consolidation and reorganization through various measures such as mergers, establishment of bank holding companies, and business alliances have become common in the financial sector in the past few years. Business reorganization is taking place in various different forms, such as mergers between financial institutions beyond the confines of their own corporate groups, integration of trust bank business and that of securities business within financial groups, and plans for super-regional banks. The most important thing is for financial institutions to find ways to take full advantage of business reorganization to reform their business management. I hope that financial institutions' efforts to improve their profitability will contribute to pushing forward both the disposal of NPLs and the corporate rehabilitation, and to revitalizing the financial system. The progress in NPL disposal, corporate rehabilitation, and financial system revitalization will bring about positive synergy effects, such that markets' confidence in financial institutions will be restored, which in turn will have positive effects on stock prices. It cannot be denied, however, that it will take time for measures implemented by financial institutions to have positive effects. D. Injection of Public Funds and the Ending of the Blanket Guarantee on Bank Deposits As the disposal of NPLs progresses, we need to prepare for an emergency where concerns about the stability of the financial system as a whole are raised despite the efforts made by financial institutions. The amended Deposit Insurance Law, which came into effect in April 2001, states that in such an event, the Prime Minister may, following deliberation by the Council for Financial Crisis, acknowledge the necessity of injecting public funds. It is necessary to expeditiously advance the resolution process of financial institutions that cannot reconstruct their business. In addition to the injection of public funds by the Government, if it is necessary from the viewpoint of maintaining the stability of the financial system, the Bank will for its part fulfil its responsibility of providing liquidity as the lender of last resort, which is one of its fundamental roles. As the last topic on the financial system, I would like to comment on the ending of the blanket guarantee on bank deposits scheduled for the end of this March. There is little time left before the ending of the blanket guarantee on bank deposits. I hope that each financial institution will further accelerate the resolution of various business management problems and regain the market's confidence, thereby enabling smooth transition to the limited guarantee system. Then, things would go back to the way they should be. Conclusion I have talked about the tasks for Japan's economy and the thinking behind the policy of the Bank of Japan. I have to admit that we are still only halfway to the goal of a revitalized economy, and the path ahead will not be smooth. But I am not pessimistic about the potential of Japan's economy and its future course in the medium to long term. For example, Japan's personal financial assets have reached around 1,400 trillion yen. As the largest holder of net external assets of 1.2 trillion U.S. dollars that amount to almost 30 percent of annual GDP, Japan is receiving huge investment income from these assets, as a part of Japan's current account surplus that amounts to 2-4 percent of annual GDP since the 1980s. And I believe we also have ample potential in terms of technical background to cope with new businesses such as ICTrelated industries. The purpose of advancing structural reforms is to revitalize such potential so that it materializes in a visible form. In doing so, we have to face a low growth rate, declining prices, and "pain" such as increasing unemployment and bankruptcies in the short term. However, we have to bear in mind that such a painful process is inevitable if Japan is to demonstrate its potential and establish a basis for new development in the long run. I would like to conclude my speech by making two important points regarding the conduct of economic policies during the process of structural reforms. First, from the viewpoint of minimizing the short-term pain of structural reforms, it is important to withdraw some positive effects of structural reforms as early as possible by steadily advancing specific measures. And second, since a low growth rate and declining prices would be inevitable temporarily, macroeconomic policies during the period of intensive structural reforms should aim at preventing these from leading to a deflationary spiral. Given the relationships between the economy and prices as I explained earlier, the economy can be expected to exit from the downtrend of prices if it can achieve sustainable growth led by private demand after the period of intensive adjustments. However, the future positive effects of structural reforms might not be achieved if the economy were to fall into a deflationary spiral where price falls and a decrease in demand accelerate in interaction with each other. In order to prevent such a deflationary spiral, it is important to improve the content of fiscal spending to stimulate private demand effectively, and to provide a better safety net for the unemployed. It is also essential to strengthen the financial system. The Bank of Japan will continue to make the utmost effort to maintain the stability of the financial markets and enhance penetration of the monetary easing effect into the economy by continuing to provide ample liquidity. With regard to the financial system, the Bank will also perform its duty as the lender of last resort if necessary. As I stated at the beginning of this speech, this year will be especially important for Japan's economy. I would like to conclude my speech by restating our firm stance on the revitalization of Japan's economy. Thank you for your attention.
|
bank of japan
| 2,002 | 1 |
Bank of Japan, February report of recent economic and financial developments 12 February 2002.
|
Bank of Japan’s February report of recent economic and financial developments1 Bank of Japan, 12 February 2002. * The Bank’s View * * Japan’s economy continues to deteriorate. With regard to final demand, net exports (real exports minus real imports) tend to decrease at a slower pace since the decline in exports is moderating. Meanwhile, business fixed investment continues to decrease and private consumption is also weakening. Moreover, housing investment remains sluggish and public investment is on a downward trend. Amid this weak final demand, inventory adjustment is progressing in many industries including electronic parts as a result of the large production cutbacks to date. Reflecting this development, the rate of decline in industrial production is contracting. However, firms maintain their stance on reducing personnel expenses under strong excessiveness in employment. Hence, the severity of employment and income conditions of households is rather intensifying, with unemployment continuing to rise and winter bonuses having decreased distinctly. Turning to the outlook, with regard to exporting conditions, the synchronized inventory adjustment in IT-related goods worldwide is coming to an end. As a consequence, there seem to be signs that exports and production of the East Asian economies have stopped declining. Moreover, the yen has been depreciating recently. Under these conditions, exports are expected to stop decreasing and to turn up toward the middle of this year. However, exports will recover only modestly, while the recovery in overseas economies is weak and final demand for IT-related goods worldwide remains stagnant for the time being. As regards the U.S. economy, there are increasing number of indicators suggesting that the economy will hit the bottom, but there still remain many uncertain factors. Therefore, including this aspect, developments in overseas economies continue to require close scrutiny. Meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downtrend reflecting the fall in corporate profits. Private consumption is also likely to be weak mainly due to worsening employment and income conditions. Thus, while domestic private demand generally weakens, government spending is basically projected to follow a downward trend. Consequently, it may take quite a while for economic activity as a whole to stop declining, even though the decrease in industrial production may move toward cessation against the background of the improvement in exporting conditions and progress in inventory adjustment. Overall, Japan’s economy will continue to deteriorate, but the pace is expected to moderate gradually with the downward pressure from exports and inventories abating. Still, while the economy continues to be in a fragile state, continuous attention should be paid to the risk of a negative impact on the economy from developments in foreign and domestic financial markets. With regard to prices, import prices are rising as the decline in international commodity prices has stopped and the yen has been weakening. Domestic wholesale prices continue to decline as a whole mainly in machinery and chemical products, although the decrease in the prices such as of electronic parts seems to have ceased. Consumer prices are declining somewhat faster from the effects of the past decline in crude oil prices, while the prices of imported products and their substitutes continue to decrease. Corporate service prices continue to decline. As for the conditions surrounding price developments, the effects of the past decline in crude oil prices are likely to continue for a time. On the other hand, the recent yen’s depreciation is regarded as a factor to support prices in the period ahead. However, as the economy continues to deteriorate, the balance between supply and demand in the domestic market will keep exerting downward pressure on This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on February 7 and 8, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on February 7 and 8 as the basis for monetary policy decisions. prices. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation, and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to follow a gradual declining trend for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. In the financial market, the overnight call rate continues to move around zero percent as the Bank of Japan provided ample liquidity to the money market by aiming at maintaining the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen. Interest rates on term instruments are declining on the whole. Yields on long-term government bonds rose slightly and are mainly moving in the range of 1.5-1.6 percent recently. Yield spreads between private bonds (bank debentures and corporate bonds) and government bonds remain mostly unchanged as a whole. Stock prices continue to weaken. In the foreign exchange market, the yen dropped slightly against the U.S. dollar mainly due to the widening gap between the U.S. and Japanese economic outlook. With regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are gradually becoming more severe. In corporate bonds and CP markets, the fund-raising conditions are generally favorable particularly for firms with high credit ratings as seen in a slight decline in CP issuance rates, but the issuing environment for those with low credit ratings continues to be severe on the whole. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline at about 2 percent on a yearon-year basis. As for the amount outstanding of corporate bonds issued, the year-on-year growth rate has been slowing since the issuance of corporate bonds with low credit ratings is sluggish. The yearon-year growth rate of the amount outstanding of CP issued is declining, although the amount is still well above the previous year’s level. The year-on-year growth rate of monetary base has increased further. The year-on-year growth rate of money stock (M2 + CDs) continues to be around three to four percent. Funding costs for firms continue to be at extremely low levels on the whole, although market funding costs for some firms and the long-term prime lending rate are rising somewhat. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions and interest rate levels. However, the fund-raising conditions of firms with high credit risks, especially of small firms, are becoming severe as private banks and investors are becoming more cautious in taking credit risks against the background of a growing number of corporate bankruptcies. Hence, the developments in the behavior of financial institutions and corporate financing need closer monitoring.
|
bank of japan
| 2,002 | 2 |
Speech by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan and Chairman of the Committee on the Global Financial System, at the Third Joint Central Bank Research Conference on Risk Measurement and Systemic Risk held in Basel, Switzerland, 7 March 2002.
|
Yutaka Yamaguchi: Systemic risk Speech by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan and Chairman of the Committee on the Global Financial System, at the Third Joint Central Bank Research Conference on Risk Measurement and Systemic Risk held in Basel, Switzerland, 7 March 2002. * * * Introduction: A brief history of the Systemic Risk Conference Ladies and gentlemen, I am very pleased to join you at the third conference on “Risk Measurement and Systemic Risk”. This theme has gained increasing importance since the first conference in 1995. The keen attention paid to it by the international community is evident in the fact that a number of international fora now endeavour to spot potential financial vulnerabilities which might lead to systemic crisis in the global market. Actually, the term “systemic risk” makes me a bit uneasy as it unfortunately has too realistic a connotation in my own country. I am looking forward to taking home new insights on this subject, and, as Chair of the Committee on the Global Financial System co-hosting this conference, I would be happy if you could do the same. The aim of this series of conferences is to enhance our understanding of the mechanism through which a systemic shock is generated and transmitted. Meanwhile, during the six years since the first conference, we have witnessed significant changes in the world of finance. As a result, the focus of the conferences has changed over the years. If I may generalise at the risk of oversimplification, the centre stage of the first conference in 1995 was occupied by VaR methodology, which was then gaining acceptance at leading financial institutions. Reporters explored how risk could be quantitatively measured and what would be the real-life meaning of such measures. Well, in real life, crisis erupted in Asia in 1997 triggered by events that were largely beyond the bounds of standard VaR methodology. Naturally, discussions at the second conference in 1998 were much influenced by the Asian crisis. We began to realise that market microstructure theory could shed light on market dynamics in times of stress. Our third conference today carries this theme further, with many papers paying attention to what creates stress and how stress is contagious. Triangular view of systemic risk This brief history of our conference series suggests that with the structural changes in financial markets, systemic risk has revealed a few faces in actual crisis and therefore the nexus between them has to be more deeply explored. Conventional thinking or the narrowest coverage inextricably tied systemic risk to banks. Systemic disturbances that originate in a bank spill over to the banking system, which in turn adversely affects the real economy. Obviously, this bank-centred risk propagation still holds; in fact, much of the existing safety net is aimed at preventing a chain reaction within the banking system. However, it has now become evident that financial markets play a significant role as channels propagating the disturbances involving the banking system as well as the real economy. The importance of the market and its dynamics is underscored by our recent experiences in Japan, the Asian region, Russia and the LTCM case. The novelty of the Russian and the LTCM crises lies in the fact that the largest capital market in the world “seized up” without entailing any banking crisis. It was often the case that the sudden deterioration in asset prices brought about turbulence in the financial system. To illustrate, the successive failures of major Japanese financial institutions in 1997 and 1998 were not directly triggered by a major default. Instead, their undoing was a rapid loss of confidence in the market. Typically, as the soundness of a bank was questioned in the market, prices of its stocks and credit ratings started to fall. The bank would then begin to experience funding difficulties, as its access to markets became problematic. In such a situation, the troubled bank had to resort to fire sales of assets, which in turn damaged its balance sheet and drove its stocks down even further. In this self-fulfilling spiral, several banks went out of business. At the same time, the deterioration in asset prices led to further difficulties in channelling funds to the corporate sector, a familiar credit crunch process. A credit crunch is usually attributed to the dysfunction of the banking system – a correct observation of one aspect of such a phenomenon. A deeper look suggests that the process is more complex. We have witnessed that the borrowers blame the banks for tightening credit standards, while the lenders complain of the lack of credit demand. No doubt, an important feedback mechanism also runs from the real economy to the financial system via corporate balance sheets, asset prices, banks’ capital position, among others. I am not attempting to draw definitive lessons from a specific episode of past crisis, let alone from the unsolved problems of the Japanese economy. However, the experiences of the last several years show that disturbances are multifaceted. Systemic problems develop as market risk, liquidity risk and credit risk factors interact with each other in a complex manner. This means that any evaluation of systemic risk based on one isolated factor could only provide a fragmentary view. What is called for is the “triangular view of systemic risk” – comprehensive analysis covering the interrelations or nexus between the banking system, financial markets and the real economy. It is against this background that I think we need to devote at least as much attention to market microstructure as to sophisticated analyses of “fat tails” in loss distribution. A focus on market microstructure could shed light on the relations between various risk factors. Particularly important is to investigate how individual market participants under different budget and information constraints would behave rationally in stressful events, and how such behaviour would affect the formation of asset prices. Strategic interactions Recent episodes of financial crises seem to defy explanation on the basis of conventional economic theory, which regards macroeconomic phenomena as a mere aggregate of independent decisionmaking by economic agents. As a reflection of such limitations of conventional theory, there is a growing body of work attempting to interpret financial crises from the viewpoint of “strategic interactions” among market participants. I would like to devote a few minutes to outlining why. Strategic interaction can be defined as a process in which each market participant explores his/her optimal strategy by conjecturing the response of other participants. Some of the papers presented at this conference follow this path. Herding behaviour is one example. As you know, a large number of small investors tend to follow a small number of large investors. Once stressful events happen, such behaviour is likely to lead to one-sided market sentiment, which accelerates and propagates the stress within and across the markets. From the viewpoint of policymakers, herding behaviour as a phenomenon is hard to tackle. If we understand such a phenomenon as a consequence of strategic interactions among market participants, however, we might find a key to reducing the risk of triggering herding behaviour. According to my reading of this line of research, the outbreak of systemic disturbances would heavily depend on how many market participants, when faced with systemic threats, expect disturbances to actually occur. In other words, a crisis is not necessarily an accident, but a consequence of market participants’ expectations. Their expectations are formed from conjectural views of other market participants’ responses to such threats. The magnitude of any crisis and the extent of contagion would critically depend on the feedback from market participants reacting collectively to systemic threats. Feedbacks could also accelerate any crisis. These explanations seem to offer a useful perspective on the mechanism of systemic disturbances and appropriate policy responses thereto. The strategic interaction framework seems to offer us a roadmap for developing more stress-resistant markets. A possible approach would be to enhance the visibility of future stress. Let us suppose that there is a scenario consisting of a series of events leading to stress. If market participants have the view that such a scenario could result in a serious impact on a market in the future, they might take necessary actions to avoid losses which would materialise under the scenario. As market participants take necessary actions gradually and individually, the actual impact of events as they happen would be softened and stress would not materialise. In other words, a stress scenario would not remain a stress scenario once it is publicly recognised as such. In fact, we observe such episodes in financial markets. For example, proposed changes to accounting rules sometimes raise concerns initially, but only rarely would they result in severe impacts when they are implemented. Based on these experiences, I should say that an approach enhancing the visibility of stress appears more appealing. “Macro stress-census”, an experiment conducted by the CGFS, might be one of the options for developing commonly recognised stress scenarios among market participants and central banks, although not a panacea. Challenges to central banks Before concluding my remarks, let me outline the challenges facing central banks with regard to systemic risk. In the six years since the first Systemic Risk Conference, we have learned considerably from our involvement in real-life crises and through intellectual interchanges at this conference and other venues. At the same time, one answer leads to new questions and there remain many unanswered questions. The same can be said for policy responses by central banks in times of financial crisis. In relation to policy responses to systemic risk, we have generally recognised the importance of both pre-emptive actions, ie actions aimed at preventing systemic problems, and after-the-fact measures to contain an unfolding crisis. In this regard, I see a greater rationale than ever for views that stress the importance of preventive measures. This is because globalisation of financial markets and consolidation of financial institutions have considerably raised the possible costs of dealing with actual systemic disturbances. To this end, the strengthening of market discipline as well as supervision would be essential, and the international community has made serious joint efforts. However, even the best of preventive measures may not be always successful in completely removing sources of systemic crises in an environment where financial intermediation keeps evolving at a speed beyond our wildest imagination. If there is the slightest chance of severe financial disturbances, the central bank must not lower its guard. In envisaging crisis management, the changing environment could compel us to rethink established doctrines. For example, there is no doubt about stressing that we need to minimise moral hazard. Nevertheless, in the event that a systemic crisis is actually unfolding, we must not overlook the fact that there is an inherent, conflicting aspect in crisis management. In a sense, crisis management artificially creates moral hazard in order to avoid catastrophic consequences. In real-life policy responses, authorities inevitably face a trade-off between prevention of systemic crisis and minimisation of moral hazard. Another example concerns the traditional lender of last resort functions of the central bank. According to traditional thinking, this is aimed only at banks. But the contemporary reality, as I noted earlier, is that systemic problems could originate in financial markets and such markets are populated not only by banks but also by a large number of non-bank financial institutions and conglomerates. This may argue in favour of the view that the traditional principle should be augmented. A related issue is the conditions under which central banks would take certain policy actions, such as invoking their lender of the last resort functions. Traditionally, “constructive ambiguity” was regarded as the golden rule in such cases, but the Bank of Japan distanced itself from this in dealing with the crisis in the late 1990s, with a view to precluding speculations and enhancing policy transparency and accountability. The issue of the practical significance of “constructive ambiguity” must be explored vigorously without leaving any ambiguity. Conclusions Today, I have offered my views on systemic risk, which might have raised more questions than answers for central banks. In concluding my remarks, I would like to stress that central banks must continue to pursue these issues to discharge their responsibilities. The responsibilities arise from the following facts. First, central banks are unique economic agents having relations with each corner of the systemic risk triangle – the banking system, financial markets and the real economy. Second, central banks are expected to confront almost every systemic crisis as entities that can readily provide liquidity. Fortunately, central banks have made progress in gaining insights through extensive research on market dynamics. Nevertheless, central banks must not be satisfied with what they have achieved so far. In order to answer the remaining questions, and refine views on established concepts, we are looking forward to continuously interacting with market participants, who have first-hand knowledge of the markets, and members of academia, who have been laying the groundwork. In this regard, I hope this series of conferences will remain a valuable venue that continues to inspire the central bank community. Thank you for your attention.
|
bank of japan
| 2,002 | 3 |
Bank of Japan, March report of recent economic and financial developments 22 March 2002
|
Bank of Japan’s March report of recent economic and financial developments1 Bank of Japan, 22 March 2002 * The Bank’s View * * Japan’s economy still continues to deteriorate as a whole, although the downward pressure from exports and inventories is gradually abating. With regard to final demand, the decline in net exports (real exports minus real imports) has almost ceased amid the improvement in exporting conditions. Meanwhile, business fixed investment continues to decrease and private consumption remains weak. Moreover, housing investment remains sluggish and public investment is also declining. To be sure, final demand overall is still weak, but exports—which have a relatively large impact on production—have recently stopped declining. Also, inventory adjustment is progressing further in many industries including electronic parts due to the continued production cutbacks to date. Reflecting these developments, the decline in industrial production is moderating further. However, firms maintain their stance on reducing personnel expenses under strong excessiveness in employment. Under this situation, the severity of employment and income conditions of households is rather intensifying, with unemployment being on a rising trend and the rate of decline in wages expanding. Turning to the outlook, as for exporting conditions, the synchronized inventory adjustment in IT-related goods worldwide is nearing an end. Under this condition, the East Asian economies appear to have hit bottom. As for the U.S., the possibility is increasing that the economy will recover since household spending remains solid and inventory adjustment has almost finished, although there still remain uncertain factors. Furthermore, the yen is at low levels compared to last autumn. Under these circumstances, exports are expected to turn up toward the middle of this year. Still, the pace of recovery in exports will be modest, while the anticipated expansion in overseas economies is only gradual and final demand for IT-related goods worldwide remains stagnant for the time being. Meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downtrend reflecting the fall in corporate profits. Private consumption is also likely to remain lackluster mainly due to worsening employment and income conditions. While domestic private demand generally weakens as mentioned above, government spending is basically projected to follow a downward trend. Consequently, it may take quite a while for economic activity as a whole to stop declining, even though the decrease in industrial production may come to an end against the background of the improvement in exporting conditions and completion of inventory adjustment. Overall, the economic deterioration in Japan is projected to moderate steadily, as production stops declining due mainly to the recovery in exports. Still, while the economy continues to be in a fragile state, continuous attention should be paid to the risk of a negative impact on the economy from developments in foreign and domestic financial markets. With regard to prices, import prices are increasing reflecting the depreciation of the yen since around the end of last year and the rise in international commodity prices. The decline in domestic wholesale prices is recently contracting somewhat against the background of the increase in import prices and the progress in inventory adjustment. Consumer prices continue to decline with the effects of the fall in crude oil prices in the latter half of last year persisting, while the prices of imported products and their substitutes keep on falling. Corporate service prices continue to decline. As for the conditions surrounding price developments, the depreciation of the yen from around the end of last year and the rise in international commodity prices are regarded as factors to support prices for the time being. However, since domestic demand is projected to remain weak for a time, the balance between supply and demand is expected to keep exerting downward pressure on prices. Furthermore, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on March 19 and 20, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on March 19 and 20 as the basis for monetary policy decisions. of distribution channels will restrain prices. In addition, the expansion in the rate of decline in wages may also work as a factor to push prices downward, mainly in services prices which are apt to be influenced by this factor. Overall, prices are expected to follow a gradual declining trend for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices continuously warrants careful monitoring. In the financial market, the overnight call rate continues to move around zero percent as the Bank of Japan provided ample liquidity to the money market by aiming at maintaining the outstanding balance of the current accounts at the Bank at around 10 to 15 trillion yen. Interest rates on term instruments rose somewhat temporarily generated by the activation of fundraising beyond the fiscal year-end since mid-February, but continue to be at low levels since this rise was constrained due to additional measures decided at the Monetary Policy Meeting on February 28. Yields on long-term government bonds are mainly moving in the range of 1.4-1.5 percent recently. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are expanding slightly. Stock prices started to turn up due to tighter regulations on short-selling of stocks and the rise in U.S. stocks, and are subsequently increasing as domestic and foreign institutional investors bought back. In the foreign exchange market, the yen surged temporarily in reaction to the rise in Japanese stock prices but is weakening once again thereafter. With regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are becoming more severe. In corporate bonds and CP markets, the fund-raising conditions are generally favorable particularly for firms with high credit ratings, but the issuing environment for those with low credit ratings continues to be severe on the whole. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline at about 2 percent on a yearon-year basis. Meanwhile, the amount outstanding of corporate bonds issued is growing at around 2-3 percent on a year-on-year basis. The year-on-year growth rate of the amount outstanding of CP issued continues to decline, although the amount is still well above the previous year’s level. The year-on-year growth rate of the monetary base has increased further and is recording a substantial increase of somewhat less than 30 percent. The year-on-year growth rate of the money stock (M2 + CDs) has increased slightly. Funding costs for firms continue to be at extremely low levels on the whole, although market funding costs for some firms and the long-term prime lending rate are rising somewhat. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions. However, the fund-raising conditions of firms with high credit risks, especially of small firms, are gradually becoming more severe as private banks and investors continue to be more cautious in taking credit risks. Hence, the developments in the behavior of financial institutions and corporate financing continue to require closer monitoring.
|
bank of japan
| 2,002 | 3 |
Bank of Japan, 12 April 2002.
|
Bank of Japan’s April report of recent economic and financial developments1 Bank of Japan, 12 April 2002. * The Bank’s view * * Japan’s economy still continues to deteriorate as a whole, but the pace has moderated somewhat. With regard to final demand, net exports (real exports minus real imports) are gradually starting to increase while overseas economies are clearly gaining momentum for recovery. Meanwhile, business fixed investment continues to decrease and private consumption remains weak. Moreover, housing investment remains sluggish and public investment is also declining. Final demand overall is still weak, but exports—which have a large impact on production—are starting to turn up recently. Also, inventory adjustment is progressing further in many industries. Reflecting these developments, industrial production appears to have stopped declining and also, the deterioration in business sentiment of firms, mainly in manufacturing, has almost ceased. However, firms maintain their stance on reducing personnel expenses given persistently strong excessiveness in employment. Therefore, employment and income conditions of households continue to worsen, with the ongoing decrease in the number of employees and the growing trend in the rate of decline in wages. Turning to the outlook, as for exporting conditions, the synchronized inventory adjustment in IT-related goods worldwide is coming to an end except for some goods such as networking equipment. Overseas economies, mainly in the U.S. and East Asia, are likely to follow a recovery path. Moreover, the yen is at low levels compared to last autumn. Under these circumstances, exports are expected to pick up moderately for the time being. Meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downtrend for a while, judged mainly from leading indicators and firms’ investment plans. Private consumption is also likely to remain lackluster mainly due to worsening employment and income conditions. In addition, government spending is basically projected to continue a downward trend. While the recovery in exports and the weakness in domestic demand are mixed, industrial production is expected to remain almost flat for the time being. As for the further outlook, assuming that exports will continue to recover steadily, the economy as a whole will eventually hit bottom through the increase in production and rebound in corporate profits, mainly in manufacturing. Overall, the economic deterioration in Japan is projected to stop steadily, as production stops declining and then turns up reflecting the improvement in exporting conditions. Still, the rebound in exports is expected to be modest for a while and there also remain various uncertain factors regarding the pace of recovery in overseas economies. In addition, domestic demand continues to be weak for some time. Consequently, it will take quite a while for the economy as a whole to stop declining evidently. While the economy continues to be in a fragile state, continuous attention should be paid to the fact that unstable movements in the foreign and domestic financial markets are apt to have a negative impact on the real economy. With regard to prices, import prices are increasing reflecting the depreciation of the yen since around the end of last year and the rise in international commodity prices. The decline in domestic wholesale prices is contracting against the background of the increase in import prices and the progress in inventory adjustment. Consumer prices continue to decline with the persisting effects of the fall in crude oil prices in the latter half of last year, while the prices of imported products and their substitutes keep on falling. Corporate service prices continue to decline. As for the conditions surrounding price developments, the depreciation of the yen from around the end of last year and the rise in international commodity prices including crude oil are regarded as factors to This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on April 10 and 11, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on April 10 and 11 as the basis for monetary policy decisions. support prices for the time being. However, since domestic demand is projected to remain weak for a time, the balance between supply and demand is expected to keep exerting downward pressure on prices. Furthermore, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will restrain prices. In addition, the growing trend in the rate of decline in wages may also work as a factor to push prices downward, mainly in services prices which are apt to be influenced by this aspect. Overall, prices are expected to follow a gradual declining trend for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices continuously warrants careful monitoring. As for the financial market, in the short-term money markets, the end-of-March outstanding balance of the current accounts at the Bank of Japan was 27.6 trillion yen as the Bank provided further ample liquidity to the money market toward the fiscal year-end in reaction to the increase in liquidity demand. Under this condition, the overnight call rate, including transactions beyond the fiscal year-end, is steadily moving around zero percent. Moreover, interest rates on term instruments have been declining since late March when pressures on fund-raising beyond the fiscal year-end alleviated. Yields on long-term government bonds are mainly moving around 1.4 percent recently. As for yield spreads between private bonds (bank bonds and corporate bonds) and government bonds, the widening since last fall has been constrained recently, but spreads between bonds with low credit ratings and government bonds still remain wide. Stock prices are level on the whole. In the foreign exchange market, the yen is currently traded in the range of 130-133 yen to the U.S. dollar. With regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are becoming more severe. In corporate bonds and CP markets, the fund-raising conditions are generally favorable particularly for firms with high credit ratings, but the issuing environment for those with low credit ratings continues to be severe on the whole. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline at about 2 percent on a yearon-year basis. Meanwhile, the amount outstanding of corporate bonds issued is growing at around 2-3 percent on a year-on-year basis. The year-on-year growth rate of the amount outstanding of CP issued continues to decline, although the amount is still well above the previous year’s level. The year-on-year growth rate of the monetary base in March increased further due to heightened liquidity demand for the fiscal year-end, showing a significant increase of over 30 percent. The yearon-year growth rate of the money stock (M2 + CDs) remained around 3.5-4.0 percent. Funding costs for firms continue to be at extremely low levels on the whole, although market funding costs for some firms are rising somewhat. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions. However, the fund-raising conditions of firms with high credit risks, especially of small firms, are gradually becoming more severe as the stance of investors toward taking credit risks remains severe and the lending attitudes of private banks are becoming more cautious. Hence, the developments in the behavior of financial institutions and corporate financing continue to require closer monitoring.
|
bank of japan
| 2,002 | 4 |
Bank of Japan, 22 May 2002.
|
Bank of Japan’s May report of recent economic and financial developments1 Bank of Japan, 22 May 2002. * The Bank’s View * * The pace of deterioration in Japan’s economy has moderated, with production starting to pick up reflecting the increase in exports and progress in inventory adjustment. With regard to final demand, business fixed investment continues to decrease and private consumption remains weak. Moreover, housing investment remains sluggish and public investment is on a downtrend. Meanwhile, net exports (real exports minus real imports) are increasing due to the recovery in overseas economies. Industrial production is starting to pick up, reflecting the increase in exports and also the further progress in inventory adjustment as a whole. However, firms are maintaining their stance on reducing personnel expenses given persistently strong excessiveness in employment. Therefore, employment and income conditions of households continue to worsen, reflecting the decrease in the number of employees and the faster pace of decline in wages. Turning to the outlook, with respect to domestic demand, business fixed investment is expected to follow a downtrend for a while, judged mainly from leading indicators and firms’ investment plans. Private consumption is also likely to remain lackluster mainly due to worsening employment and income conditions. In addition, government spending is basically projected to continue a downward trend. Meanwhile, as for exporting conditions, overseas economies, especially in the U.S. and East Asia, are likely to follow a recovery path. The worldwide inventory adjustment in IT-related goods has come to an end except for some goods such as networking equipment. Moreover, the yen is still lower than where it was last autumn. Under these circumstances, exports are projected to continue a moderate recovery. Industrial production is likely to follow a gradual uptrend supported by the increase in exports and also by the progress in inventory adjustment. This increase in production will help corporate profits to recover, particularly in the manufacturing sector, and is expected to gradually support domestic private demand such as business fixed investment. Overall, Japan’s economy is projected to stop deteriorating as a whole since an increase in exports and production will lead to an improvement in corporate profits and in turn, domestic private demand. However, in addition to the weak employment and income conditions, the pace of increase in exports and production is likely to remain modest on balance. Therefore, it will take a while for the positive effects, stemming from the developments in exports and production, to spread across the nonmanufacturing sector, small firms and households. With regard to the outlook for overseas economies, an essential element for exports, there are various uncertain factors including the U.S. economy, and the developments in crude oil prices and its effects on the global economy. Amid the persisting fragility and uncertainty of the economy, continuous attention should be still kept in mind that unstable movements in the foreign and domestic financial markets, including the foreign exchange market, would easily exert a negative influence on the economy. On the price front, import prices continue to rise mainly due to higher crude oil prices. Domestic wholesale prices are almost flat recently since the decline in machinery prices and the reduction in electricity charges are offset against the increase in import prices and the effects of the progress in inventory adjustment. However, consumer prices and corporate service prices continue to decline. As for the conditions surrounding price developments, past depreciation of the yen and the rise in crude oil prices are regarded as factors to support prices for the time being. However, since domestic demand is projected to remain weak for a time, the balance between supply and demand is expected This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on May 20 and 21, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on May 20 and 21 as the basis for monetary policy decisions. to keep exerting downward pressure on prices. Furthermore, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will restrain prices. In addition, the faster pace of decline in wages may also work as a factor to push prices downward, mainly in services prices which are sensitive to wage developments. Reflecting these factors, domestic wholesale prices, which tend to be greatly affected by the exchange rate and crude oil prices, are likely to be more or less flat for the time being. On the other hand, consumer prices are expected to stay on a gradual declining trend. As for the financial market, in the short-term money markets, the outstanding balance of the current accounts at the Bank of Japan is recently moving around 15 trillion yen as the Bank continues to provide ample liquidity to the money market. In these circumstances, the overnight call rate continues to move around zero percent. Moreover, interest rates on term instruments remain steady. Yields on long-term government bonds are moving in the range of 1.3-1.4 percent recently. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are contracting slightly. However, spreads between bonds with low credit ratings and government bonds still remain wide. Stock prices are level on the whole and are basically moving in the range of 11,000-12,000 yen. In the foreign exchange market, the yen appreciated reflecting the overall downtrend in U.S. dollars due mainly to weak U.S. stock prices. With regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are becoming more severe. In corporate bonds and CP markets, the issuing environment for firms with low credit ratings continues to be severe on the whole, but the environment for firms with high credit ratings is improving recently. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The year-on-year growth rate of the amount outstanding of corporate bonds issued is decreasing somewhat. The year-on-year growth rate of the amount outstanding of CP issued continues to decline, although the amount is still well above the previous year’s level. The year-on-year growth rate of the monetary base in April increased further due partly to the continued high liquidity demand even after entering the new fiscal year, reflecting a system failure of a major bank group. The year-on-year growth rate of the money stock (M2 + CDs) remained around 3.5-4.0 percent. Funding costs for firms continue to be at extremely low levels on the whole. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions. The deterioration in the financial position of firms is coming to a halt. However, the stance of investors toward firms with high credit risks remains severe and the lending attitudes of private banks are becoming more cautious. Hence, the developments in the behavior of financial institutions and corporate financing continue to require close monitoring.
|
bank of japan
| 2,002 | 5 |
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at Kisaragi-kai, Tokyo, 30 May 2002.
|
Masaru Hayami: The economy - recent developments and challenges Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at Kisaragi-kai, Tokyo, 30 May 2002. * * * Introduction There have finally been some positive signs that Japan’s economy has begun to stabilize as we enter the new fiscal year. However, our more than ten years of experience tells us that sustainable growth cannot be realized unless growth potential is strengthened through productivity growth. While economic activity is showing signs of improvement, we should not be complacent. Rather we should take advantage of this favorable development and further promote structural reform through specific measures. Such efforts will no doubt augment resilience of our economy through rejuvenating business activity and improving consumer confidence. In this sense, this fiscal year will be crucial for our economy in order to return to a sustainable and stable growth path. Today, I would like to review recent economic developments and monetary policy management, followed by some of the main issues our financial system now faces. Recent economic developments Developments in domestic and overseas economies Amid the synchronous deceleration in world economies, Japan’s economy continued to deteriorate from the beginning of last year. Yet, the pace of deterioration has recently somewhat moderated, with production starting to pick up reflecting an increase in exports and the progress of inventory adjustment against the backdrop of a recovery in overseas economies. The US economy had been confronting a contraction phase since around end-2000 such as retrenchment in the information-technology (IT) sector, and the tragic events of early September further increased uncertainty. However, due to stabilizing forces such as the progress of inventory adjustments in the IT sector and resilient consumer spending as well as effects of monetary and fiscal policy stimulus, there have been increasing signs recently that the US economy is beginning to recover. In March, the Federal Reserve Board thus revised its assessment for the foreseeable future from saying that “the risks are weighted mainly toward conditions that may generate economic weakness” to “the risks are balanced” with respect to prospects for price stability and sustainable economic growth. In response to indications of US economic recovery, exports and production in East Asian economies, which are highly dependent on exports to the US, have started to increase and the decline in domestic demand is nearing an end. European economies are also showing some signs of recovery. Japan’s economy has also basked in this movement toward recovery in overseas economies, as evidenced by increased exports to East Asian countries and the US. Inventory adjustments have further progressed in many industries, leading to a gradual recovery in production. But we have yet to see unequivocal movement toward the recovery of domestic demand, which will play a key role for a sustainable recovery. Capital investment continues to decline and consumer spending remains sluggish because of the cumulative worsening of the employment and income environment. April ‘Outlook Report’ What is the outlook for Japan’s economy? The Bank of Japan released, exactly one month ago, ‘Outlook and Risk Assessment of the Economy and Prices’ - the so-called ‘Outlook Report’ - which gives the standard scenario for the economy for about one year ahead and entailing risk factors. The economic outlook for fiscal 2002 and early fiscal 2003 described in the report can be summarized as follows. First, should the recovery in exports and production continue, it will lead to an improvement in corporate profits and capital spending, particularly in the manufacturing sector. Therefore, the standard scenario for Japan’s economy is that the economy is expected to stop deteriorating towards the latter half of fiscal 2002. Second, even though this might be the case, it will take some time for the export and production recovery in the manufacturing sector to spread to the economy as a whole, including the non-manufacturing sector, small firms, and households. This is because, given the high level of labor’s relative share (wages/value added output), the corporate sector continues to pursue restructuring efforts and thus persistent pressure on employment and wages is expected to remain. Consequently, even after the economy stops deteriorating, an autonomous recovery is not likely to gain much momentum. Third is the outlook for price developments under the aforementioned prospects for the economy. Indications of change have also been emerging on the price front recently. The Domestic Wholesale Price Index (WPI), which represents upstream developments in the price transmission process, has been leveling off reflecting the progress of inventory adjustments and rise in oil prices, thereby narrowing the decline in the index on a year-on-year basis. How such changes affect overall price developments, the Consumer Price Index (CPI) in particular, deserves our deliberate review. As I previously mentioned, however, it will take some time for domestic demand to exhibit a distinct recovery, and supply-side factors such as the import of low-priced goods, technological advances, and deregulation are likely to remain forces pushing prices down. How wage declines affect service prices will also warrant attention. Bearing these factors in mind, it will likely take a long period before various price indexes, especially CPI, turn positive on a year-on-year basis. In relation to this standard scenario, the Outlook Report identifies risk factors which might induce deviation both on the upside and downside. Recently, downside risk triggered by overseas economies has certainly diminished substantially, but it is undeniable that the outlook for overseas economies is still difficult to pin down. In particular, sustainability of the recovery of the US economy is still uncertain given the low personal savings rate of the household sector, the high level of household debt, and existing pressure to adjust capital stock in the private sector. A somewhat weak US stock market of late might mirror market participants’ lack of confidence with respect to prospects for corporate profits. Due attention continues to be required for the global economic implications of developments in oil prices and instability in some emerging economies. In addition, while the yen depreciated against the dollar from the end of last year, it has started to appreciate since early spring this year. Some correction of the once optimistic prospects for the US economy and expectations for the recovery of Japan’s economy might be factors behind such a development. Careful monitoring is thus also warranted with respect to developments in the foreign exchange market and international capital flows. Domestic factors, including the resilience of domestic demand, effects from the disposal of nonperforming loans (NPLs) and structural reform, as well as prospects for long-term interest rates and stock prices should also be deliberately assessed. A detailed explanation of each of these factors is in the main text of the Outlook Report 1. What I would like to convey today is that these domestic factors are closely related. For example, the disposal of the NPLs of financial institutions and structural reform of the economy are two sides of the same coin, and are also deeply related with financial market and asset price developments. On the one hand, should long-term interest rates rise in the absence of an economic recovery or stock and land prices plunge, there would be an adverse impact on the management of financial institutions and their financial intermediary function, which would result in hampering the smooth pursuit of structural reform on the corporate front. On the other hand, how positively the disposal of NPLs and structural reform developments will be received by the financial markets offers a key to the smooth implementation of structural reform. The NPL problem, structural reform of the economy, and asset price and financial market developments are eventually critical factors which have a decisive influence on the resilience of the recovery of domestic private demand. Firms and households can only reactivate spending such as investment and consumption when clear prospects of a demand recovery following the resolution of various structural problems are in sight, future uncertainties with respect to employment and wages are dissolved, and a stable financial environment is in place. Such thinking again highlights the importance of structural reform, through which resources will be efficiently reallocated and growth potential strengthened. As assumed in the standard scenario, our economy is expected to stop deteriorating led mainly by improved exports and production, but there still remain various structural adjustment pressures. In other words, cyclical factors and structural factors are locked in battle. I will now address this issue. Business cycle and structural problem Cyclical recovery and structural problem Although our economy has followed a daunting road since the 1990s after the bursting of the bubble, there were some periods when the economy expanded. According to the government’s official business cycle turning point, there were two recovery phases: from the end of 1993 and also the beginning of 1999. During the former, after experiencing a temporary standstill due to effects stemming from the rapid appreciation of the yen in spring 1995, the economy realized more than 3% growth in 1996. In retrospect, the economy entered a recovery phase triggered by monetary easing and fiscal expansion after the bursting of the bubble, followed by an increase in personal consumption and capital investment partly supported by the prevalence of mobile phones and personal computers. The economy rapidly deteriorated in the latter half of 1997 against the backdrop of a slowdown in overseas economies due to the Asian crisis, increased uncertainty with respect to the domestic financial system, and downward pressure from the fiscal front. The next recovery phase, from the beginning of 1999 to the latter half of 2000, is still clear in our memories. Against the backdrop of the global boom of information technology (IT), exports played a leading role and capital investment centering on IT-related industries also increased. However, since adjustment pressure in the IT-related area had intensified worldwide before domestic consumption, another engine of the economy, gained momentum, Japan’s economy deteriorated again after entering 2001. What the two recovery phases in the 1990s have in common is that although the economy started to recover there was no autonomous and sustainable expansion of private demand as a whole. This was principally because the economy was directly hit by a cyclical slowdown in overseas economies and was also vulnerable to shocks such as financial system instability. The fundamental reason for such vulnerability is that excess debt, facilities, and employment, which firms had shouldered during the bubble period, were not thoroughly resolved, and forward-looking business activities which might have led to an increase in productivity and strengthened competitiveness, did not appear. This can be interpreted as the NPL problem in the banking sector not having been completely solved. Such a problem becomes increasingly difficult to solve once the economy enters a downturn and tends to get caught in a vicious circle. Our economy is about to see the third recovery phase since the bursting of the bubble. As I mentioned previously, recent developments can be interpreted as a cyclical movement triggered by the progress of inventory adjustment worldwide in IT-related sectors. However, a precious lesson derived from our experience in the 1990s is that the autonomous and sustainable growth of domestic private demand can never be achieved without an improvement in growth potential. In other words, structural reform of the economy and strengthening of the financial system are more important than anything else in order to see current cyclical recovery movements develop into full-scale economic growth. Monetary policy Monetary policy over the past year Let me now turn to the issue of monetary policy management. One year and two months have passed since the Bank adopted a new monetary policy framework which aims at ‘quantity’ - the outstanding balance of current deposit accounts (reserves) held at he Bank - as its main operating target. The past 14 months can be characterized as a period when not only economic activity but also financial markets have been under enormous stress stemming from such factors as the further deterioration of the economy, the tragic events in the US, and increased financial system uncertainty in the face of the partial ending of the blanket guarantee with respect to deposits. Amid these economic and financial developments, the Bank timely and flexibly took monetary easing measures such as increasing the target reserve amount. Such policy management has played a substantial role in ensuring financial system stability, thereby preventing the economy from further deteriorating. Conditions for exerting monetary easing effects However, we have to face the reality that even such drastic monetary easing has not been sufficiently effective in igniting private demand. To understand this point, it is perhaps useful to review actual developments in the financial markets and real economy. In the financial markets, not only the overnight call rate but also short-term interest rates have been at extremely low levels. For example, the yield of one-year short-term government bonds is less than 0.01%, virtually a zero interest rate, in the secondary market. The financing environment has been more or less favorable for firms. Credit spread, which is the difference between yields on CP and corporate bonds issued by major private firms and those on government bonds, generally widened from last autumn centering on firms with a lower credit rating but has recently started to gradually narrow. Although a severe financing environment continues for small and mediumsized firms, it would seem that such deterioration is nearing an end. One noted development of late is the high growth of monetary base which shows the amount of money directly provided by the Bank. Year-on-year growth of monetary base exceeded 10% from September 2001 and has been around 30% since entering 2002. Such recent high growth matches that during the runaway inflation period immediately after the first oil shock. Overall, financial conditions in Japan have been extremely easy. But the growth rate of the economy and various price indexes has been negative. In other words, despite an extremely accommodative financial environment, real economic activity has not been rejuvenated. Various structural adjustment pressures lie in the background, which can be summarized from the viewpoint of firms, the financial system, and households as follows. First, on the part of firms, they cannot activate business activity such as capital investment no matter how easy monetary conditions are since the problems of excess debt and industrial structure are yet to be solved. Second, forces to lift the economy from the financial side are not likely to emerge since the intermediary function of financial institutions has been eroded against the backdrop of the NPL problem. Third, households are cautious to increase spending even under easy monetary conditions because of uncertainties with respect to the future course of the public pension and social security system. For the Bank’s monetary easing to exert powerful effects, it will be necessary to solve such problems. Once fund demand related to economic expansion emerges, effects of current monetary easing will materialize before our very eyes. Based on such a view, I have been repeatedly emphasizing the importance of strengthening the financial system and promoting structural reform of the economy. The Bank conducted research through its branch network to discover new approaches taken by firms in the various regions. According to this research, in the wake of deregulation and proactive efforts by firms, nationwide we are seeing an increase in new entries to new business areas including the environment, nursing care, and health care. For specific examples, please refer to the report I recently made to the Council on Economic and Fiscal Policy 2. To foster such new developments and ensure that they bear fruit, it is important not only to promote deregulation decisively, but also for private firms to take advantage of new business chances utilizing their management resources to the extent possible. Now, let me move to another important issue, that is, the financial system problem. Recent developments and challenges facing the financial system Current assessment of the financial system The blanket guarantee for time and savings deposits was terminated in April this year and will be totally terminated for all deposits from April 2003. Simply put, the world will shift from perfect protection of depositors with the public sector shouldering the burden to self-responsibility in principle, and, in this sense, fiscal 2002 will be a turning point for Japan’s financial system. It is ten years since the first bankruptcy of a financial institution was resolved by deposit insurance in April 1992. Six years have passed since the framework of government guarantee was introduced to the deposit insurance system, and four years have passed since a framework to cover losses was established by the government. In the meantime, deposits with failed financial institutions have been fully protected. In addition, various arrangements have been devised for the sake of financial system stability such as the injection of public funds to financial institutions and establishment of safety nets with respect to securities and insurance companies. The development of such arrangements has, of course, been closely related to various problems associated with the bursting of the bubble and many financial institutions being forced to fail. In fact, the number of financial institutions - banks, shinkin banks, and credit cooperatives - has decreased by more than 30% from about 1,000 ten years ago to less than 700 at present, partly reflecting the progress of integration such as mergers. In our estimation, the amount of NPLs to be disposed of by financial institutions, that is the sum of write-offs and loan-loss provisioning, has reached more than 80 trillion yen over the past ten years. This figure suggests that financial institutions have disposed of a substantial amount, more than 17% of the loans they held ten years ago. Stated differently, with the NPL problem unresolved, Japan’s financial system has significantly contracted in terms of the number of players and volume of assets. However, despite the painful experience of the past ten years, we have yet to restore credibility in our financial system that still receives harsh criticism from both home and abroad. Financial statements for fiscal 2001 In fact, all major banks went into the red as shown in their financial statements released last week. Such results evidence that major banks have continued to dramatically dispose of their NPLs in an amount more than their operating profits, which should be taken positively. However, at the same time, the results also remind us of the severe situation Japanese financial institutions now face. In addition, financial institutions do not have enough of a buffer left due to the past disposal of NPLs and decline in stock prices. For them, the source of revenue that can be used for the disposal of future NPLs is basically operating profit, and, in this regard, an improvement in profitability is an extremely important challenge which financial institutions urgently need to tackle. Challenges for the financial system Bearing such a situation in mind, I would like to summarize the challenges the system now faces. There are two challenges. One is the NPL problem. The outstanding balance of NPLs has not shown any marked decrease and new NPLs continue to emerge at a high rate. The other relates to the profitability of financial institutions or, more broadly, to financial system infrastructure and markets. These two challenges are mutually related and we need to tackle them simultaneously in order to restore financial system credibility both at home and abroad and to regain strength. Recent developments of the non-performing loan problem I would like to start with the NPL problem. When discussing the NPL problem, we should also look at the borrower side, since the claims of financial institutions are the debts of firms. There are various background factors to the NPL problem depending on the environment surrounding corporate management. The main factors behind the generation of NPLs just after the bursting of the bubble have been the excess debt of firms and the price decline in real estate purchased, but factors stemming from structural changes in industries have gradually became dominant in recent years. The number of firms which are forced to undergo drastic restructuring is expected to increase from now on as structural reform progresses, and there is concern that banks’ loan assets will deteriorate in the process. To make loans to small and medium-sized firms becomes an important future challenge. In response to the ‘special inspections’ conducted by the Financial Services Agency since last year, various measures such as the drawing up of management rehabilitation plans and organization changes through mergers have been taken by large firms carrying a large amount of debt and seeing a noticeable weakening of business performance. Although careful follow-up will be necessary with respect to rehabilitation plans, it is arguably one step forward from the viewpoint of the disposal of NPLs and corporate rehabilitation. Measures have increasingly been adopted for small and medium-sized firms such as rehabilitation under the Civil Rehabilitation Law and out-of-court procedures based on the activities of newly established sections within individual banks to exclusively support the rehabilitation of client firms. However, as a whole, small and medium-sized firms, especially those in the non-manufacturing sector, are facing harsh business conditions and how to cope with the situation has become a big challenge also for the sake of restoring credibility in the financial system. Effective capital adequacy ratios take into account unrealized gains and losses on land and shares, and, looking at them as indicators to see the actual financial conditions of borrowing firms, we find that the current level for all firms is about 30% lower than that before the bubble period, confirming the decline in management strength. And, looking at the ratio by size of firm, the effective capital adequacy ratio of large firms is about the same as before the bubble period, but that of small and medium-sized firms has declined to almost half. Particularly noteworthy is that, within the category of small and medium-sized firms, those in the non-manufacturing sector such as distribution, services, and construction are in a more severe situation than those in the manufacturing sector. Given the fact that about 80% of Japan’s labor force works for small and medium-sized firms, the NPLs of small and medium-sized firms are a serious problem. Things to be considered when dealing with small and medium-sized firms Since the management of small and medium-sized firms varies, the actual management conditions at individual firms should be carefully grasped by considering different aspects. For example, one should look at not only the indicators used in assessing large firms, such as the capital adequacy ratio, but also the financial position of owners, business areas, human resources, and skills. Therefore, financial institutions should have more thorough dialogue with individual small and medium-sized firms than in the case of large firms with respect to their financial conditions and management prospects. In the case of Japan, financial institutions extend loans to a firm as a whole, known as corporate lending, rather than to individual projects as in the US. Consequently, the viability of the firm becomes an important factor when assessing the adequacy of each loan or conducting ex-post assessment. Since small and medium-sized firms have limited access to direct financing and almost exclusively rely for funding on bank borrowing, careful follow-up of individual cases becomes all the more important for financial institutions. In this regard, as has already started in some cases, it might be a meaningful approach in the process of dialogue between firms and financial institutions if financial institutions disclosed their credit rating of borrowing firms, share points of concern, and together explore ways to solve them. Such an approach might contribute to putting in place risk-based loan pricing for financial institutions. At any rate, bearing in mind the economic outlook for the foreseeable future and progress of structural reform, we should anticipate that, at least for some time to come, there is the risk new NPLs will emerge and existing NPLs further deteriorate. In this regard, it is critical that financial institutions are well prepared for such risks and review in a timely fashion their classification of borrowers and collateral conditions, and make appropriate provisions. Removal of non-performing loans from the balance sheet As a matter of course, increasing provisioning is not enough to overcome the NPL problem. Based on dialogue with borrowing firms, financial institutions need to remove NPLs from their balance sheets if the borrowing firms are not likely to be rehabilitated. The Financial Services Agency released a guideline regarding the disposal of NPLs which states that newly generated NPLs should be disposed of within three years, with, in principle, 50% being disposed of within one year and most removed from the balance sheet within two years. At the same time, in the event financial institutions themselves cannot cope with firms which are likely to be rehabilitated, the functions of the Resolution and Collection Corporation (RCC) have been strengthened, such as by the establishment of an investment fund. From now, financial institutions will be requested to make efforts to utilize their own know-how as well as such arrangements. In order to rejuvenate our economy as a whole, it is my strong hope that concerned parties will make every effort to realize the rehabilitation of firms which are viable but facing difficulties due to pressures stemming from structural adjustment. Treatment of insolvent/undercapitalized financial institutions As a result of such disposal of NPLs and their removal from balance sheets, insolvent financial institutions have no choice but to exit from the market. In such cases, non-viable financial institutions should be disposed of in an orderly manner. Even in cases where financial institutions have excess assets, it becomes necessary to expand the business base and improve profitability through measures such as merger if they are not likely to survive on their own from a medium- to long-term perspective. As previously mentioned, although the number of financial institutions has already decreased substantially, further integration should not be ruled out if necessary. The government recently announced it would consider merger promotion measures and I hope they will be implemented expeditiously. Thorough preparation is also needed to avoid credibility in the financial system being substantially eroded or system stability questioned in the process of disposing of NPLs. The idea that appropriate measures, including the injection of public funds, might be necessary in such a case is what I have repeatedly advocated. At the same time, the Bank, together with government measures such as capital injection, is ready to discharge its responsibility as lender of last resort in providing liquidity when deemed necessary to maintain financial system stability. Introduction of fixed asset impairment accounting My bottom line thinking is as I have explained so far, and now I would like to consider challenges for financial institution management from different viewpoints such as the accounting system, which is a financial system infrastructure, and also strengthening the profitability of financial institutions. The precise amount of NPLs has always been a matter of debate, and thus various improvements have been made such as clarification of the definition of NPLs and also the recognition process centering on the introduction of self-assessment. However, for financial institutions to precisely grasp detailed conditions of borrowers, it is imperative that balance sheets correctly reflect their financial conditions. The improvement of accounting rules is quite an important task in order to pursue dialogue between financial institutions and borrowing firms. Although Japan’s accounting rules recently underwent substantial change because of, for example, the introduction of mark-to-market accounting for financial products, there still remain challenges, especially the introduction of fixed asset impairment accounting. When the profitability of fixed assets is lower than anticipated, fixed asset impairment accounting rules require firms to recognize differences from initial plans as losses, thereby aiming at narrowing divergence between balance sheets and the actual business conditions of firms. The Business Accounting Council released an exposure draft this April and fixed asset impairment accounting rules are scheduled to be introduced from fiscal 2005. The introduction of the new accounting rules will impact corporate management, but in view of their significance I hope for their early introduction following thorough discussion. It goes without saying that such accounting principles are also applied to financial institutions. Because of balance sheet regulations, especially capital adequacy requirements, accounting rules have extremely important meaning for financial institutions. In this regard, the Basle Committee on Banking Supervision, an international forum on bank supervision, is considering revising international capital adequacy requirements with a view to implementing revised requirements from end-2006. The most important point of the revision is the introduction of a mechanism that recognizes any deterioration in the value of loan assets at an early stage and that requires a proportional increase in capital corresponding to such deterioration or the risks adhering to projects. Under the current Basel Capital Accord, financial institutions are required to hold 8% of capital against corporate loans, while the new Accord tries to estimate the probability of default according to the business conditions of borrowing firms and imposes required capital based on such estimates. Leading banks in Western countries have already adopted practices to promptly recognize any deterioration in the value of loan assets within their credit risk management framework. There is still some time until the implementation of the new Basel Capital Accord, but the idea that bank capital should be held as a cushion for risks corresponding to the business conditions of borrowers seems quite reasonable, and I believe it necessary that Japan’s financial institutions should, regardless of the existence of regulations, actively pursue sophistication of such risk management. Strengthening of profitability As far as bank management goes, risk-based pricing is as important as holding capital to cover risks. Stated another way, it is important to secure lending profit margins. In the business world, it seems quite reasonable for financial institutions to receive interest from borrowing firms based on negotiations and the risks involved. However, in order to do so, it is quite important for financial institutions to reach an understanding with the borrowers who pay the interest. For example, in the US, many firms ranging from large firms to those with lower credit ratings and medium-sized firms, widely issue corporate bonds to obtain funding, and a resale market for loan assets is in place. Yields of corporate bonds issued and those in the secondary market for loan credits are mutually arbitraged with lending rates, thus forming an environment in which lenders and borrowers can easily agree with respect to interest rate conditions. Improvement in terms of direct access by small and medium-sized firms to capital markets and expansion of the secondary market for loan credits including NPLs are also important tasks in Japan. Once a secondary market for loan credits starts to function, removal of NPLs from balance sheets can be made more efficiently, and will have a positive effect in improving capital efficiency. And, It is important to continue improving the secondary market for loan credits by exerting steady efforts to reduce legal costs such as by standardizing contract formats and simplifying the procedure to transfer legal rights. From the viewpoint of strengthening conviction with respect to interest rate setting, some point out that credit assessment by Japanese financial institutions has put too much emphasis on judging whether there is default risk or not and has disregarded viewpoints such as the probability of default and what interest rate would be necessary to make a loan profitable. In order to set interest rates based on credit risks, I hope our financial institutions will take a more forward-looking attitude in dialogue with their customers. From the viewpoint of improving financial institutions’ profitability, there are other important tasks. To begin with, cost reduction and retreat from unprofitable business sectors are fundamental ways of increasing profits, and thus financial institutions should constantly review their business and drastically pursue such measures if deemed necessary. In addition, not to go as far as seeing entry to other business sectors, I believe that chances to develop various financial services are substantially increasing with the arrival of a full-fledged high-tech society. Individual financial institutions will be rewarded if they use their ingenuity and make unremitting efforts toward improving the quality of their financial services. The issue of public financing Of course there is a problem which cannot be solved through responses by financial institutions alone and that is the existence of public financing. The existence of institutions that provide public financing is extremely large in Japan compared with other countries and there are not a few areas in which they compete with private financial institutions. Viewed from the aspect of setting appropriate loan rates to cover risks, it seems necessary to review the role of government-affiliated financial institutions. Structural reform should proceed based on the idea that business activity be left to the private sector to the fullest extent possible. Concluding remarks Today, I have talked about recent economic developments and financial system problems. With respect to economic developments, I have explained that our economy has finally started to witness some cyclical bright signs. On the financial system front, I have explained that, under a new environment where the blanket guarantee of deposits is scheduled to be terminated, there still remain many challenges financial institutions have to tackle. What I wanted to emphasize most in today’s speech is that, for our economy to realize autonomous and sustainable growth, we should not be complacent about the cyclical improvement of the economy but seriously tackle resolution of the NPL problem and structural reform of the economy. These are the important challenges which Japan’s economy could not accomplish during the 1990s and which have been carried over to the 21st century. I believe that, if not only the government but also financial institutions, private firms, and each and every citizen make efforts to derive and enhance the growth potential of Japan’s economy, we can form the foundation for renewed economic development. The Bank of Japan will continue to make every effort on the monetary policy front to achieve price stability and sustainable economic growth, as well as to discharge its responsibility as a central bank from the viewpoint of financial system stability.
|
bank of japan
| 2,002 | 5 |
Bank of Japan, 13 June 2002.
|
Bank of Japan’s June report of recent economic and financial developments1 Bank of Japan, 13 June 2002. * The Bank’s view * * Japan’s economy shows signs of stabilizing with a distinct increase in exports and a pick-up in production, although domestic private demand remains weak. With regard to final demand, business fixed investment continues to decrease and private consumption, despite some resilience, remains weak as a whole. Moreover, housing investment remains sluggish and public investment is on a downtrend. Meanwhile, net exports (real exports minus real imports) are increasing markedly due to the recovery in overseas economies and also to the effects of restocking abroad, mainly in IT-related goods. Industrial production is picking up, reflecting the increase in exports and completion of inventory adjustment. The rebound in production is beginning to affect employment conditions, albeit marginally, with an increase in overtime working hours and in new job offers mainly for part-time workers. Nevertheless, firms are still maintaining their stance on reducing personnel expenses from a longer term perspective and as a consequence, household income continues to decrease noticeably. In sum, employment and income conditions of households overall remain severe. Turning to the outlook, exports are projected to continue to trend up mainly in IT-related goods amid the ongoing recovery in overseas economies, especially in the U.S. and East Asia. However, the pace of recovery is likely to become somewhat slower in the future than at present, as the effects from overseas restocking dissipate. Supported by this upturn in exports and also by the completion of inventory adjustment, industrial production is expected to accelerate momentarily followed by a gradual uptrend. Meanwhile, with respect to domestic demand, public investment is projected to follow a declining trend and private demand is likely to remain weak for the immediate future. Nevertheless, if the increase in exports and production mentioned above continues, corporate profits will recover, particularly in the manufacturing sector, and this will gradually have a positive impact on domestic private demand such as business fixed investment. Overall, Japan’s economy is projected to stop declining as a whole since an increase in exports and production will lead to an improvement in corporate profits and in turn, domestic private demand. However, considering that forces restraining the economy stemming from excessive employment and debt are still persistently at work, it will take a while for the positive momentum to spread across the nonmanufacturing sector, small firms and households. The outlook for overseas economies, particularly for the U.S. economy, is also accompanied by various uncertain factors. Amid the persisting fragility and uncertainty of the economy, it should continue to be borne in mind that unstable movements in the foreign exchange and financial markets at home and abroad would easily exert a negative influence on the economy. On the price front, import prices become almost unchanged because the continued upward pressure from the rise in crude oil prices around early spring is offset by the recent appreciation of the yen. Domestic wholesale prices are also almost flat since the decline in machinery prices and the reduction in electricity charges are offset by the effects of the increase in import prices in the past and of the progress in inventory adjustment. However, consumer prices and corporate service prices continue to decline. As for the conditions surrounding price developments, the balance between supply and demand is expected to still keep exerting downward pressure on prices amid persistently weak domestic demand for a while, although the progress in inventory adjustment will support prices to some degree. Moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on June 11 and 12, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on June 11 and 12 as the basis for monetary policy decisions. streamlining of distribution channels will continue to restrain prices. Under these circumstances, as import prices are likely to turn down, domestic wholesale prices, which are sensitive to import prices, will edge down after remaining flat a little further. On the other hand, consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. This is partly because while the slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices to some extent, the faster pace of decline in wages may possibly reinforce the ongoing decline in prices, especially for services prices. As for the financial market, in the short-term money markets, the outstanding balance of the current accounts at the Bank of Japan is recently moving around 15 trillion yen as the Bank continues to provide ample liquidity to the money market. In these circumstances, the overnight call rate continues to move around zero percent. Moreover, interest rates on term instruments remain steady. Yields on long-term government bonds are mainly moving in the range of 1.3-1.4 percent recently. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds continue to contract. However, spreads between bonds with low credit ratings and government bonds still remain wide. Stock prices are level on the whole and are basically moving in the range of 11,000-12,000 yen. In the foreign exchange market, the yen continued to appreciate reflecting the overall downtrend in the U.S. dollar, but has been mixed thereafter since late May due mainly to the news on yen-selling intervention by the Japanese monetary authority. With regard to corporate finance, private banks are becoming cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are becoming severe. In the corporate bonds and CP markets, the issuing environment for firms with low credit ratings remains severe, but the environment for firms with high credit ratings is on an improving trend. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The year-on-year growth rate of the amount outstanding of corporate bonds issued is decreasing somewhat. The year-on-year growth rate of the amount outstanding of CP issued is declining recently, although the amount is still well above the previous year’s level. The monetary base continued to increase substantially by around 30 percent from the previous year’s level in May, although the growth rate slowed slightly due partly to the abatement of liquidity demand prompted by a system failure of a major bank group. The year-on-year growth rate of the money stock (M2 + CDs) remained around 3.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions. The deterioration in the funding situation of firms is coming to a halt. However, the stance of investors toward firms with high credit risks remains severe and the lending attitudes of private banks are becoming more cautious. Hence, the developments in the behavior of financial institutions and corporate financing continue to require close monitoring.
|
bank of japan
| 2,002 | 6 |
Opening speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Tenth International Conference held by the Institute for Monetary and Economic Studies, Bank of Japan, 1 July 2002.
|
Masaru Hayami: Exchange rate regimes in the 21st century Opening speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Tenth International Conference held by the Institute for Monetary and Economic Studies, Bank of Japan, 1 July 2002. * * * It is my great pleasure today to address the 10th international conference hosted by the Institute for Monetary and Economic Studies. On behalf of all my colleagues here at the Bank of Japan, I welcome all the participants. And my special thanks to the Institute’s two advisors, Professor Allan Meltzer and Professor Maurice Obstfeld. You have done a wonderful job helping us organize the conference. This is the first conference in the 21st century, and for such an occasion my colleagues chose ‘Exchange Rate Regimes in the 21st Century’ as the theme. Exchange rate regimes among major countries experienced several changes after World War II while fulfilling their expected role of enhancing cross-border trade and investment as well as encouraging world economic growth and preserving price stability. Being a central banker, I was also involved in changes in exchange rate regimes. On Sunday, August 15, 1971, when U.S. President Nixon announced that the US would no longer convert the dollar into gold, I was stationed in the London office of the Bank of Japan. And I still vividly remember that on the following day, Monday, with Bundesbank Vice-President Emminger, I took part in a confidential meeting with US Treasury Undersecretary Volcker. He had flown over to London to explain to the European monetary authorities the President’s announcement. Most of the major countries, except Japan, closed their foreign exchange markets after the announcement. European participants, who broke the ice at the meeting, said that they could not re-open their markets until the US decided the new parity of the dollar. For monetary authorities at that time, the adoption of floating exchange rates was not like the dawn of a new era with full confidence. The then BIS President Zijlstra termed the trial and error among authorities under the floating exchange rate regime “a voyage through uncharted waters,” and that was how all the monetary authorities felt. Some 30 years have passed under the floating regime and now we have two challenges for the regime to meet. First, we have to work out how to preserve foreign exchange rate stability between major currencies. The dollar has functioned as a key currency under the floating exchange rate regime. Its exchange rate on other major currencies, however, has by no means been stable. I have had a hard time, sometimes as a central banker, and sometimes as the head of a trading company, dealing with fluctuations in foreign exchange rates. In the meantime, EU countries made efforts to stabilize foreign exchange rates between member countries and such efforts paid off at the end of the 20th century. They gave birth to a single currency, the euro. The euro will no doubt contribute to enhancing trade and investment within the region and will be a model for other regions in the world. And it will take some time to get clues to what extent the euro will play the role of a key currency and lead to the stability of foreign exchange rates between major currencies. I should also add that we might need to review the background history and rationale behind the special drawing rights (SDR) of the IMF which were created in 1969. The other important challenge in the 21st century is how we can devise the exchange rate regime in order to stave off currency and financial crises in the emerging economies and also how to contain resultant contagion to the minimum. We understand that the past currency crises in Latin American and Asian countries were brought about by individual and unique factors. Still, we have no choice but to make steady efforts to learn from the past crises in various countries in order to ward off currency crises and contain contagion. I am told that this conference will take up such issues related to currency crises and I am convinced that your discussions will provide a good opportunity to enhance our understanding. A better understanding of an ideal exchange rate regime may not lead to a universal currency system all the countries around the globe accept. I have several times witnessed a currency system, once optimal for a certain country at a certain time, gradually become fraught with inconsistencies and unstable in time. Yet, pessimism is not what I want to spread. A series of inconsistencies in the international currency have, in my judgement, deepened our understanding of the functions and roles of an exchange rate regime and have encouraged the evolution of such a system. To rack our brains and map out ways to achieve a better exchange rate regime is one of the most important challenges for central bankers. I am convinced that with the experts from all over the world exchanging their experiences and views, this conference will contribute to meeting such a challenge. And I believe this conference will also provide clues to how to map out charts through troubled waters. Thank you for your attention.
|
bank of japan
| 2,002 | 7 |
Remarks by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Foreign Correspondents¿ Club of Japan, Tokyo, 3 July 2002.
|
Yutaka Yamaguchi: Central banking in uncharted territory Remarks by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Foreign Correspondents’ Club of Japan, Tokyo, 3 July 2002. * 1. * * Introduction It is my great honor and pleasure to address the Foreign Correspondents’ Club of Japan today. Recalling last year’s experience at this Club, my colleague, Deputy Governor Fujiwara, warned me to be prepared for a high risk of receiving very tough questions today. I think there are two cases when a cautious central banker willingly takes such a risk. The first is when the economy is doing so well and the central banker wants to display a good job. The other is when he/she really wants to ensure listeners better understand the state of the economy. Unfortunately, my decision to be here today is the latter case. Japan’s economy now faces a broad range of difficulties. Various comments are made on Japan’s economy and monetary policy by economists both in Japan and abroad. Listening to some of them, I sometimes feel a perception gap which is difficult to remedy. Using the limited time given today, I would like to discuss the challenges facing Japan’s economy and the role of monetary policy. I would also like to touch upon the perception gap in the context of the transparency of monetary policy. 2. Economic and financial developments in Japan Just like other economies, from the end of 2000, Japan’s economy experienced a sharp downturn in exports and production against the background of a slowdown in the US economy and the collapse of the global IT boom. Downward pressure on the economy initially hit the corporate sector in the form of deterioration in profits and a fall in capital expenditures. Since summer last year, the adjustment process has gradually spread to the household sector through weakening employment and wages. Against this background, the underlying trend of private consumption remains weak. In recent months, we have at last seen some positive signs. Exports have clearly started to increase and production has been recovering. Major factors inducing such positive changes are again external developments including the US economic recovery and the progress of stock adjustment in the IT-related industries. The issue here is whether such positive moves could lead to a sustainable economic recovery. The Bank of Japan publishes a half-yearly report entitled “Outlook and Risk Assessment of the Economy and Prices”, and the most recent April issue gives the outlook for this fiscal year. As a standard scenario for Japan’ economy for the rest of this fiscal year, the report assumes a recovery led by exports and production, an outlook I still fully endorse. At the same time, it is difficult to assume that the coming recovery will soon become a domesticdemand-led spontaneous one. For one, it is hard to presume that the upward momentum supported by exports and production will fast spread to non-manufacturing and small business sectors. Given the relatively high labor’s income share, restructuring efforts by firms to cut labor costs are likely to continue. Therefore, the expected recovery in the corporate sector may not be fully transmitted into an improvement in the employment and income situation and, in that case, downward pressure on households may persist for a while. Turning to recent price developments, the Outlook report assumes that prices will continue to decline, albeit somewhat less compared to last fiscal year, as downward pressure will continue both from the demand and supply sides. The Bank of Japan saw a need to prevent such a price decline and has adopted strong monetary easing measures. Reviewing the debate over deflation since last year, an important question is how to interpret the relationship between prices and economic activity. To be more specific, it is crucial whether a price decline associated with economic slowdown would further accelerate economic deterioration. In the past few years, this question has been actively discussed in the context of the possibility of a deflationary spiral where a vicious circle of price declines and economic deterioration emerges. Reviewing actual economic data, however, we have thankfully not seen the economic situation assumed by the deflationary spiral camp. It seems to me that price development can be better understood more as a result of economic activity rather than vice versa. According to research by my colleagues at the Bank, a loose correlation between changes in CPI and the output gap is observed. But the deviation of actual CPI inflation from estimates based on a calculated output gap could be as large as a full percentage point in each direction, which requires us to have an approximate two-percentage-point allowance in total. This reflects various factors including the effects of structural changes on the supply side and simple technical drifts associated with assembling the index. Our experience in 1999 and 2000 showed that, under certain conditions, the economy could recover while a mild decline in the CPI continued. It is my impression that declining asset prices, especially in the property market, has had a much more severe impact on economic activity rather than the moderate deflation of goods and services. There exist various uncertainties and risks to the standard scenario. As the Outlook report discussed such risks in detail, here I would just like to touch upon the following two issues. First is the global economic developments, especially in the US, which is expected to play a key role for Japan’s recovery in the near future. (Needless to say, from the US point of view, Japan’s economy might be regarded a risk factor. This is a clear evidence that we are living in a world of interdependence). Looking at the US developments in recent months, a large gap has been witnessed between macroeconomic data showing signs of recovery and the soft stock market. If we look at global financial and capital markets, the effective exchange rate of the US dollar reached its peak in January and has been depreciating significantly since then. Such foreign exchange rate movements reflect recent changes in global capital flows such as a decline in direct investment into the United States in favor of the euro zone. These developments warrant careful monitoring as they could have a global impact. Second is the vulnerability of Japan’s economy to exogenous shocks and stresses. Since the 1990s, the economy experienced sharp downturns triggered, for example, by concern over the financial system, withdrawal of fiscal support, and the global economic slowdown. We should always be prepared for such exogenous shocks but, given the present condition of the financial system, we should be especially aware that Japan’s economy is currently vulnerable to major shocks. 3. Monetary policy by the Bank of Japan Against the economic and financial background that I have just described, the Bank took a series of easing measures in February and March last year, stepping into an unprecedented policy area in the history of central banking. Among the several pillars of this new monetary easing framework, the most important is the change in the target of money market operations. The target was changed from the overnight call money rate, that is the interest rate for the shortest term, to the outstanding balance of current accounts held at the Bank of Japan which represents the quantity of liquidity. This change was introduced to explore the possibility of further monetary easing even after short-term interest rates, the starting point of the transmission mechanism of monetary policy, had effectively fallen to zero. This framework is often called ‘quantitative easing.’ Let me share with you some facts and figures to show why these are unprecedented monetary easing measures in the history of central banking. First of all, the call money rate declined to very close to zero at 0.001%. The rate on one-year government bills declined below 0.01% and, since summer last year, the long-term government bond yield has stayed at a historically low level of 1.3-1.5%. Turning to ‘quantity,’ the current account balance at the Bank of Japan has increased to 15 trillion yen. You may not fully appreciate how large this figure is. The amount of reserves legally required to be held is only 4 trillion yen. Thus, financial institutions are holding 11 trillion yen in excess liquidity without earning any interest. The size of monetary base, that is the sum of cash in circulation and the outstanding balance of current accounts at the Bank of Japan, has posted dramatic double-digit growth on a year-on-year basis to reach almost 17% of GDP. This is the highest level over the last hundred years with the exception of a period during World War II. The minutes of the Monetary Policy Meeting in March 2001 describe how Policy Board members arrived at the decision to adopt a quantitative easing framework. I will summarize the steps leading to this decision. First, the members felt that the effects of such a framework were uncertain and might have negative side effects. Second, therefore, whether the Bank should adopt such a framework depended on the specific economic situation. Third, they concluded that, although it had not been appropriate to adopt such measures in the preceding two years when the economy had been gradually recovering, the worsening situation in March 2001 required the Bank adopt strong measures. The Bank of Japan has pursued such strong monetary easing measures while concurrently examining their effects, in other words, on a ‘learning by doing’ basis. Through this process, we have learned a lot about the new measures but, at the same time, more questions have arisen. It is said that it took a long time for Man to learn the concept of ‘zero’. I am increasingly convinced that it will also require a long time for central bankers and economists to completely understand the meaning of a zero interest rate. Let me share some of my observations and current thinking on this subject. As most evident effects, we can point out that the abundant and flexible provision of liquidity under the quantitative easing framework successfully maintained extremely easy monetary conditions, thereby preserving financial market stability. You may think such effects nothing special but recall the difficulties we have experienced since the end of 2000, namely a global economic retreat triggered by the bursting of the global IT bubble and the tragic events of September 11th. Additionally, we suffered from the adverse impact of structural adjustment and rising concerns over the financial system. It is thus significant that our flexible and abundant provision of liquidity contained market participants’ concerns over liquidity financing. There is little doubt such accommodative monetary conditions played the key role in avoiding a deflationary spiral. Apart from this role in mitigating negative impacts, what other positive effects have our monetary easing measures had on the economy? The effectiveness of additional liquidity provision after the short-term interest rate reached zero has not been fully examined and will continue to be discussed by economists. A key here is whether such additional liquidity provision will lead to increased investment in riskier assets, often called asset reallocation. There are two theoretical hypotheses. One interprets the situation as a liquidity trap. Caught in this trap, without room for a further decline in short-term interest rates, any increase in liquidity provision by the Bank will merely result in higher idle balances in the Bank’s current accounts. In other words, additional liquidity will be fully absorbed by an increase in demand as financial institutions no longer hesitate to hold more excess liquidity because the cost of doing so is zero. In this case, a quantitative increase cannot give any stimulus to economic activity. The other interpretation sees an increase in liquidity provision inviting liquidity saturation and, consequently, somehow inducing investment in riskier assets. For example, increased investment in stocks would raise their prices and more investment in foreign-currency denominated assets would promote the depreciation of the yen. This camp argues that such a change in asset prices would stimulate economic activity. What do actual data tell about the effects of quantitative easing? It is always difficult to single out the effects of quantitative easing because there always exist various other factors; There also exists a certain time lag in effect of monetary policy. Although I am not able to make an assertive judgment, let me try to present some facts related to the question based on four yardsticks. The first yardstick is whether the growth of monetary aggregates such as money supply has increased. The annual growth rate of M2+CDs was at the 2% level in March last year and has been at the 3% level in recent months. This marginal change reflects a shift of funds into cash and demand deposits after the massive redemption of investment trusts following the failure of Enron. In fact, the growth rate of broadly-defined liquidity, which covers a wider rage of financial assets, has been declining. The relatively high growth of monetary aggregates with higher liquidity reflects a greater preference for liquidity as a result of lower interest rates. It also reflects an increase in demand deposits which will be guaranteed even after the partial removal of the blanket guarantee of bank deposits in April. Looking at bank lending which plays the key role in credit creation, the outstanding amount has been showing a negative growth rate against the background of weak credit demand. In the meantime, the lending attitude of commercial banks has rather tightened reflecting their desire to strengthen profitability. The second yardstick is whether asset prices have changed in the direction assumed by the process of quantitative easing. In actuality, stock prices in Japan have declined compared to the level in March last year. And, while the yen began to depreciate from last autumn, it has started to appreciate since April this year. This appears to indicate that the yen rate has been dominated by changes in the market perception of business conditions in the US and Japan. The third yardstick is whether prices have stopped declining. For those who claim that deflation is a monetary phenomenon, a significant increase in the monetary base should induce a significant rise in prices. As I have already explained, however, we have so far seen little change in the gradual declining trend of prices. The fourth yardstick is whether economic activity has recovered. Although we are seeing some positive signs in recent months after a sharp economic downturn, it appears to largely reflect an export increase against the backdrop of the global economic recovery. I have discussed the effect of quantitative easing, that is to increase the current account balance at the Bank under the zero interest rate constraint. It will take some time to judge which camp is right, namely the liquidity trap or the liquidity saturation. Even in retrospect, it might be difficult to draw a clear conclusion. In any event, having listened to my explanation of quantitative easing, you may come up with the following question: If quantitative easing proves to be ineffective, why don’t you try `unconventional` policies of purchasing some specific assets such as stocks and property in order to affect their prices? By adopting such options, a central bank would significantly intervene in microeconomic resource and capital allocation. I am also skeptical if the central bank operations could directly affect asset prices in this world of free capital flows. I refer those of you who have an interest in this subject to other speeches of mine in which I discuss this kind of policy in more detail. Today I would like to add just one comment. And that is, leaving the issue of the effectiveness of such policy aside, the zero interest rate environment enables those who believe in such effects, the government or private firms, to carry out such purchases funding at zero interest rates. Thus, the real question is what parties would be best suited to issue short-term debt at zero interest rates and to purchase specific assets. 4. What is needed to return to a sustainable growth path? Next, I would like to turn to the question of what is needed to return to a sustainable growth path. To be honest, this is a difficult question. This is because, in order to answer it, we have to consider another difficult question. Why has Japan’s economy remained stagnant for ten years? The most pressing issue for Japan’s economy is a shortage of demand relative to supply capacity. Therefore, what is crucial is to increase demand to fill the output gap and make the economy grow at its growth potential. As I have discussed, with the zero interest rate constraint, the effect of monetary policy may be limited in creating demand. But, once demand starts to increase responding to exogenous factors, the present monetary policy has the potential to strongly support such moves. In this regard, another pillar of our framework is going to play an important role. And this is the policy commitment of continuing the current easing framework until the Consumer Price Index registers stably zero or an increase. Monetary policy is usually conducted in a forward-looking manner based on the expected inflation rate. This is because the effect of monetary policy materializes with a time lag. When an economic recovery is seen, long-term interest rates automatically rise as market participants come to expect the tightening of monetary policy. In contrast, the policy commitment of the Bank promises that the present strong easing framework will continue until the currently negative CPI inflation rate registers stably above zero. This commitment, by stabilizing short- to medium-term interest rates at low levels, is expected to support economic recovery as it unfolds. On the other hand, it is known that actively using fiscal policy in the interest of stabilization could rather destabilize economic activity or distort resource allocation. For this reason, in recent years, many countries let monetary policy play the key role in stabilizing economic activity. At the same time, it is also known that, theoretically, in the face of the zero interest rate constraint, there is a role for fiscal policy in increasing demand. The outstanding balance of government debt has reached nearly 140% in terms of GDP. But, if fiscal funds obtained from the issuance of new debt are used effectively to boost aggregate demand, the associated growth of income and production would lower the level of government debt in terms of GDP. To the contrary, if used in an inefficient way, fiscal spending funded by debt would restrain longterm growth prospects. It is difficult to judge a priori which scenario is more likely to happen, because, in the end, it all depends on which policy the public will support. I have so far discussed demand-side policy. What about structural reform, which has been actively talked about? ‘Structural reform’ means different things to different people. A very general definition could be to regard it as supply-side policy to improve productivity. Improving productivity is always crucial because the long-term growth path depends on productivity growth. To that end, resources such as labor, land, and capital - have to be reallocated in the most efficient way to adapt to a changing economic environment. It is a quite orthodox policy indeed. The reallocation of resources is required at various levels such as inside a corporation, among corporations within the same industry, among various industries, and among various regions. In the end, the non-performing loan problem in our country is the reflection of such inefficient firms and industries. Efforts to improve productivity are important. However, if demand is not created to meet an increase in supply capacity, the output gap will widen further. In addition, there is a risk that, before seeing an increase in supply capacity, a deflationary impact may emerge as competition, inevitably induces firms to exit from the market. On the other hand, however, if policy efforts to promote future growth are seen to be promising, it could lead to an increase in the current demand partly through a rise in stock prices. Taking the example of business investment, it is the key for improving productivity and, at the same time, is in itself a demand. Therefore, it is quite important to promote competition and improve the domestic environment for such investment. Given that the ultimate goal of such investment is to fulfill private consumption demand, it is equally necessary to remove public concern over the future so that consumption can increase. These things are easy to say but difficult to implement. Fully recognizing that this is the conundrum facing Japan’s economy, I want to stress here that, when pursuing ‘structural reforms,’ it should clearly be recognized that such reforms could cut both ways as I have explained. In the end, the public determines the desirable sequencing of policy change. A decision to realize the efficient reallocation of resources all at once will be associated with significant pain but, at the same time, it could pave a way for faster recovery later. To the contrary, a decision to realize reallocation in a gradual manner could avoid a sharp downturn but it could delay a sustainable recovery. An economist from abroad who had believed that Japan’s economy was almost moribund changed his view after arriving in Japan and was said to have called the situation here a “golden recession.” As this story indicates, after the bursting of bubbles, Japan has in effect chosen the latter gradualist approach with respect to resource reallocation. As a result, we have avoided a situation where unemployment has skyrocketed to double-digit figures or GDP dropping by 5 percent a year. It is hard to say which approach is appropriate a priori. Having said that, given the speed of change in today’s economy as well as the fact that the economy has recorded low growth for ten years or so, the shortcomings of the gradual approach are becoming more evident. I have so far mainly discussed how to improve Japan’s economy through policy efforts. Finally, I would like to touch upon the role of individuals and business firms. In a market economy, the importance of individuals and business firms cannot be emphasized enough. In this regard, it is impressive to review how Japanese players have established themselves in major league baseball in the US. Ten years ago, there were no Japanese baseball players in the major league but now there are thirteen. Have the skills of Japanese players improved dramatically in the past ten years? I don’t think this is the case. Rather, I suspect that one player challenged the major league and his success invited others to follow. 5. Transparency of monetary policy My final topic today is the transparency of monetary policy and the perception gap between critics and the Bank of Japan. The Bank of Japan has been making efforts to improve external communication and to enhance the transparency of monetary policy since the new Bank of Japan Law was enacted in 1998. The new law includes “transparency” along with “independence” as its basic concepts. There are two reasons why transparency is important for a central bank. First, it is important from the viewpoint of accountability. In a democratic society, an independent central bank should fully explain its actions to people and their representatives in the legislature. Transparency makes a central bank keenly aware of the responsibility associated with independence. Second, transparency is important in helping to secure the effects of monetary policy. This has been the case for many years but, as economic developments in the past 15 years both domestically and abroad witnessed, asset prices are increasingly playing an important role in the transmission mechanism of monetary policy. An important characteristic of asset prices is that they fluctuate reflecting expectations for the future. Although a central bank cannot manipulate asset prices, given that information from a central bank could affect their movements, it is extremely important to accurately communicate its policy intention by enhancing transparency. So far I have used the abstract phrase “transparency of monetary policy.” Let me be a bit more specific. I think enhancing the transparency of monetary policy has three aspects. The first concerns the goal of monetary policy. The second is about the central bank assessment of the economy. The third is, given such goals and assessment, the policy response. If there is a perception gap between critics and the Bank, where does such a gap exist? With regard to the first aspect, i.e. the goals of monetary policy, the Bank of Japan Law clearly stipulates that policy should aim “at, through the pursuit of price stability, contributing to the sound development of the national economy.” The Bank has also adopted monetary easing measures in a determined manner aiming at overcoming deflation. This is evident in our policy commitment to continue the current easing framework until CPI inflation stably registers zero percent or a year-onyear increase. In this regard, there are some that believe the Bank of Japan should adopt an inflation targeting framework. As I have talked about this subject on other occasions, I will not go into detail today but would like to make just one comment. That is, in an environment where a zero interest rate constraint exists and a central bank lacks effective policy measures to raise inflation rates, the adoption of inflation targeting would not only fail to improve the transparency of policy-making but could also hurt the credibility. Next, on the second aspect of transparency, that is the assessment of economic and financial developments, the Bank communicates the views of Policy Board members to the public in its monthly report. The Bank also publishes the Outlook report every six months which contains a forecast of prices and growth rates by Board members as reference. How about the third aspect of transparency, that is the policy response with the given policy goals and economic assessment? Some critics raise harsh questions as to how current monetary policy is related to the policy goal of the Bank’s monetary policy, which is price stability. On this point, the Bank is facing difficulty in winning full public understanding, largely due to the fact that views differ on some important issues, namely how to interpret the background to current mild deflation and also how to assess the effects of quantitative easing under the zero interest rate constraint. For example, many of you might have heard the mantra-like argument which claims that ‘deflation is a monetary phenomenon.’ I think this phrase comes from the famous proposition by a Nobel laureate economist Milton Friedman. Based on research into the monetary history of the US, he said that “inflation is always and everywhere a monetary phenomenon.” I do not know if rampant inflation and mild deflation can be symmetrically treated as ‘monetary phenomenon.’ If I may quote another giant, John Maynard Keynes offered a different view on deflation. In “A Treatise on Money” published in 1930, Keynes referred to British deflation in the late 19th century and wrote “I consider, therefore, that the history of this period is a perfect example of a prolonged commodity deflation - developing and persisting in spite of a great increase in the total volume of bank money.” As a central banker, I am increasingly convinced that, when facing an unprecedented situation, what is required for us is to take a pragmatic approach without being dogmatic. It requires considering the background and possible solutions by referring to available theories and historical experience both at home and abroad and by analyzing the observed hard facts. Recalling various economic changes in the past, it is surprising that we could not recognize many such changes on a real-time basis. We often have difficulty in recognizing changes when they are taking place. This can be said in the case of the rise and bursting of the financial bubbles and the development of IT technology. Ongoing global disinflation, which is demanding the attention of central banks worldwide, could turn out to be a major change in retrospect. If we look at CPI inflation at the end of last year, in East Asia, the Taiwan Province of China, Hong Kong SAR, Singapore, Malaysia and China recorded negative figures. Looking at the G7 countries, all except two registered inflation rates below 2%. Such a trend is more evident if we look at WPI or PPI inflation. The Taiwan Province of China, Hong Kong SAR, Singapore, Malaysia, China and Korea registered negative inflation rates as did all the G7 countries with the exception of Canada and Germany. Such price developments must to a large extent reflect cyclical economic weakness but may also be affected by other factors. 6. Closing remarks Japan’s economy currently faces various challenges. The Bank of Japan also faces an unprecedented economic environment in the history of central banking characterized by the zero interest rate constraint and the non-performing loan problem. To cope with the challenges, the Bank has been making its utmost efforts. I believe that, in order to fully perform its duty, a central bank needs to be able to accurately assess the economic environment, demonstrate a strong will to conduct appropriate monetary policy, and explain its policy fully. With this in mind, we will continue to exert our best efforts. Thank you for your kind attention.
|
bank of japan
| 2,002 | 7 |
Bank of Japan¿s July report of recent economic and financial developments
|
Bank of Japan’s July report of recent economic and financial developments Bank of Japan, 17 July 2002. * * * The Bank’s view Japan’s economy, despite continued weakness in domestic demand, has almost stabilized as a whole with an increasing upward impetus from exports and production, and an improvement in corporate profits and business sentiment. With regard to final demand, business fixed investment continues to decrease and private consumption, despite some resilience, remains weak as a whole. Moreover, housing investment remains sluggish and public investment is on a downtrend. Meanwhile, net exports (real exports minus real imports) are increasing significantly due to the recovery in overseas economies and also to the effects of restocking abroad, mainly in IT-related goods. Industrial production is picking up clearly in response to the increase in exports and adequate reduction of excess inventory stocks. Against this background, corporate profits appear to be turning up and business sentiment is improving. In addition, the rebound in production affects employment conditions, albeit marginally, with an increase in overtime hours worked and in new job offers mainly for part-time workers. However, firms are still maintaining their stance on reducing personnel expenses and as a consequence, household income continues to decrease noticeably. Thus, employment and income conditions of households overall remain severe. Turning to the economic outlook, the upward trend in exports are expected to continue against the background of the gradual recovery in overseas economies, although the pace is likely to slow as the impetus from overseas restocking weakens. Thus, industrial production is expected to follow a gradual uptrend with some fluctuations in its pace. On the other hand, with respect to domestic demand, public investment is projected to follow a declining trend and private demand is likely to remain weak for the immediate future. Yet, if the increase in exports and production mentioned above continues, the recovery in corporate profits will become distinct, and this will gradually bring a positive impact on domestic private demand. In fact, leading indicators of business fixed investment show some signs of stabilizing. Overall, it can be envisaged that the stabilization of Japan’s economy will become more secured as the increase in exports and production, through the improvement in corporate profits, will underpin domestic private demand. However, considering that forces restraining the economy, such as excessive employment and debt, are still persistently at work, momentum for a self-sustaining recovery will be subdued for some time. Furthermore, uncertainty regarding external conditions, particularly in the IT-related sector, is somewhat rising amid a fall in stock prices in the U.S. and worldwide as well as depreciation of the U.S. dollar. In these circumstances, it should be heeded that further destabilization in the foreign exchange and financial markets at home and abroad would easily exert a negative influence on the economy. On the price front, import prices are turning down due to the U.S. dollar’s depreciation against the yen since this spring. Domestic wholesale prices are leveling off since a decline in machinery prices and a reduction in electricity charges are offset by the effects of the increase in import prices until recently and the completion of inventory adjustment. Meanwhile, consumer prices stay on a gradual downtrend and corporate services prices continue to decline. As for the conditions surrounding price developments, the balance between supply and demand is expected to still keep exerting downward pressure on prices for a while amid persistently weak domestic demand, although the completion of inventory adjustment will support prices to some degree. Moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will continue to restrain prices. With import prices beginning to turn down, the currently unchanged domestic wholesale prices is likely to edge down again as they are sensitive to import prices. Consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. This is because while the slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices to some extent, the faster pace of decline in wages may possibly reinforce the ongoing decline in prices, especially for services prices. As for the financial market, in the short-term money markets, the outstanding balance of the current accounts at the Bank of Japan is recently moving around 15 trillion yen as the Bank continues to provide ample liquidity to the money market. In these circumstances, the overnight call rate continues to move around zero percent. Moreover, longer-term interest rates remain steady. Yields on long-term government bonds inched down in response to a fall in stock prices and are mainly moving in the range of 1.2-1.3 percent recently. As for yield spreads between private bonds (bank bonds and corporate bonds) and government bonds, the downtrend from the start of this fiscal year has come to a halt since mid-June. Stock prices fell through June in line with a decline in U.S. stock prices, but have edged up thereafter and are recently mixed, moving around 10,500 yen. In the foreign exchange market, the yen continued to appreciate reflecting the overall downtrend in the U.S. dollar, and is currently traded around 115-117 yen to the U.S. dollar. With regard to corporate finance, private banks are becoming cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms continue to be severe. In the corporate bonds and CP markets, the issuing environment for firms with low credit ratings remains severe, but the environment for firms with high credit ratings is on an improving trend. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The year-on-year growth rate of the amount outstanding of corporate bonds issued is decreasing. The year-on-year growth rate of the amount outstanding of CP issued has slowed, although the amount is still above the previous year’s level. The monetary base increased substantially by around 20-30 percent from the previous year’s level, although the growth rate slowed slightly. The year-on-year growth rate of the money stock remained around 3.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions. The deterioration in the financing situation of firms is coming to a halt. However, the stance of investors toward firms with high credit risks remains severe and the lending attitudes of private banks are becoming more cautious. Hence, the developments in the behaviour of financial institutions and corporate financing continue to require close monitoring.
|
bank of japan
| 2,002 | 7 |
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Naigai Josei Chousa Kai (The Research Institute of Japan), Tokyo, 24 July 2002.
|
Masaru Hayami: The challenges facing Japan’s economy Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Naigai Josei Chousa Kai (The Research Institute of Japan), Tokyo, 24 July 2002. * I. * * Introduction Led by an increase in exports and production, Japan’s economy is entering a cyclical recovery for the third time in ten years. During the previous two recoveries, during 1993-1996 and 1999-2000 according to the Reference Date of Business Cycle of the government, momentum disappeared over a period of several months against a background of a slowdown in overseas economies and uncertainty surrounding the domestic financial system, and the sustainable growth of private domestic demand was not realized. Today, I would like to talk about the conditions and challenges for the economy to firmly return to a sustainable growth path this time around when some signs of recovery are finally being seen. In doing so, I will focus on three issues. First, how to strengthen the financial intermediary function. Second, the complete removal of the blanket deposit guarantee scheduled for April 2003. And third, the important role of the private sector in structural reform. II. Recent economic and financial developments and monetary policy A. Current economic situation After the deterioration from the beginning of 2001 because of sharp downward pressure from IT-related industries worldwide, Japan’s economy has been showing some positive signs due to a surge in exports reflecting the recovery of overseas economies. Against this background, inventory reduction has progressed rapidly, and production has recovered significantly. In addition, the TANKAN (Short-Term Economic Survey of Enterprises in Japan) survey released early this month showed an improvement in corporate business sentiment. While we factored in, to a certain degree, the recovery of exports and production in the April issue of our Outlook Report (Outlook and Risk Assessment of the Economy and Prices, issued twice a year in April and October), the recovery is now slightly stronger than was expected at that time. However, domestic private demand components continue to be sluggish reflecting the severe employment and income conditions, and downward pressure stemming from corporate balance sheet adjustment. Nevertheless, there are some positive signs in domestic demand reflecting the increase in exports and production. Some business fixed investment indicators, such as machinery orders in the manufacturing sector, are showing signs that they have stopped declining. In addition, new job offers and overtime hours are slightly increasing reflecting the rise in production. Wholesale prices have been leveling out since February reflecting higher import prices and improvement in the supply-demand balance which is due to the completion of inventory liquidation. However, consumer prices have continued to decline moderately. B. Economic outlook Despite such positive signs, prospects for economic recovery have not necessarily become solid. Uncertainty has increased somewhat recently because of the fall in US stock prices and the US dollar, and their effects on Japan’s export conditions through developments in the US economy. The recent declines in US stock prices and the dollar seem to have been brought about by factors such as corporate accounting malfeasance, concern about the political situation worldwide, and cautious views about the outlook for the US economy. While recent economic indicators generally suggest that the US economy is recovering and that productivity has been continuing to increase, there is caution with respect to business fixed investment and corporate profits. With such developments in mind, we need to stay vigilant for a while about developments in the US economy, international capital flows inclusive of Latin American countries, stock prices worldwide, and foreign exchange markets. C. Recent monetary policy Next, I would like to move on to the recent conduct of monetary policy. In March last year when overnight interest rates reached virtually zero, the Bank, firmly determined to halt the continuing fall in prices, adopted a new framework for money market operations by shifting the operating target to the ‘quantity’ of liquidity, namely the outstanding balance of current accounts held at the Bank. Under the new framework, the Bank has conducted decisive monetary easing which is unprecedented in the history of central banking both at home and abroad. As a result, short-term interest rates across the board have declined to virtually zero percent, from overnight call rates to those with three-month and six-month maturity. Medium- to long-term interest rates have also declined to extremely low levels. For example, yields on three-year JGBs are currently at 0.1-0.2 percent, and those on five-year JGBs are at around 0.4 percent. The growth rate of the monetary base, an indicator of the amount of funds provided by the Bank, has been increasing considerably at a rate close to 30 percent year on year. The ratio of monetary base to nominal GDP has been at its highest level in Japan’s history, except during World War II. Monetary easing has played an important role in preventing deterioration of the economy and has secured financial market stability. This was especially so when the economy was under significant downward pressure following the terrorist attacks in the US and also when concern about financial system stability heightened from the end of December last year to the end of March this year. Since April this year, the economy has started to show positive signs, and liquidity demand in financial markets has gradually stabilized reflecting the abatement of concern about financial system stability. However, as mentioned earlier, the economic recovery is still in a nascent stage and there are also risks for the economic outlook. The Bank should therefore continue strong monetary easing to support recent positive movements. As I mentioned earlier, it is extremely difficult to revitalize Japan’s economy solely by monetary easing when it faces various structural problems. However, the Bank’s strong monetary easing will continue to firmly underpin the recovery of the economy by stabilizing financial markets. Furthermore, it is expected that the effects of the Bank’s monetary easing measures will be fully felt when forwardlooking economic activity increases as structural reform progresses and efforts to strengthen the financial system bear fruit. III. Strengthening the financial intermediary function As Japan’s economy is finally showing signs of recovery, whether the financial system can fulfill a growing need for funds in the course of the recovery is the key to ensuring a return to sustainable growth led by private demand. At the same time, it has been tackling the non-performing loan, or NPL, problem, which is a negative legacy from the past. Financial institutions should strive to promote the disposal of NPLs while reviewing unprofitable loans, a process which could be painful for many firms. However, there is basically no contradiction between fostering soundness of banking business and fortifying the financial intermediary function. I would like to outline three key tasks that need to be addressed in strengthening the financial intermediary function while improving financial system soundness. A. Securing lending margins First, it is important for financial institutions to set lending rates in line with credit risk (risk-based pricing). At present, a large proportion of the loan assets of financial institutions are, in fact, unprofitable if default risk is taken into account. This is evidenced by the fact that NPL disposals by financial institutions have exceeded their ‘core’ profits, in other words interest rate margins obtained from lending, in each of the eight years since 1994. The risk-based pricing of lending rates is to secure the lending margins of financial institutions. It is essential that financial institutions fortify their financial strength by striving to dispose of NPLs, reduce credit costs, and secure lending margins. I would like to emphasize that risk-based pricing is vital not only for financial institutions to increase profitability and secure soundness but also for firms to expand their opportunities to procure funds. Risk-based pricing will more than ever require firms to decide the size of their debts according to risks arising from their business and borrowing costs. At the same time, firms will be able to obtain necessary credit as long as they pay interest margins which cover the risk. Firms in a serious financial situation can also seek ways to overcome difficulties by clarifying how they can improve their business and financial situation and thereby lower borrowing costs through close dialogue with financial institutions. In Japan today, the mainstream of lending is corporate financing, which largely depends on the creditworthiness of firms. Further use of other types of lending, such as project finance that focuses on the profitability of a project itself would, in my judgement, strengthen the financial intermediary function. During the bubble period, financial institutions did not put much weight on examining firms’ profitability and risks when negotiating lending conditions, as they believed that collateral would always secure their loan assets and land prices would never fall. This is no longer the case, and in this regard I welcome the recent move on the part of financial institutions to strive to maintain close contact with firms to ensure common understanding about their profitability and risks. Financial institutions have only recently started to further utilize risk-based pricing and there is still room for further improvement, but, at the same time, the financial strength of firms needs to be bolstered to support financial institutions’ lending margins. Thus, it will certainly take a while for the positive effects of risk-based pricing to prevail in the banking sector. B. Securitization and sale of loan assets The second important task for strengthening the financial intermediary function is expanding markets for the securitization and sale of loan assets, and extension of commitment lines by financial institutions. The secondary market for loan assets has been developed. In this market, loan assets, which are usually held by financial institutions until maturity, are traded among institutional investors and other financial institutions. Furthermore, a market for loan syndication is also being fostered whereby lending rates are determined at the time of loan extension for resale in the market for loan assets. The outstanding balance of loan assets transferred to a third party by the original lender institution amounted to 6 trillion yen at the end of June. This, however, accounts for only a small portion of total bank loans of 433 trillion yen. Development of the secondary market for loan assets will contribute to strengthening the financial intermediary function in two ways. First, it enhances the transparency of the pricing of credit risks and enables risk-based pricing because credit risks attaching to loan assets that are traded can be evaluated by markets on a continuous basis. And second, it strengthens the financial intermediary function of financial institutions while maintaining their capital base. In addition, it efficiently reallocates risks among investors who are willing to, and have capacity to, take risks, and thus the capacity to take risks in the financial system as a whole will increase. Financial institutions can extend commitment lines. A commitment line is a contract between a bank and a corporate client which legally obliges the bank to extend loans upon request up to the amount and the term of validity which are agreed in advance. In this way, firms can obtain credit flexibly and at the same time streamline their balance sheets. Since their introduction in 1999, commitment lines have been widely used as a means of fund-raising not only by large firms but also small and mediumsized ones. The contract amount of funds extended by commitment lines is slightly over 14 trillion yen, accounting for 3 percent of the total loans of financial institutions. I consider that the potential need for this type of funding is huge bearing in mind continuing efforts by firms to cut interest-bearing debt and improve their financial position. C. Expansion of the role of the capital market The third important task is to further develop the capital market. In Japan where bank lending (indirect financing) rather than capital markets (direct financing) is the main channel of financing, the financial intermediary function depends heavily on the soundness of financial institutions, and this has been reaffirmed by events of recent years. Fostering intermediary channels for raising funds through markets while achieving an appropriate balance between direct and indirect financing will help to buffer external shocks, thereby contributing to financial system stability. Given current economic and industrial structural changes, how to smoothly provide funds for innovative and new business efforts is another important issue to be addressed. It is essentially the responsibility of capital markets, such as the stock and bond markets, to provide funds to such businesses which are ‘risky but quite promising.’ Even though Japan’s capital markets have been growing recently, there seems to be room for further growth. Firstly, funding from the capital market has been marking a year-on-year increase while bank lending has been declining. The share of corporate bonds and commercial paper (CP) in total fund raising has recently increased to around 20 percent. In the US, however, there is a wide range of markets from those for AAA-rated bonds to those for non-investment grade bonds, thus fulfilling a variety of corporate fund-raising needs. In Japan, the corporate bond and CP markets are virtually limited to bonds issued by firms with relatively high credit ratings. Secondly, markets for asset-backed securities (ABS) and asset-backed CP (ABCP) where firms raise funds by securitizing their assets such as sales credits and loan credit receivables have been rapidly expanding, but the volume and liquidity of these markets are still limited compared with those in the US. D. Role of the government and that of the Bank I have mentioned three important tasks to be undertaken to improve the financial intermediary function of the financial system. If steady progress is made, funds necessary for economic growth can be supplied in significant quantities. That said, the role of the government is also significant in preparing an environment conducive to strengthening the financial intermediary function. For example, in Japan, the loans extended by government financial institutions have generally been on an increasing trend as a proportion of total loans in the past ten years, accounting for some 20 percent, a level with no precedent in other countries. If the proportion is too high, depending on the financial environment, private financial institutions will have difficulty in carrying out lending activities based on market principles. From the viewpoint of promoting risk-based pricing, the role and function of public financial institutions should be discussed taking into account the prevailing financial environment. An adequate investment-related tax system and also disclosure system are very important infrastructure for smooth provision of risk capital. Investment trusts are crucial in providing a bridge from household savings to capital markets. Since the failure of Enron last fall, investors have been shifting their money away from investment trusts because some money market mutual funds that held Enron bonds fell below par. The recognition of risks and return through appropriate disclosure will be necessary to create mature markets for financial instruments including bonds and investment trusts. The Bank is also supporting private sector efforts to strengthen the financial intermediary function in various ways. As mentioned earlier, we are taking decisive monetary easing measures. These measures are also contributing to smooth corporate finance through encouraging positive lending activity on the part of financial institutions by dispelling concern about liquidity, and keeping extremely low the market interest rates which serve as a benchmark for setting lending rates. The Bank is constantly reviewing the operational tools for money market operations from the viewpoint of ensuring the effectiveness of monetary policy, paying due regard to the development of financial and capital markets. For example, in October 1999 and in December 2001, the Bank decided to accept ABSs and ABCP as eligible collateral in conducting money market operations. These measures not only enhance the Bank’s ability to provide funds, but also foster capital markets. The Bank is also actively taking part in projects to improve market infrastructure, such as improving securities settlement systems and setting rules regarding market practices. E. Change in the financial system and financial institution lending I should add that while all three ways mentioned will contribute to improving the financial intermediary function, they may not necessarily lead to an increase in loans outstanding extended by financial institutions in the short run. Arguably, financial institution lending is an important channel for monetary easing effects to permeate the economy. In the process of disposing of excessive debt and NPLs, however, it should be noted that total loans outstanding could decrease as the financial intermediary function operates more smoothly and strengthens. IV. Financial system challenges arising from the complete termination of blanket deposit guarantee Toward the end of March this year, a significant amount of deposits shifted from time and savings deposits to demand deposits ahead of the April termination of blanket deposit guarantee for time and savings deposits. Though the shift gradually weakened after April, it seems that depositors are still risk-averse in general. Developments in the run-up to next April when blanket deposit guarantee will be completely terminated, for example the movement of funds and the possible effects on the financial intermediary function of financial institutions, are key issues not only in terms of financial system stability but also for the economy which is entering a recovery phase. In this regard, an imminent task for Japan’s financial system is to ensure that the termination of blanket deposit guarantee passes without any undue disruption. Individual financial institutions must make further efforts to secure market and depositor confidence by further advancing measures to dispose of NPLs. A. Voices calling for the postponement of the complete termination of blanket deposit guarantee A view that the planned complete termination of blanket deposit guarantee in April 2003 should be postponed has started to gain some ground. The background to this is the considerable shift of funds from time and savings deposits to demand deposits which took place this spring before the partial lifting of deposit guarantee. Until the end of fiscal 2001, the government fully protected deposits whenever financial institutions failed, in order to restore financial system soundness by disposing of NPLs and non-viable financial institutions while maintaining system stability. However, we cannot maintain such generous measures indefinitely that insure deposits for an amount exceeding that covered by the normal deposit guarantee scheme, that is, any amount exceeding 10 million yen in principal and interest, since it would increase moral hazard. Thus, it was decided that blanket deposit guarantee would be terminated on all deposits next April after a transition period this fiscal year during which demand deposits are fully protected. Given this, I believe it undesirable to maintain blanket deposit guarantee for demand deposits indefinitely. Needless to say, in order to terminate blanket deposit guarantee, circumstances should allow for depositors to have confidence in individual financial institutions. To this end, it is essential to clearly indicate the path to overcoming the NPL problem. Prospects for overcoming the NPL problem are, unfortunately, not yet clear at this stage despite the large disposal of NPLs to date, as new NPLs have been emerging. In addition to the problems of the excessive debt of large firms, an issue even more crucial from now on in relation to the NPL problem will be the disposal of NPLs to small and medium-sized firms in financial difficulty due to structural adjustment. Financial institutions need to make further efforts to dispose of their NPLs. B. Introduction of impairment accounting and the new Basel Capital Accord In relation to the disposal of NPLs, two issues must be borne in mind besides the removal of blanket deposit guarantee. One is the introduction of impairment accounting and the other is the revision to the capital adequacy regulatory framework. The idea of fixed asset impairment accounting rules is that when the profitability of firm’s fixed assets is lower than planned, the rules require firms to recognize the difference from initial plans as a loss, the aim being to narrow divergence between firms’ balance sheets and their actual business condition. The Business Accounting Council released a draft of the accounting rules this April, and fixed asset impairment accounting rules are scheduled to be introduced from fiscal 2005. The Basel Committee on Banking Supervision, an international forum on banking supervision, is considering revising international bank capital adequacy requirements with a view to implementing the revised requirements from the end of 2006. The most important point of the revision is in line with that of the introduction of impairment accounting rules. The new accord will introduce a mechanism that acknowledges any deterioration in the value of financial institution’s loan assets at an early stage and requires banks to promptly increase their capital relative to the risks associated with a loan project and any change in degree of risk. Under the current 1998 Basel Capital Accord, financial institutions are required to hold the minimum requirement of 8 percent of capital to corporate loans, while under the new accord they will estimate the probability of default associated with each borrower according to its business condition and hold capital based on such estimates. Leading banks overseas have already adopted practices to acknowledge in a timely manner any deterioration in the value of loan assets within their credit risk management framework. C. The need to promote the disposal of NPLs Financial institutions should make every effort to address business management tasks, including the disposal of NPLs, in preparation for the introduction of the new accounting rules and regulatory changes. If the complete removal of blanket deposit guarantee were to be postponed without such efforts being made on the part of financial institutions, this would merely be putting off the decision. To overcome the NPL problem, it is important that financial institutions make, in advance, loan-loss provisions sufficient to dispose of their NPLs. Financial institutions are, then, expected to make further use of various measures that have been introduced to date such as the expanded function of the Resolution and Collection Corporation and the guideline on out-of-court procedures for corporate reconstruction. Financial institutions that have used up most of their cushion of capital might be confronted with an inadequate capital base when they carry forward measures to drastically dispose of NPLs. If this gives rise to serious concern about a loss of confidence in the financial system as a whole, measures such as the injection of public funds should be taken in a timely manner, as I have repeatedly said in the past. If public funds are to be injected, it is essential that the receiving institutions implement measures to improve their profitability such as a comprehensive review of their business and corporate restructuring. As the central bank, we will also swiftly implement necessary measures to maintain financial system stability, including the provision of liquidity, based on an accurate grasp of the situation through careful monitoring. V. Role of the private sector in structural reform My last topic today is structural reform in Japan. The necessity of structural reform measures is already widely recognized, and I have talked about the subject on various occasions. So today, I will limit myself to two points that may be the starting point of structural reform. A. The important role of the private sector The first is the significance of active participation by the private sector in pursuing structural reform. The government regards structural reform as an important task. In June this year, the so-called “Basic Policies 2002 (Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002)” were decided which proposed concrete measures on issues such as economic revitalization, tax reform, and a review of government expenditure. However, what I feel somewhat lacking in recent discussions is the fact that the leading role in structural reform should always be played by private economic entities, that is, individual enterprises. Structural reform means reallocation of production resources such as labor, land, and capital to enhance productivity in the overall economy in response to significant changes in the economic environment such as economic globalization, aging, a declining birthrate, and the bursting of bubbles. It is not the government that decides how such resources should be reallocated. Efficient reallocation can only be realized through the economic activity, such as production and investment, of individual enterprises under the market mechanism. The same applies to overcoming financial system problems. The main force in enhancing the financial intermediary function is the profit incentive of financial institutions and investors. Tax reform, deregulation, and the review of pension and medical systems currently being promoted by the government are indeed important. However, these are basically done to provide an environment that promotes free and creative activity on the part of individual enterprises. We need not recite the words of Schumpeter, a prominent economist in the 20th century, to know that one of the important driving forces promoting economic growth is innovation by entrepreneurs. Historically, there are countless examples both in Japan and abroad where innovative enterprises and entrepreneurs started new businesses by combining available technology and resources, which created demand, and as a result enriched the overall economy. Therefore, I have little doubt that new business chances will emerge in line with changes in the financial and economic structure, and I look forward to seeing both enterprises and individuals pursuing innovation. B. Potential strength of the economy and timeframe for reform The second point of structural reform is the potential strength of Japan’s economy and the timeframe for such reform. Looking at recent arguments on the progress of structural reform, it is not hard to find ones which take a pessimistic line. Indeed, while the situation may not justify an optimistic view, excessive loss of confidence may hinder momentum for reform. Looking back, the Japanese economy has, over the years, overcome various big changes in the economic environment such as the termination of convertibility of US dollar into gold, two oil shocks, and the Plaza Accord. All these severely impacted the terms of trade of a country with poor natural resources and a high degree of dependence on trade. In each of these adjustment phases, Japan experienced drastic restructuring, the exit of weak enterprises, and a change in industrial structure. However, from the efforts and ideas to overcome such ‘pains,’ higher value-added products that satisfied the needs of the times that called for energy-saving products, diversification of life styles, and environmental concerns, were created and in turn enriched the Japanese economy. Japan would not be what it is today if it just avoided pains. And, I would like to stress that all this was achieved by none other than our nation’s private sector. Since the aftermath of the bursting of asset bubbles still lingers, the structural reform our economy needs may perhaps be more challenging than changes in the economic environment, which we have often experienced in the past. While it goes without saying that we need to quicken the pace of structural reform, it is also true that such reform cannot be accomplished in a short time. The 1990s are often called ‘the lost decade’, but I do not think they were. Both in the industrial and financial arena, we have already seen reorganization and cooperation on a scale that was unimaginable ten years ago. New business models adapting to globalization are beginning to emerge. Cross shareholdings, keiretsu relationships, and long-term employment are being reviewed in response to recent changes in the economic environment. Corporate governance is also changing steadily. As a successful outcome of these developments, export-oriented enterprises are able to secure profits even in the severe environment presented by a sharp decline in production in the IT industry and increasing productivity in China and other East Asian economies. Though there are no real observable results in the overall economy, I believe that these individual efforts will in the end bear fruit. Fortunately, our country has abundant personal financial assets and foreign claims. This means that unlike countries where weakness in the economy directly leads to external debt repayment problems, Japan can ensure the necessary timeframe for reform. This is our country’s strongest advantage and may perhaps also be a weakness in that our sense of crisis may be lacking. We know where the problems lie. I would like to conclude my speech today by repeating that the present situation, where economic recovery is beginning to be seen, is a good opportunity to overcome the challenges with a clear will and vision. Thank you for your attention.
|
bank of japan
| 2,002 | 7 |
Statement by Mr 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 19 July 2002), Tokyo, 5 August 2002.
|
Masaru Hayami: Remarks on the Bank’s view of Japan’s recent economic and financial developments Statement by Mr 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 19 July 2002), Tokyo, 5 August 2002. * Introduction * * The Bank of Japan submitted its Semiannual Report on Currency and Monetary Control for the second half of fiscal 2001 to the Diet in June 2002. 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 developments and on the thinking behind our recent conduct of monetary policy. I. Developments in Japan’s Economy Japan's economy continued to deteriorate throughout 2001 and into early 2002, reflecting the rapid deceleration of the world economy due to adjustment in IT-related industries. After the spring of 2002, however, the pace of the deterioration moderated, reflecting the recovery in overseas economies. Recently, Japan's economy has almost stabilized as a whole with an increasing upward impetus from exports and production, and an improvement in corporate profits and business sentiment. Employment conditions continue to improve, albeit marginally, with an increase in overtime hours worked and in new job offers. In contrast, private demand, a key factor for a sustainable recovery of the economy, has not displayed any clear movement toward recovery. Business fixed investment continues to decrease, and private consumption remains weak as a whole. As for the economic outlook, if overseas economies continue to recover, the stabilization of Japan's economy will become more secure as the increase in exports and production will underpin domestic private demand through the improvement in corporate profits. However, considering that forces restraining the economy, such as excessive employment and debt, are still persistently at work, momentum for a self-sustaining recovery will be subdued for some time. In addition, uncertainty regarding external conditions which supported the recent economic recovery is rising somewhat amid a fall in stock prices in the United States and worldwide as well as depreciation of the U.S. dollar. Regarding prices in Japan, domestic wholesale prices have been generally leveling off, due partly to the effects of the increase in import prices in the past and of the completion of inventory adjustment. The pace of year-on-year decline in domestic wholesale prices has been slowing gradually. On the other hand, consumer prices continue to decline at a moderate pace. With regard to the outlook, the slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices to some extent. However, as I mentioned earlier, momentum for a recovery in domestic private demand is expected to be weak, and factors such as technological innovation, deregulation, and streamlining of distribution channels will continue to restrain prices. Given the situation, prices as a whole are expected to follow a moderate downtrend for the time being. II. Financial Developments Financial markets were unstable toward the end of March 2002, reflecting market participants' nervousness due to growing concern about the stability of the financial system in the period immediately before the removal of blanket deposit insurance. Regarding corporate financing, the lending attitude of private banks became more cautious, and the financing conditions of firms with high credit risks, especially small firms, gradually became more severe. Governor Hayami made a statement regarding the Semiannual Report on Currency and Monetary Control for the second half of fiscal 2001 before the Committee on Financial Affairs, House of Councillors, on July 4, 2002. Financial markets have gradually regained stability on the whole since April 2002, as the economy improved slightly. In the corporate bonds and CP markets, the issuing environment has been improving recently. This suggests that investors' stance toward taking credit risk is starting to improve. Financing conditions of firms with relatively high credit risks, however, remain severe. Hence, developments in the behavior of financial institutions and corporate financing continue to require close monitoring. Japanese stock prices have been somewhat weak since mid-June 2002, reflecting the fall in U.S. stock prices. The yen has become stronger against the U.S. dollar. If these developments go so far as to cause financial markets to become significantly unstable, Japan's economy, which is on an improving trend, will be negatively affected. Thus, developments in financial markets also require close monitoring. III. Recent Conduct of Monetary Policy The Bank adopted a new framework for money market operations at the Monetary Policy Meeting in March 2001. The main operating target was the "quantity" of liquidity, i.e., the amount of the outstanding balance of current accounts at the Bank as the uncollateralized overnight call rate had declined to low levels close to zero percent and there was hardly any room left for further easing using 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. 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. As a result, interest rates have been at extremely low levels. For example, in addition to overnight call rates, short-term interest rates with relatively longer maturity declined to close to zero percent. The year-on-year growth rate of the monetary base increased considerably, by 20-30 percent. The Bank's conduct of monetary policy has played an important role in preventing further deterioration of the economy by securing stability in financial markets when Japan's economy was under significant stress due to adjustment in IT-related industries worldwide, the terrorist attacks in the United States, and increasing concern about the stability of the financial system. However, it is also true that business fixed investment and household spending have not been fully revitalized 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 accomplish the following. Private demand must be generated by advancing structural reforms on the economic and industrial fronts through tax reform and implementation of concrete measures to revitalize the economy. At the same time, it is also vital to strengthen the financial system and ensure its stability by resolving the nonperforming-loan problem. Conclusion Japan's economy is about to undergo its third cyclical recovery since 1990. In the past two recovery phases, the economy lost its momentum due to the slowdown of overseas economies and concern about the stability of the financial system. As a result, private demand could not expand autonomously and sustainably on the whole. Bearing that experience in mind, the Bank strongly hopes that action to tackle structural reforms will be pursued tenaciously in a variety of fields to establish a basis for the sustainable growth of Japan's economy. The Bank is determined to continue to do its utmost from the both of the following viewpoints as a central bank. First, it will make efforts to stabilize financial markets and ensure permeation of the effects of monetary easing through provision of ample liquidity so that Japan's economy will exit from deflation. And second, the Bank will endeavor to prevent systemic risk from materializing as "the lender of last resort."
|
bank of japan
| 2,002 | 8 |
Bank of Japan, 12 August 2002
|
Bank of Japan’s August report of recent economic and financial developments1 Bank of Japan, 12 August 2002 * The Bank’s View * * Japan’s economy, despite persistent weakness in domestic demand and increasing uncertainty regarding the global economy, has almost stabilized as a whole with exports and production continuing to increase. With regard to final demand, business fixed investment continues to decrease and private consumption, despite some resilience, remains weak as a whole. Moreover, housing investment remains sluggish and public investment continues to decline. Meanwhile, net exports (real exports minus real imports) continue to increase significantly due to the recovery in overseas economies and also to the effects of restocking abroad, mainly in IT-related goods. Industrial production is picking up clearly in response to the upsurge in exports and adequate reduction of excess inventory stocks. Against this background, corporate profits appear to have started to recover. In addition, the rebound in production is having effects on labor markets, albeit marginally, with an increase in overtime hours worked and in new job offers mainly for part-time workers. However, firms are still maintaining their stance on reducing personnel expenses and as a consequence, household income continues to decrease noticeably. Thus, employment and income situation of households overall remains severe. Turning to the economic outlook, the upward trend in exports is expected to continue against the background of the gradual recovery in overseas economies, although the pace is likely to slow as the impetus from overseas restocking weakens. Thus, industrial production is expected to follow a gradual uptrend with some fluctuations in its pace. On the other hand, with respect to domestic demand, public investment is projected to follow a declining trend and private demand is likely to remain weak for the immediate future. Yet, if the increase in exports and production mentioned above continues, the recovery in corporate profits will become distinct, and this will gradually bring a positive impact on domestic private demand. In fact, the decline in some leading indicators of business fixed investment has come to a halt. Overall, it can be envisaged that the stabilization of Japan’s economy will become more definite as the increase in exports and production, through the improvement in corporate profits, will underpin domestic private demand. However, considering that forces restraining the economy, such as excessive labor input and debt, are still persistently at work, momentum for a self-sustaining recovery will be subdued for some time. Furthermore, stock prices in the U.S. and worldwide as well as the U.S. dollar remain volatile and firms’ outlook for the global demand for IT-related goods has become rather cautious. Judging from these factors, uncertainty regarding external conditions seems to have increased somewhat further. In these circumstances, it should continue to be heeded that further destabilization in the foreign exchange and financial markets at home and abroad could easily exert a negative influence on the economy. On the price front, import prices have started to decline mainly due to the U.S. dollar’s depreciation against the yen since this spring. Domestic wholesale prices have weakened, partly because the effects of the increase in import prices until spring started to dissipate. Moreover, consumer prices stay on a gradual downtrend and corporate services prices continue to decline. As for the conditions surrounding price developments, the balance between supply and demand is expected to keep exerting downward pressure on prices for a while amid persistently weak domestic demand, although the completion of inventory adjustment and the rise in capacity utilization rates will This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on August 8 and 9, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on August 8 and 9 as the basis for monetary policy decisions. support prices to some degree. Moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will continue to restrain prices. With import prices beginning to decline, domestic wholesale prices are projected to continue to be weak for a while, as they are sensitive to import prices. Consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. This is because while the slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices to some extent, the faster pace of decline in wages may possibly reinforce the ongoing decline in prices, especially for services prices. As for the financial market, in the short-term money markets, the outstanding balance of the current accounts at the Bank of Japan is moving around 15 trillion yen as the Bank continues to provide ample liquidity to the money market. In these circumstances, the overnight call rate continues to move at very close to zero percent. Also, longer-term interest rates remain steady. Yields on long-term government bonds dropped to 1.26 percent in response to a further depreciation of the U.S. dollar against the yen and a decline in stock prices, and are recently mixed moving around 1.25-1.3 percent. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are virtually level. Stock prices declined from late July as foreign institutional investors sold stocks in line with a decline in U.S. and European stock prices, and are recently moving around 9,500-10,000 yen. In the foreign exchange market, the yen rose to 115-116 yen in mid-July reflecting the overall downtrend in the U.S. dollar, and is currently fluctuating at around 120 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms continue to be severe. In the corporate bonds and CP markets, the issuing environment for firms with low credit ratings is still severe, but the environment for firms with high credit ratings is accommodative. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The year-on-year growth rates of the amount outstanding of corporate bonds and CP issued are on a downtrend. The monetary base increased substantially —by around 20-30 percent— from the previous year’s level, although the growth rate slowed slightly. The year-on-year growth rate of the money stock remained around 3.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions. The deterioration in the financing situation of firms has come to a halt. However, the stance of investors toward firms with high credit risks remains severe and the lending attitudes of private banks remain cautious. Hence, the developments in the behavior of financial institutions and corporate financing continue to require close monitoring.
|
bank of japan
| 2,002 | 8 |
Bank of Japan, 19 September 2002.
|
Bank of Japan’s September report of recent economic and financial developments1 Bank of Japan, 19 September 2002. * The Bank’s View * * Japan’s economy, despite persistent weakness in domestic demand and large uncertainty regarding the global economy, has almost stabilized as a whole with exports and production continuing to increase. With regard to final demand, while the decline in business fixed investment has become moderate, private consumption remains weak. Moreover, housing investment remains sluggish and public investment is declining. Meanwhile, net exports (real exports minus real imports) continue to increase due to the recovery in overseas economies. Industrial production remains on an upward trend in response to the rise in exports and adequate reduction of excess inventory stocks. Against this background, corporate profits have started to recover. In addition, the rebound in production has been effecting labor markets, albeit marginally, with an increase in overtime hours worked and in new job offers mainly for part-time workers. However, as firms are still maintaining their stance on reducing personnel expenses, household income continues to decrease noticeably with a plunge in summer bonuses. Thus, the employment and income situation of households overall remains severe. Turning to the economic outlook, the growth in exports is expected to slow temporarily with the impetus from overseas restocking coming to a halt, but the uptrend in exports will be maintained against the background of the moderate recovery in overseas economies. Thus, industrial production is also expected to follow a moderate uptrend despite a temporary slowdown. With respect to domestic demand, public investment is projected to follow a declining trend and private consumption is likely to remain weak for some time due to the severe employment and income situation. Leading indicators suggest that business fixed investment will stop declining, but a distinct recovery in the immediate future is unlikely partly due to large uncertainty regarding overseas economies. Nevertheless, if the uptrend in exports and production continues, corporate profits will stay on a track to recovery, and this will gradually have a positive impact on domestic private demand. Overall, it can be envisaged that the stabilization of Japan’s economy will gradually become definite as overseas economies continue the moderate recovery. However, it will take a while for the economy to show clear signs of recovery, as the pace of increase in exports and production is expected to slow temporarily while restraining forces such as excessive labor input and debt persist. Furthermore, there is large uncertainty regarding exports such as the developments in stock prices in the United States and worldwide, the outlook for IT-related goods, and geopolitical factors and oil prices. In these circumstances, the recent weakness in domestic stock prices and its potential adverse effects on the financial system and the economy should be monitored carefully. On the price front, import prices are declining mainly due to the U.S. dollar’s depreciation against the yen from spring toward summer, but international commodity prices including crude oil have recently risen. Domestic wholesale prices have weakened, reflecting the decrease in import prices to date. Moreover, consumer prices remain on a gradual downtrend and corporate services prices continue to decline. As for the conditions surrounding price developments, the balance between supply and demand is expected to keep exerting downward pressure on prices for a while amid persistently weak domestic demand, although the completion of inventory adjustment and the rise in capacity utilization rates will support prices to some degree. Moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will continue to restrain prices. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on September 17 and 18, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on September 17 and 18 as the basis for monetary policy decisions. Under these circumstances, domestic wholesale prices are projected to continue to be weak for a while. Consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. While the slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices to some extent, the faster pace of decline in wages may possibly reinforce the ongoing decline in prices, especially for services prices. As for the financial market, the outstanding balance of the current accounts at the Bank of Japan is moving around 15 trillion yen as the Bank continues to provide ample liquidity. Under these circumstances, in the short-term money markets, more market participants have come to feel that there is an excess of liquidity in the market and the overnight call rate continues to move at very close to zero percent. Also, longer-term interest rates are declining. Yields on long-term government bonds followed a downtrend in line with a decline in yields on overseas long-term government bonds and in domestic and overseas stock prices, in addition to widespread perceptions among market participants that there is an excess of liquidity. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are virtually level. Meanwhile, stock prices have been declining since the start of September in line with a decline in U.S. and European stock prices, as more investors preferred to hold off buying stocks. Stock prices are mainly moving around 9,000-9,500 yen recently. In the foreign exchange market, the yen, after being fluctuating without trend until early September, dropped in mid-September. It is currently being traded in the range of 122-123 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms continue to be severe. In the corporate bonds and CP markets, the issuing environment for firms with low credit ratings is still severe, but the environment for firms with high credit ratings is accommodative. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The amount outstanding of corporate bonds and CP issued is recently moving near the previous year’s level. The monetary base increased substantially—by around 20-30 percent—from the previous year’s level. The year-on-year growth rate of the money stock remained around 3.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions. The deterioration in the financing situation of firms has come to a halt. However, the stance of investors toward firms with high credit risks remains severe and the lending attitudes of private banks remain cautious. Hence, the developments in the behavior of financial institutions and corporate financing continue to require close monitoring.
|
bank of japan
| 2,002 | 9 |
Speech by Mr Yutaka Yamaguchi , Deputy Governor of the Bank of Japan, at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 30 August 2002.
|
Yutaka Yamaguchi: Monetary policy in a changing economic environment Speech by Mr Yutaka Yamaguchi , Deputy Governor of the Bank of Japan, at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 30 August 2002. * * * 1. Three years ago at this same conference, I was given an opportunity to talk about Japan's monetary policy in the years when asset price bubbles expanded. Today, I would like mainly to review monetary policy in the following phase when the bubbles burst, for asset price swing is the “changing economic environment” most relevant to us. Incidentally we are now in the third phase when the economy is in “liquidity trap”, which I will leave for a future topic of discussion. 2. I have to start with a bit old story. The Tokyo stock market peaked at end-1989. The bubble in the property market -and in Japan the real estate had far greater market capitalization relative to the stocks- persisted about a year longer. Growth slowdown followed. The trend growth rate in the 1990s is just one percent a year on average, a marked shift downward from 4% in the 1980s (Chart 1). Chart 1. Economic Growth and Inflation Note: Figures for the CPI are adjusted for the impacts of consumption tax which was introduced at the rate of 3 percent in April 1989, and increased to 5 percent in April 1997. Sources: Ministry of Public Management, Home Affairs, Posts and Telecommunications, Consumer Price Index; Cabinet Office, Annual Report on National Accounts. 3. There is little doubt that the burst of asset price bubbles contributed significantly to the decline in the trend growth rate. But it was not the sole reason. Against the backdrop of a changing environment such as a rapidly aging society and limit to export-led growth, I again benefited from discussions with my colleagues of the Bank of Japan, especially Kunio Okina and Masaaki Shirakawa. The views expressed however are those of my own. Yutaka Yamaguchi, “Asset Prices and Monetary Policy: Japan's Experience,” New Challenges for Monetary Policy, Federal Reserve Bank of Kansas City, 1999. prospective shift to a more moderate growth was already broadly envisioned in the early 1980s. The economic system, which had been built on the premise of high growth, needed to be modified and in fact was already in the middle of significant structural adjustment in the mid-1980s. 4. The asset price bubbles not merely interrupted this process but turned the clock backward. The excessive optimism, the main feature of a major asset bubble, induced the businesses to build up capital stock, payrolls and debts that would have made sense only under sustained acceleration of growth. When the bubbles burst, the ensuing adjustment and workout had to be all the more painful and prolonged. This aspect of Japan's asset market bubble, with its consequences on the structural adjustment in the 1990s, is important because it illustrates the specific environment in which the Bank of Japan had to conduct monetary policy. In other words, monetary policy conducted in different context should be assessed in the light of each unique historical setting and its effects should be different where, for instance, a need is less evident for a structural shift to lower growth. 5. The Bank of Japan started to cut the ODR, then at 6%, in July 1991. Those were the days when production and CPI showed signs of acceleration and substantial uncertainty existed if the business cycle had peaked. Reemergence of a land price bubble was a more convincing scenario than a sustained asset deflation. Therefore the ODR cut in mid-1991 received harsh criticism in and outside the country as a premature relaxation. In retrospect, it turned out to be the first of a series of reductions, and by September 1995 the ODR was as low as 0.5% - the level some economists regard a possible threshold to a liquidity trap. In about four years span, the sizable room for interest rate reduction had essentially been used up. 6. The Bank of Japan has often been criticized for an alleged delay in monetary easing. A number of research has been conducted, including among others those by the BOJ staff as well as by the Federal Reserve Board staff, to assess the easing path by applying a standard backward-looking 'Taylor rule' as criteria. Chart 2 shows one such example. They conclude that monetary easing after the bubble burst, particularly in the crucial early stage of relaxation, could be considered to have been generally appropriate as a standard stabilization policy based on real-time financial and economic indicators as well as market forecasts. And yet, even with a policy response which could be considered appropriate in normal times, there emerged a substantial decline in the trend growth rate as well as rapid and continuous fall in asset prices that weakened the financial system and destabilized the economy. 7. Against the background of the post-bubble economic performance of Japan, the views have been expressed that the Bank should have gone beyond standard stabilization policy and tried more aggressive easing before monetary policy became constrained by the zero nominal bound. Let me briefly examine such views on two aspects. The first is the practical feasibility which partly depends on predictability on real-time basis of a post-bubble economic trend. The second is effectiveness of an aggressive monetary policy to mitigate the adverse effects stemming from the burst of asset price bubbles. See, for example, Naruki Mori, Shigenori Shiratsuka, and Hiroo Taguchi, “Policy Responses to the Post-Bubble Adjustments in Japan: A Tentative Review” (Monetary and Economic Studies, 19 (S-1), Institute for Monetary and Economic Studies, Bank of Japan, 2001), and Kunio Okina and Shigenori Shiratsuka, “Asset Price Bubbles, Price Stability, and Monetary Policy: Japan's Experience” (IMES Discussion Paper 2001-E-16, Institute for Monetary and Economic Studies, Bank of Japan, 2001) as researches by the BOJ staff, and Alan Aherne, et al. “Preventing Deflation: Lessons from Japan's Experience in the 1990s,” (International Discussion Paper No. 729, Board of Governors of the Federal Reserve System, 2002), Bank for International Settlement, 72nd Annual Report (Bank for International Settlement, 2002), as researches by staff of overseas central banks and international organizations. Chart 2. Taylor Rule Notes: 1. Taylor rule is defined as follows: 2. Target rate based on Taylor rule, shown in bold line, is adjusted for the introduction of consumption tax (3 percent) in April 1989, and increase in its rate (to 5 percent) in April 1997. For reference, consumption tax non-adjusted series is also plotted in shaded line. Sources: Kunio Okina and Shigenori Shiratsuka, “Asset Price Bubbles, Price Stability, and Monetary Policy: Japan's Experience,” IMES Discussion Paper 2001-E-16, Institute for Monetary and Economic Studies, Bank of Japan, 2001, Chart 7. 8. Suppose a central bank adopts dramatic easing actions way beyond “standard” or rulebased monetary policy at an early stage. The intention would be to create an accelerated inflation preemptively to avoid the future risk of a deflation when, as in the case of Japan, sharp falls in some but not all asset prices, still fairly robust economic growth, and mild inflation co-exist. The accelerated inflation rate required to offset the negative shock generated by collapsing asset bubbles should well exceed the target if the country in question were pursuing an inflation targeting. The central bank pursuing such a strategy would have to be fully convinced, substantiated by quantitative analyses, and strongly concerned about the risk of deflation a few years into the future. Without such a superb insight, it would be hardly possible for a central bank to abandon a price target, explicit or implicit, at a stage when deflation is yet a remote potential risk. 9. Economic predictions are inevitably clouded by uncertainties. What makes economic reading in the post-bubble period uniquely difficult is the great uncertainties associated with the asset market developments. First, we cannot be sure how the asset markets will develop and where an equilibrium with the real economy will be restored. In addition, different asset segments can show divergent price patterns, as was the case in Japan's stock and real estate markets in 1990. Such divergence can emerge at an early stage when bubble-day inertia of wishful thinking lingers with the confusing effects on expectations. Thus the possible size of capital loss and its harm on the financial health of businesses and households is extremely difficult to estimate. 10. Second, uncertainty also exists in the transmission mechanism between asset prices and real activity and inflation. In an economy like Japan where banks dominate financial intermediation (Chart 3), capital losses tend to gradually accumulate in the banking system. Indeed there was a presumption that shocks would be contained within the financial sector and would not spread to the real side of the economy. Therefore, there was a widespread belief that the situation would turn around if business could be sustained until land prices started to rise again. When bank capital was eroded to a critical threshold, however, an acute credit crunch erupted. It is against such uncertain setting that economic forecasting must incorporate the timing and magnitude of the “headwind” generated by the deteriorating balance-sheet conditions of businesses, households and particularly banks. Chart 3. Financial Structures [1] Financial liabilities held by non-financial corporations (ratio to total financial liabilities) [2] Financial assets held by households (ratio to total financial assets) Notes: 1. Figures are those for the end of 1999. 2. Regarding financial debt for enterprises, stocks are evaluated at the market value, and, thus, do not necessarily correspond to the accumulated funding by enterprises. It should be noted that U. S. for equities are likely to be higher, compared to those for other countries, because it includes net worth of sole proprietorships as households' equities. Source: Bank of Japan, Research and Statistics Department, “Japan's Financial Structure: In View of the Flow of Funds Accounts,” Quarterly Bulletin, 9 (1), Public Relations Department, Bank of Japan, 2001, pp.105-142. 11. Let me turn to the second aspect namely the effectiveness of a hypothetical early easing. Some simulation results indicate that such a policy would have elevated the inflation rate to a level that would work as a comfortable cushion against future deflation (Chart 4). Chart 4. Simulation of Hypothetical Early Monetary Easing Sources: Alan Aherne, et al. “Preventing Deflation: Lessons from Japan's Experience in the 1990s,” International Discussion Paper No. 729, Board of Governors of the Federal Reserve System, 2002, Exhibit IV.2. An important point here is what lies at the root of the predicament of Japan's economy and financial system. Admittedly, under the non-negativity constraint of nominal interest rates, real rates will be pushed up by the extent of deflation, even though deflation itself is rather limited at less than 1 percent a year in Japan now. However, as suggested by Chart 5, asset price deflation, which has been continuous for ten years at an annual rate of close to 10 percent, has likely exerted far greater pressure on activity than slightly positive real interest rates. Chart 5. Asset Price Deflation Sources: 12. Bank of Japan, Financial and Economic Statistics Monthly; Ministry of Public Management, Home Affairs, Posts and Telecommunications, Consumer Price Index; Japan Real Estate Institute, Urban Land Price Index. The question from my perspective is: could an aggressive easing have significantly moderated the fall of real estate price and therefore the balance sheet problem? Generally speaking, significantly lower interest rates should be conducive to tighter output gap, higher inflation and, when asset market is falling, moderation of asset price decline. Would such results be achieved by aggressive easing in the aftermath of an asset bubble? I am skeptical. We have witnessed time and again that, after an asset inflation has developed into a major bubble, it is impossible to “soft land” the market. If that is the case, and if the asset market in question has traditionally served as a sort of anchor for financial stability, like the case with the real estate in Japan, the capacity of monetary policy to stimulate demand and inflation is bound to be severely impaired. Even if such strategy had proved to be successful, it would only have delayed the inevitable adjustment between the asset prices and economic fundamentals. 13. If central bank's predicting ability of post-bubble developments has to remain less than perfect, would it better once again to consider aggressive tightening when a bubble is perceived to be growing? This is the question I talked about three years ago here. I remain skeptical as I was. However given the fact it is always the preceding massive flows of credit that become worthless once the tide is reversed, leaving severe damages on the balance sheets of parties concerned, it might be worth considering possible ways to focus on restraining “excessive” credit flows during asset market upswings (See Chart 6 for the development of credit and asset prices in Japan). Chart 6. Credits and Asset Prices in Japan Notes: Real aggregate asset price indices are a weighted average of equity and residential and commercial estate price indices deflated by consumer prices. The weights are based on the composition of private sector wealth. Sources: Bank for International Settlements, Quarterly Review, International Banking and Financial Market Developments, August 1999 14. Let me conclude by adding a few observations in somewhat broader context. It is ironic that, as the track record shows (Chart 1, Chart 2), the Bank of Japan followed a path in the 1980s and early 1990s that could be regarded as fully consistent with some policy rule such as Taylor rule, and yet suffered from the wildest swings of asset markets. Suggestions have been made that the Bank should have deviated from such implicit rule-based path both in times of upswing as well as downswing. From my perspective, for discussions on policy rules to be more relevant and robust, they should at least take into account major swings of asset prices. Our experience shows that price stability, by making low interest rate possible, can pave a way to a major asset price bubble when it is coupled with excessive optimism for the future. 15. Finally, what matters most in the post-bubble development is the magnitude of the lost capital and its distribution ie who in the system has to absorb the loss. In Japan, that magnitude has been overwhelming and has concentrated in the banking sector. When an economy is faced with the size of lost capital as Japan was, well-functioning financial infrastructure is crucially important for its prompt resolution. Infrastructure in this context includes proper accounting, disclosure, disciplined governance, incentive mechanism and supervision. Japan was slow developing and putting in place such framework. I emphasize this aspect because, if expeditious and forceful progress had been made to deal with the capital loss in general and that of banking system in particular, monetary policy in Japan might have found different environment to operate. Amid a major shock such as the collapse of key asset prices, a need to address the nexus of monetary and prudential policies can't be overemphasized.
|
bank of japan
| 2,002 | 10 |
Bank of Japan, 15 October 2002
|
Bank of Japan’s October report of recent economic and financial developments1 Bank of Japan, 15 October 2002 * The Bank’s View * * Japan’s economy has stabilized as a whole, but clear signs of recovery have not yet been observed partly due to large uncertainty regarding the global economy. With regard to final demand, while the decline in business fixed investment is coming to a halt, private consumption continues to be weak. Moreover, housing investment remains sluggish and public investment is declining. Meanwhile, exports continue to increase, albeit at a slower pace. Industrial production, despite some deceleration, continues to rise in response to these developments in final demand and adequate reduction of excess inventory stocks. Against this background, corporate profits are recovering and business sentiment continues to improve as a whole. However, the pace of improvement in business sentiment has become gradual and the improvement for the immediate future is also expected to be small partly due to large uncertainty regarding the global economy. As for the employment situation, the overtime hours worked continue to increase and new job offers remain firm. Nevertheless, as firms are still maintaining their stance on reducing personnel expenses, household income continues to decrease noticeably with a plunge in summer bonuses. Thus, the employment and income situation of households overall remains severe. Turning to the economic outlook, the uptrend in exports is expected to continue against the background of the moderate recovery in overseas economies, but the deceleration in the pace of increase is projected to continue toward the year-end with the impetus from overseas restocking coming to a halt. Thus, while industrial production is also expected to follow a moderate uptrend, the pace is likely to continue decelerating for the time being. With respect to domestic demand, public investment is projected to follow a declining trend and private consumption is likely to remain weak for some time due to the severe employment and income situation. Judging from leading indicators and the recovery in corporate profits, it will gradually become certain that the decline in business fixed investment has come to a stop. However, a distinct recovery in business fixed investment in the immediate future is unlikely due to, among other things, large uncertainty regarding overseas economies. Once the outlook for the increase in exports and production becomes more certain, domestic private demand will react to it positively. Overall, it can be envisaged that Japan’s economy will gradually form foundations for recovery as overseas economies continue the moderate recovery. However, it will take a while for the economy to show clear signs of recovery, as the increase in exports and production is expected to slow for the time being while restraining forces such as excessive labor input and debt persist. Furthermore, there is large uncertainty regarding exports such as the developments in stock prices in the United States and worldwide, the outlook for IT-related demand, and geopolitical factors and oil prices. On the domestic side, stock prices have fallen to a considerably low level. Hence, the progress in the disposal of non-performing loans of financial institutions hereafter and its effects on stock prices and the economy should be carefully monitored. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on October 10 and 11, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on October 10 and 11 as the basis for monetary policy decisions. On the price front, import prices are bottoming due mainly to the rise in oil prices. Meanwhile, domestic wholesale prices have weakened, reflecting the decrease in import prices to date. Moreover, consumer prices remain on a gradual downtrend and corporate services prices continue to decline. As for the conditions surrounding price developments, import prices are expected to start turning up. However, the balance between supply and demand is expected to keep exerting downward pressure on prices for a while amid persistently weak domestic demand, although the completion of inventory adjustment and the rise in capacity utilization rates will support prices to some degree. Moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will continue to restrain prices. Under these circumstances, domestic wholesale prices are projected to continue to be weak for a while, although this depends on the degree of rise in import prices. Consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. While the slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices to some extent, the faster pace of decline in wages may possibly reinforce the ongoing decline in prices, especially for services prices. As for the financial market, the outstanding balance of the current accounts at the Bank of Japan basically continues to move at around 15 trillion yen as the Bank continuously provides ample liquidity. Under these circumstances, in the short-term money markets, the overnight call rate, except for the temporary rise on September 30, continues to move at very close to zero percent. Also, longer-term interest rates remain steady at low levels. Yields on long-term government bonds fluctuated and rose temporarily to around 1.3 percent in lateSeptember mainly due to uncertainty over the disposal of non-performing loans by banks, but declined again thereafter and are recently moving around 1.1-1.2 percent. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds remain virtually unchanged. Meanwhile, stock prices have been falling again in line with a decline in U.S. and European stock prices, reflecting the ongoing selling of Japanese stocks by foreign institutional investors. Stock prices are moving around 8,500 yen recently. In the foreign exchange market, the yen is currently being traded in the range of 122-125 yen to the U.S. dollar as the market continues to be nervous due mainly to the uncertainty regarding global economic conditions and the unstable situation in the Middle East. With regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are becoming slightly more severe. In the corporate bonds and CP markets, the issuing environment for firms with low credit ratings is still severe, but the environment for firms with high credit ratings is accommodative. Credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The amount outstanding of corporate bonds and CP issued is recently moving near the previous year’s level. Meanwhile, according to business surveys, the financial position of firms, particularly that of small firms, remains severe. The monetary base continued to exhibit a high year-on-year growth rate of around 20-30 percent, although the rate has slowed slightly. The year-on-year growth rate of the money stock remained at around 3.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial environment as a whole is summarized as follows. Money market conditions overall continue to be extremely easy. The money stock and the monetary base maintain high growth rates relative to that of the economic activity as a whole. However, stock prices remain unstable and long-term interest rates are showing relatively large fluctuations. In corporate finance, the fund-raising environment of firms with low credit risks is accommodative on the whole, but with regard to the firms with high credit risks the stance of investors remains severe and the lending attitudes of private banks are becoming more cautious. Hence, developments in the financial and capital markets including stock prices, the behavior of financial institutions, and the situation of corporate finance require close monitoring.
|
bank of japan
| 2,002 | 10 |
Bank of Japan, 20 November 2002
|
Bank of Japan’s November report of recent economic and financial developments1 Bank of Japan, 20 November 2002 * The Bank’s view * * Japan’s economy has stabilized as a whole, but there is greater uncertainty toward recovery. With regard to final demand, while the decline in business fixed investment has almost come to a halt, private consumption continues to be weak. Moreover, housing investment remains sluggish and public investment is declining. While signs of recovery are still not observed in domestic demand, exports are losing their momentum. The completion of the cutbacks in inventory stocks still underpins the increase in industrial production, but the pace of increase has become slower as exports are not rising anymore. As for the employment situation, the overtime hours worked continue to increase and the number of employees, which widely covers various non-regular employees such as temporary workers, appears to have stopped declining. However, as firms are still maintaining their stance on reducing personnel expenses, household income continues to decrease noticeably due to, among other factors, an ongoing decline in wages. Thus, the employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared prospect for overseas economies throughout next year is that they will follow a gradual recovery path. However, an increasing number of economic indicators are softening in some countries, particularly in the United States. Based on this development, the recovery in overseas economies is likely to be anemic at least for the time being. Therefore, exports and industrial production are expected to be more or less unchanged for the immediate future. With respect to domestic demand, public investment is projected to follow a declining trend and private consumption is likely to remain weak for some time due to the severe employment and income situation. Business fixed investment is expected to be supported by the improvement in corporate profits to date, but a distinct recovery is unlikely for the time being due to, among other things, greater uncertainty regarding overseas economies. Overall, assuming that overseas economies will recover next year even at a moderate pace, the increase in exports and production will resume, making the foundations of Japan’s economic recovery gradually firmer. However, the economy is unlikely to show clear signs of recovery for some time, since exports and production are expected to be virtually unchanged for the time being while restraining forces such as excessive labor input and debt persist. Furthermore, the uncertainty regarding the outlook for the U.S. and other overseas economies, including geopolitical factors and their effects on the economies, is becoming greater. On the domestic side, stock prices have fallen to a considerably low level. Hence, the progress in the disposal of non-performing loans of financial institutions and its effects on stock prices, corporate finance, and the economy, should be carefully monitored. On the price front, import prices are starting to turn up reflecting the rise in oil prices during the summer and into the fall, and the depreciation of the yen. Domestic wholesale prices are virtually level since the rise in import prices and the improvement in the balance of supply and demand in the materials industries have almost been offset by the decline in machinery prices and electricity charges. However, consumer prices remain on a gradual downtrend and corporate services prices continue to decline. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on November 18 and 19, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on November 18 and 19 as the basis for monetary policy decisions. Looking at the conditions influencing price developments, import prices are projected to continue firming up for the time being as the effects from the rise in oil prices will remain. However, the overall supply-demand condition is expected to keep exerting downward pressure on prices for a while amid persistently weak domestic demand, although the completion of inventory adjustment and the rise in capacity utilization rates will support prices to some degree. Moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will continue to restrain prices. Under these circumstances, domestic wholesale prices are expected to remain virtually level for a while. Consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. While the slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices to some extent, the faster pace of decline in wages may possibly reinforce the ongoing decline in prices, especially for services prices. As for the financial market, the outstanding balance of the current accounts at the Bank of Japan is recently moving at around 17-18 trillion yen, as the Bank provides further ample liquidity following the guideline for money market operations decided at the Monetary Policy Meeting held on October 30. Under these circumstances, in the short-term money markets, the overnight call rate continues to move at very close to zero percent. Meanwhile, TB and FB rates, which declined temporarily after the Monetary Policy Meeting held on October 30, have inched up since mid-November as banks have held off buying TB and FB in response to a drop in bank stock prices. Yields on long-term government bonds declined below 1.0 percent for the first time since November 1998 as banks and institutional investors increased investment in bonds, and are moving around 1.0 percent recently. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds remain virtually unchanged. Meanwhile, stock prices declined and are recently moving around 8,000-8,500 yen due to rising uncertainty about the economic outlook. In the foreign exchange market, the U.S. dollar is weakening again on the whole reflecting the strained situation in the Middle East and the deterioration in the U.S. economic indicators. The yen is currently being traded in the range of 119-122 yen to the U.S. dollar. With regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are becoming slightly more severe. In the corporate bonds and CP markets, the issuing environment for firms with high credit ratings is accommodative, but the environment for firms with low credit ratings is severe. Credit demand in the private sector continues to follow a downtrend mainly because firms’ business fixed investment remains sluggish while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. Growth rates of the amount outstanding of corporate bonds and CP issued are on a declining trend and the amount outstanding dropped slightly below the previous year’s level in October. Meanwhile, according to business surveys, the financial position of firms, particularly that of small firms, remains severe. The monetary base exhibits a high year-on-year growth rate of around 20 percent. The year-on-year growth rate of the money stock is around 3.0-3.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions as a whole continues to be extremely easy partly due to the additional monetary easing by the Bank. Long-term interest rates are low. The money stock and the monetary base maintain high growth rates relative to that of the economic activity as a whole. However, stock prices remain unstable. In corporate finance, the fund-raising environment of firms with low credit risks is accommodative on the whole, but with regard to firms with high credit risks, the stance of investors remains severe and the lending attitudes of private banks are becoming more cautious. Under these circumstances, the government released the “Comprehensive Measures to Accelerate Reforms” which includes policies to accelerate the disposal of non-performing loans. Including the effects arising from these measures, developments in the financial and capital markets including stock prices, the behavior of financial institutions, and the situation of corporate finance require closer monitoring.
|
bank of japan
| 2,002 | 11 |
Bank of Japan, 20 December 2002.
|
Bank of Japan’s December report of recent economic and financial developments1 Bank of Japan, 20 December 2001. * The Bank’s View * * Japan’s economy is deteriorating broadly, as private consumption is weakening in addition to a decline in exports and business fixed investment. With regard to final demand, net exports (real exports minus real imports) continue to decline and business fixed investment is also decreasing. Housing investment remains sluggish and public investment is on a downward trend. Moreover, private consumption is weakening recently. Industrial production continues to decline considerably, reflecting these developments in final demand and the still strong excessiveness in inventories mainly in materials. Corporate profits are falling and business sentiment keeps on worsening. The weakness in household income is becoming noticeable amid the decrease in the hours worked and the rise in unemployment, and consumer confidence is becoming cautious. Turning to the outlook, as for exporting conditions, inventory adjustments in IT-related goods worldwide are showing steady progress, and this has strengthened the view that adjustments will be mostly completed by around next spring. However, as final demand of IT-related goods still remains stagnant, a distinct recovery in exports of the sector is unlikely for the time being. Moreover, the world economy has decelerated further since the terrorist attacks of September 11, and there is considerable uncertainty about future economic developments especially for the U.S. Therefore, such concern still exists that downward pressure may be exerted on Japan’s exports and production once again depending on the developments in overseas economies such as the U.S. Meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downward trend amid the fall in corporate profits. Private consumption will also continue to be weak along with deteriorating employment and income conditions and the more cautious consumer sentiment. Government spending is basically projected to follow a downward trend while domestic private demand generally weakens on top of the uncertainty about exporting conditions. Consequently, it may take quite a while for economic activity as a whole to stop declining, even though the decrease in industrial production may moderate somewhat in line with the progress in inventory adjustments such as of IT-related goods. Overall, Japan’s economy will inevitably continue to deteriorate for a while. In this situation, continuous attention should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic financial markets. With regard to prices, import prices continue to decline reflecting the softening of international commodity prices. Domestic wholesale prices are declining faster from the effects of the fall in crude oil prices in addition to the continuous decreases in prices of electrical machinery and materials. Consumer prices are weakening owing mainly to the decline in prices of imported products and their substitutes. Corporate service prices continue to decrease. As for the conditions surrounding price developments, crude oil prices remain weak. Also, as the economy will continue to deteriorate, the balance between supply and demand in the domestic market will increasingly exert downward pressure on prices. Furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation and the streamlining of distribution channels will continue to restrain price developments. Overall, prices are expected to follow a gradual declining trend for the time being. Moreover, given the high degree of uncertainty regarding future economic developments, the This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on December 18 and 19, 2001. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on December 18 and 19 as the basis for monetary policy decisions. possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. In the financial market, the overnight call rate is moving around zero percent as the Bank of Japan provided ample liquidity to the money market by aiming at maintaining the current account balances held at the Bank at above 6 trillion yen. Interest rates on term instruments basically continue to be level. The Japan premium remains negligible. Yields on long-term government bonds are virtually flat, and are mainly moving around 1.35 percent recently. As for the yield spreads between private bonds (bank debentures and corporate bonds) and government bonds, while spreads between bonds with relatively high credit ratings and government bonds remain mostly unchanged, those between bonds with low credit ratings and government bonds continue to expand slightly. Stock prices are weakening recently. In the foreign exchange market, the yen is currently being traded in the range of 127 -129 yen to the U.S. dollar, moving around the lowest level for this year. With regard to corporate finance, private banks appear to be more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms are becoming more cautious. In corporate bonds and CP markets, the fund-raising conditions continue to be generally favorable particularly for firms with high credit ratings, although the issuing environment for those with low credit ratings is deteriorating. Credit demand in the private sector is declining faster mainly because firms are decreasing their business fixed investment while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline at about 2 percent on a yearon-year basis. As for the amount outstanding of corporate bonds issued, the year-on-year growth rate has been slowing due to a decrease in the issuance of corporate bonds with low credit ratings. The year-on-year growth rate of the amount outstanding of CP issued is declining recently, although the amount is still well above the previous year’s level. The growth rate of money stock (M2 + CDs) in November increased slightly from the previous month owing to a rise in demand deposits. Funding costs for firms continue to be at extremely low levels on the whole, although market funding costs for some firms are rising. Overall, the recent financial environment remains extremely easy in terms of money market conditions and interest rate levels. However, the fund-raising conditions of firms with high credit risks, especially of small firms, are becoming severe as private banks and investors are becoming more cautious in taking credit risks against the background of a growing number of corporate bankruptcies. Hence, the developments in the behavior of financial institutions and corporate financing need closer monitoring.
|
bank of japan
| 2,002 | 12 |
Bank of Japan, 18 December 2002
|
Bank of Japan’s December report of recent economic and financial developments1 Bank of Japan, 18 December 2002 * * * The Bank’s View2 Japan’s economy has stabilized as a whole, but there is still substantial uncertainty toward recovery. With regard to final demand, while the decline in business fixed investment has almost come to a halt, private consumption continues to be weak. Moreover, housing investment remains sluggish and public investment is declining. While signs of recovery are still not observed in domestic demand, exports are virtually level. The completion of the cutbacks in inventory stocks still underpins the increase in industrial production. But the production is losing its momentum with exports leveling off. Against this background, corporate profits continue to recover, but the pace is becoming moderate. While business sentiment on the current conditions is improving gradually, firms’ outlook is cautious. As for the employment situation, the overtime hours worked and new job offers are rising gradually. In addition, the number of employees, which widely covers various non-regular employees such as temporary workers, appears to have stopped declining gradually. However, as firms are still maintaining their stance on reducing personnel expenses, household income continues to decrease noticeably due to, among other factors, an ongoing decline in wages. Thus, the employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared prospect for the overseas economy throughout next year is that it will follow a gradual recovery path. However, economic indicators in the United States and in some other regions are soft on the whole. Based on this development, the recovery in the overseas economy is likely to be anemic at least for the time being. Therefore, exports and industrial production are expected to be more or less unchanged for the immediate future. With respect to domestic demand, public investment is projected to follow a declining trend and private consumption is likely to remain weak for some time due to the severe employment and income situation. Business fixed investment is expected to be supported by the improvement in corporate profits to date, but a noticeable recovery is unlikely for the time being due to, among other things, substantial uncertainty regarding the overseas economy. Overall, assuming that the overseas economy recovers next year even at a moderate pace, the increase in exports and production will resume sooner or later, which in turn will gradually make the foundations of Japan’s economic recovery firmer. However, the economy is unlikely to show clear signs of recovery for some time, since exports and production are expected to be virtually unchanged for the time being while restraining forces such as excessive labor input and debt persist. Furthermore, the downside risk on the outlook for the U.S. and other overseas economies continues to require attention, given that there are some uncertain factors including geopolitical developments and their economic implication. On the domestic side, stock prices remain unstable. Hence, the progress in the disposal of non-performing loans and its effects on stock prices, corporate finance, and the economy, should be carefully monitored. On the price front, import prices are on the rise reflecting the earlier firmness in oil prices and depreciation of the yen. Domestic wholesale prices turned up slightly due to the increase in import prices and the improved supply-demand balances in the materials industries, although machinery This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on December 16 and 17, 2002. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on December 16 and 17 as the basis for monetary policy decisions. prices and electricity charges are declining. However, consumer prices remain on a gradual downtrend and corporate services prices continue to decline. Looking at the conditions influencing price developments, import prices are projected to be firm for the time being as the effects from the rise in oil prices and the depreciation of the yen still remains. However, the overall supply-demand condition is expected to keep exerting downward pressure on prices for a while amid persistently weak domestic demand, although the completion of inventory adjustment and the rise in capacity utilization rates will support prices to some degree. Moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will continue to restrain prices. Under these circumstances, domestic corporate goods prices, the new price indicator which will replace domestic wholesale prices from December, are expected to be virtually level for a while. Consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. While the growth in imports of consumer goods has stalled and thus is expected to alleviate the downward pressure on prices to some extent, the faster pace of decline in wages may possibly reinforce the ongoing decline in prices, especially for services prices. As for the financial environment, the outstanding balance of the current accounts at the Bank of Japan is recently moving at around 20 trillion yen, as the Bank provides further ample liquidity. Under these circumstances, in the short-term money markets, the overnight call rate continues to hover at very close to zero percent. Moreover, longer-term interest rates such as TB and FB rates continue to be at low levels as a whole, although the markets remain nervous reflecting weak bank stock prices. Yields on long-term government bonds continue to move at around 1.0 percent. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds remain virtually unchanged. Stock prices turned up in late-November, but weakened again in December in line with a decline in U.S. and European stock prices. The Nikkei 225 Stock Average is recently moving at around 8,500 yen. In the foreign exchange market, the yen declined until the beginning of December reflecting the improvement in some U.S. economic indicators. Thereafter, the yen rebounded as the U.S. dollar weakened again on the whole due mainly to geopolitical factors. The yen is currently traded in the range of 120-122 yen to the U.S. dollar. With regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms have become slightly more severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings is accommodative, but the environment for firms with low credit ratings is severe. Credit demand in the private sector continues to follow a downtrend mainly because firms’ business fixed investment remains sluggish while continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The growth rate of the amount outstanding of corporate bonds and CP issued is on a declining trend. Meanwhile, according to business surveys, the financial position of firms, particularly that of small firms, remains severe. The monetary base exhibits a high year-on-year growth rate of around 20 percent. The year-on-year growth rate of the money stock remains around 3.0-3.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions as a whole continues to be extremely easy. Long-term interest rates are low. The money stock and the monetary base maintain high growth rates relative to that of the economic activity as a whole. However, stock prices remain unstable. In corporate finance, the fund-raising environment of firms with low credit risks is accommodative on the whole, but with regard to firms with high credit risks, the stance of investors is severe and the lending attitudes of private banks are becoming more cautious. Hence, including the effects arising from government measures to accelerate the disposal of non-performing loans and to revitalize industries and firms, developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,002 | 12 |
Bank of Japan January report of recent economic and financial Developments
|
Bank of Japan’s January report of recent economic and financial Developments1 Bank of Japan, 23 January 2003. * The Bank’s view * * Japan’s economy has stabilized as a whole, but there is still substantial uncertainty about the prospects for a recovery. With regard to final demand, while the decline in business fixed investment has almost come to a halt, private consumption continues to be weak. Moreover, housing investment remains sluggish and public investment is declining. There are still no signs of recovery in domestic demand, and exports continue to be virtually level. Industrial production is basically level in response to these developments in final demand. As for the employment situation, overtime hours worked and new job offers are on a gradual rising trend. In addition, the number of employees, which covers various types of employees including non-regular employees such as temporary workers, appears to have gradually stopped declining. However, firms are still maintaining their stance on reducing personnel expenses, and household income continues to decrease significantly due to, among other factors, an ongoing decline in wages. Thus, the employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared view of the prospect for overseas economies in 2003 is that they will follow a gradual recovery path. However, their recovery is likely to be anemic, at least for the time being, given that economic indicators for the United States and for some other regions are soft on the whole. In this situation, exports and industrial production are expected to be more or less unchanged for the immediate future. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time due to the severe employment and income situation. Business fixed investment is expected to be supported by the improvement in corporate profits to date, but a noticeable recovery is unlikely for the time being due to, among other factors, substantial uncertainty regarding overseas economies. Overall, assuming that overseas economies will recover in 2003, albeit at a moderate pace, the increase in exports and production will resume sooner or later, which in turn will gradually make the foundations of Japan’s economic recovery firmer. However, the economy is unlikely to show clear signs of recovery for some time, since exports and production are expected to be virtually unchanged for the time being while downward pressures such as excessive labor input and debt persist. Furthermore, the downside risk to the economic outlook for the United States and other overseas economies continues to require attention, given that there are some uncertain factors including geopolitical developments and their economic implications. On the domestic side, stock prices are weak. Hence, careful monitoring is required of progress in the resolution of the nonperforming-loan problem and its effects on stock prices, corporate finance, and the economy. On the price front, import prices continue to rise reflecting the firmness in oil prices and depreciation of the yen from summer to autumn 2002. The decline in domestic corporate goods prices has become slower due to the rise in import prices and the improved supply-demand balance in materials industries, despite the continued fall of machinery prices. Consumer prices remain on a gradual downtrend and corporate services prices continue to decline. Looking at the conditions influencing price developments, import prices are likely to be level because the effect of the rise in oil prices will be offset by that of the recent appreciation of the yen. Although This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on January 21 and 22, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on January 21 and 22, 2003, as the basis for monetary policy decisions. the low levels of inventories will support prices to some degree, the overall condition of supply and demand is expected to continue exerting downward pressure on prices for a while amid persistently weak domestic demand. Moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will continue to exert downward pressure on prices. Under these circumstances, domestic corporate goods prices are expected to be weak for a while. Consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. The increase in imports of consumer goods has come to a halt and this is expected to alleviate the downward pressure on prices to some extent, but the faster pace of decline in wages may reinforce the ongoing decline in prices, especially that in services prices. As for the financial environment, the outstanding balance of the current accounts at the Bank of Japan is recently moving at around 20 trillion yen, as the Bank provides ample liquidity. Under these circumstances, in the short-term money markets, the overnight call rate continues to hover at very close to zero percent. Moreover, longer-term interest rates continue to be at low levels as a whole. Yields on long-term government bonds declined further and are recently moving in the range of 0.8-0.9 percent, as the demand of banks and other institutional investors for the bonds has become even stronger. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds remain virtually unchanged. Stock prices continue to be weak, reflecting the uncertainty about the domestic economic outlook. The Nikkei 225 Stock Average is recently moving at around 8,500 yen. In the foreign exchange market, the yen has been strengthening somewhat, reflecting the weakening of the U.S. dollar on the whole mainly caused by the strained situation in the Middle East. The yen is currently traded in the range of 117-119 yen to the U.S. dollar. With regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms, particularly small ones, continue to be severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings is accommodative, but the environment for firms with low credit ratings is severe. Credit demand in the private sector continues to follow a downtrend mainly because business fixed investment remains sluggish while firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The amount outstanding of corporate bonds and CP issued is moving at around the previous year’s level. Meanwhile, according to business surveys, the financial position of firms, particularly that of small firms, remains severe. The monetary base exhibits a high year-on-year growth rate of around 20 percent. The year-on-year growth rate of the money stock dropped to around 2.0-2.5 percent in December. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions as a whole continue to be extremely easy. Long-term interest rates are declining. The money stock and the monetary base maintain high growth rates relative to that of economic activity as a whole. However, stock prices remain unstable. In corporate finance, the fund-raising environment of firms with low credit risks is accommodative on the whole, but with regard to firms with high credit risks, the stance of investors is severe and the lending attitudes of private banks are becoming more cautious. Hence, including the effects arising from government measures to accelerate the disposal of non-performing loans and to revitalize industries and firms, developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 1 |
Bank of Japan's February report of recent economic and financial developments
|
Bank of Japan’s February report of recent economic and financial developments1 Bank of Japan, 17 February 2003. * * * The Bank’s View2 Economic activity remains flat amid substantial uncertainty about the outlook for the economy. With regard to final demand, while the decline in business fixed investment has almost come to a halt, private consumption continues to be weak. Moreover, housing investment remains sluggish and public investment is declining. While domestic demand has yet to show signs of recovery, both exports and imports are increasing at a very modest pace with net exports remaining virtually level. Industrial production continues to be basically level in response to these developments in final demand. As for the employment situation, new job offers are on a gradual rising trend. In addition, the number of employees, which covers various types of employees including non-regular employees such as temporary workers, appears to be declining at a slower pace. However, firms are still maintaining their stance on reducing personnel expenses, and household income continues to decrease significantly due mainly to an ongoing decline in wages. Thus, the employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared view of the prospect for overseas economies in 2003 is that, partly due to the continued firmness in Asian economies, they will follow a gradual recovery path. However, their recovery is likely to be anemic, at least for the time being, given the recent deceleration of the U.S. economy and the weakness in European economies. In this situation, the increase in exports is expected to remain very modest, and industrial production is likely to be more or less unchanged for the immediate future. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time due to the severe employment and income situation. Business fixed investment is expected to be supported by the improvement in corporate profits to date, but a noticeable recovery is unlikely for the time being due mainly to substantial uncertainty regarding overseas economies. Overall, assuming that overseas economies will recover in 2003, albeit only at a moderate pace, the increase in exports will accelerate and the uptrend in production will resume sooner or later, which in turn will initiate the momentum for a recovery. However, the economy is unlikely to show clear signs of recovery for some time, since production is expected to be virtually unchanged for the time being while downward pressures such as excessive labor input and debt persist. Furthermore, the downside risk to the economic outlook for overseas economies continues to require attention, given that there are some uncertain factors including geopolitical developments and their economic implications. On the domestic side, stock prices are weak. Hence, careful monitoring is required of progress in the resolution of the nonperforming-loan problem and its effects on stock prices, corporate finance, and the economy. On the price front, import prices are on a rising trend with some fluctuations, reflecting developments in overseas commodity prices such as crude oil. Domestic corporate goods prices have been declining gradually due to the rise in import prices and the improved supply-demand balance in materials industries, despite the continued fall in machinery prices. Consumer prices and corporate services prices have also been declining gradually. Looking at the conditions influencing price developments, import prices are projected to be firm for the time being due mainly to developments in crude oil prices. Although the low levels of inventories will This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on February 13 and 14, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on February 13 and 14, 2003, as the basis for monetary policy decisions. support prices to some degree, the overall condition of supply and demand is expected to continue exerting downward pressure on prices while domestic demand continues to be weak for a while. Moreover, factors such as the ongoing technological innovations in machinery and the streamlining of distribution channels will continue to exert downward pressure on prices. Under these circumstances, domestic corporate goods prices are likely to continue a gradual decline for the time being. The pace of year-on-year decline in consumer prices is expected to become somewhat slower. This is because the year-on-year change in prices of petroleum products is expected to become positive, and medical costs are projected to rise from April due to public insurance reforms. As for the financial environment, the outstanding balance of current accounts at the Bank of Japan is recently moving at around 20 trillion yen, as the Bank provides ample liquidity. Under these circumstances, in the short-term money markets, the overnight call rate continues to hover at very close to zero percent. Moreover, longer-term interest rates continue to be at low levels as a whole. Yields on long-term government bonds declined further in late January and are recently moving in the range of 0.8-0.9 percent. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds remain virtually unchanged. Stock prices continue to be weak reflecting the uncertainty about the domestic economic outlook. The Nikkei 225 Stock Average is recently moving at around 8,500 yen. In the foreign exchange market, the yen fell back slightly toward the end of January as market participants became sensitive to market intervention by the authorities, while the U.S. dollar has been weakening on the whole mainly due to the strained situation in the Middle East. The yen is currently traded in the range of 120-122 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms, particularly small ones, are severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings is accommodative, but the environment for firms with low credit ratings is severe. Credit demand in the private sector continues to follow a downtrend mainly because business fixed investment remains sluggish and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The amount outstanding of corporate bonds and CP issued is moving at around the previous year’s level. Meanwhile, according to business surveys, the financial position of firms, particularly that of small firms, remains severe. The year-on-year growth rate of the monetary base dropped to around 10-15 percent in January. The year-on-year growth rate of the money stock is at around 2.0 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions continue to be extremely easy. Long-term interest rates remain at low levels. The money stock and the monetary base maintain high growth rates relative to that of economic activity as a whole. However, stock prices remain weak. In corporate finance, the fund-raising environment of firms with low credit risks is accommodative on the whole, but with regard to firms with high credit risks, the stance of investors is severe and the lending attitudes of private banks continue to be cautious. Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 2 |
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Keizai Club, Tokyo, 25 February 2003.
|
Masaru Hayami: Towards a sustainable growth path Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Keizai Club, Tokyo, 25 February 2003. * * * This is my last speech as Governor of the Bank of Japan. I still remember how I braced myself for the immediate and formidable tasks when I took office five years ago. For Japan's economy, there were two: "how to return to a sustainable growth path" and "how to rebuild the financial system." And for the Bank of Japan, there was also the important challenge of navigating our way on a new voyage in line with the principles of the new Bank of Japan Law which came into effect at almost the same time as I became Governor. Today, of the various tasks I have tackled during my term, I will focus on policy measures, monetary policy in particular, to bring Japan's economy back onto a sustainable growth path, our efforts in promoting the development of financial markets, which is closely related to monetary policy management, and efforts in improving transparency under the new Bank of Japan Law. I. The current status of Japan’s economy The real economy Let me start with the current status of Japan's economy. Economic activity remains stagnant amid substantial uncertainty about the economic outlook. Exports and production, which were the engine of recovery, have slowed down since the second half of last year and do not show any sign of improvement. Business fixed investment is expected to be supported by an export-led profit recovery which also reflects corporate restructuring efforts. But a pick-up is unlikely for the time being, mainly due to substantial uncertainty regarding overseas economies. Private consumption is likely to remain weak for some time, due to the severe employment and income situation. A widely shared view of overseas economies in 2003 is that they will follow a gradual recovery path. In this situation, I believe it tenable not to change our current forecast that exports will further increase and the uptrend in production will resume sooner or later, which will in turn gather momentum for recovery. Of course, we should be vigilant against increasing uncertainties for the future. Geopolitical risk Geopolitical risks centering on Iraq is a major risk to Japan's economy. Such risk also threatens the world economy. If an attack on Iraq takes place, there seem to be three channels through which its effects spread based on the experience of the Gulf War: a surge in oil prices, deterioration in sentiment on the part of economic agents, and destabilization of financial markets such as the stock and foreign exchange markets. Given such channels, the impact of a war on the global economy is likely to be relatively small if the conflict ends quickly. At the time of the Gulf War, there was a surge in crude oil prices and a plunge in stock prices when Iraq invaded Kuwait, but, with the outbreak of the war, expectations spread for an early ending and the markets turned around. This time, oil prices have already been rising since the end of last year, and it is said that the market has already factored in, to a large extent, an early ending scenario of any war. Of course, we should not be too optimistic. To be sure, we are not certain to what extent stock prices have indeed factored in a war scenario. Another concern is that the sentiment of economic agents might deteriorate depending on war developments. What worries us is that consumer sentiment indicators in the United States have been declining since the middle of last year. More caution would be necessary for global economic prospects if a war with Iraq becomes prolonged or spreads. Oil prices might either stay high or rise further to affect the world economy. In addition, the U.S. economy, which is expected to be the driving force behind the world economy, has been underpinned by a moderate recovery in the expenditure of highly indebted households while business spending has been slow to pick up. If consumer sentiment further deteriorated under such circumstances, it would be a big threat to the scenario which assumes a moderate recovery of overseas economies led by the U.S. economy. Disposal of nonperforming loans and corporate finance Turning to domestic risk factors, we are monitoring how financial institutions will make progress in disposing of nonperforming loans, and how it will influence stock prices, corporate finance, and the real economy. Such attention is all the more necessary as Japan's fiscal year-end approaches. We have recently seen some moves to tackle the nonperforming loan problem. Major banks have announced measures to raise capital, and narrowing of the spread between bank debentures and government bonds suggests that the markets have to some extent welcomed such measures. At the same time, however, it would appear that many market participants want more time to assess whether such measures would support the increase of banks' earning powers. As was stated in "Japan's nonperforming Loan Problem" released last October by the Bank of Japan, while the problem was previously characterized primarily as the disposal of the fallout of the bursting of asset price bubbles, recently it has increasingly become more a question of the disposal of nonperforming loans newly generated during the transformation of industry and individual businesses. Given such circumstances, earning powers at both firms and banks need to be increased to overcome the nonperforming loan problem, and persistent efforts should continue to be made. And, we should always be alert to the risk that, during such a process, a certain shock might prompt banks to tighten their lending stance and impair the fixed investment of enterprises with relatively high credit risk. II. The road to sustainable growth The past two economic recovery phases in Japan, between the end of 1993 and the midst of 1997 and between early 1999 and the end of 2000, were both triggered by an increase in exports. But, unfortunately, in neither case did recovery lead to sustainable growth led by private demand. In fact, a slowdown in overseas economies and public concern over the domestic financial system dragged the economy back into recession. And now, economic indicators show that Japan's economy is in a cyclical recovery for the third time in ten years. What is important this time around is how to ensure that Japan's economy returns to a sustainable and stable recovery path. In order to answer this question, the following three points are important: room for monetary and fiscal policy, soundness of the financial system, and flexibility in the economic system. Last weekend, I attended the G7 Finance Ministers' and Central Bank Governors' Meeting held in Paris. The statement issued specifically mentioned necessary measures for Europe, Japan, and the United States in order to realize higher growth. For Japan, the statement referred to the commitment to structural reforms including in the financial and corporate sectors. Such a recognition has much in common with what I am about to address in my speech. Room for exercising monetary policy To begin with, let us consider further room for exercising macroeconomic policy. On the monetary policy front, the Bank of Japan faces the zero bound on interest rates. The uncollateralized overnight call rate was already below 0.5 percent when I took office in March 1998. Against such a backdrop, I endeavored to make utmost use of marginal room for further interest rate reduction, and the call rate now stands at virtually zero. The Bank of Japan also made efforts in seeking transmission channels other than short-term interest rates for conducting monetary easing. In March 2001 the Bank entered uncharted waters by adopting a quantitative easing framework. Commercial banks' current account deposits held at the Bank were adopted as a main target of money market operations, and ample liquidity has been provided. As a result of such ample liquidity provision, the balance sheet of the Bank of Japan has rapidly expanded to an unprecedented level (Charts 1 and 2). Recently, the total assets of the Bank reached 128 trillion yen, a 40 percent increase from 91 trillion yen at the end of March 1998, and the ratio of monetary base to nominal GDP is now at an all-time high except for during World War II. As represented by such figures, the Bank has indeed been pursuing quite unusual policy measures. The balance sheet of the Bank of Japan exceeded that of the ECB, on a foreign exchange rateadjusted basis, and became the largest of those of the central banks in the world. Recently, the size of the balance sheet to nominal GDP increased from 18 percent at the end of March 1998 to 26 percent. Compared with 11 percent for the ECB and 7 percent for the FRB as of the similar date, you can imagine the extraordinary size of the Bank of Japan's balance sheet. Such drastic monetary easing has had a tremendous impact on the financial markets. The uncollateralized overnight call rate has declined to 0.001 percent and, even interest rates for longer terms have fallen, for example 5-year government bonds now yield below 0.3 percent. The decline in longer term interest rates is due mainly to the powerful effect on the market expectations of the Bank's commitment to continue its drastic monetary easing until the Consumer Price Index registers stably zero percent or more. Ample liquidity provision by the Bank under the quantitative easing framework has played an important role in securing financial market stability by promptly responding to any sudden hike in liquidity demand and nurturing a sense of security with respect to market liquidity. With the strong commitment of the Bank of Japan to providing an extremely easy and stable environment, markets have been able to overcome various adverse shocks, not only incidents such as the September 11th terrorist attacks in the United States and increasing bankruptcies at home, but also such times as the year-end, fiscal year-end, and semiannual business year-end. The measures taken by the Bank of Japan have greatly contributed not only to financial market stability but also to the macroeconomic stability in that they have warded off the risk of the economy tumbling into a downward spiral. Yet, if you ask whether such ample liquidity provision has played a role beyond underpinning the economy through market stability, and lifting the economy by stimulating demand, the answer is, unfortunately, only to a limited extent so far. This is because, there has been a lack of forward-looking activity in the private sector to take advantage of extremely easy monetary conditions when the economy is facing the nonperforming loan problem and a high level of corporate debt, in addition to the limited room for interest rate reduction due to the zero interest rate bound. Fiscal policy With respect to fiscal policy, or another pillar of macroeconomic policy, there have been times when significant stimulus measures have been taken since the early 1990s and they have had a certain effect in underpinning the economy. Yet, it is also true that fiscal policy had not sufficiently realized the effects one would expect from the sizes of these stimulus measures. This is partly due to the fact that it has not been necessarily exercised effectively either in terms of quality or content. For example, while the share of investment expenditure within the total fiscal expenditure has been quite high among OECD countries, inefficient investment has continued. Because of this, the spillover effects on private demand through the multiplier effect declined, and overall productivity growth in the economy slowed down. In addition, when there was serious concern over the prospects of fiscal balance, tax reduction would not be effective. As a result of repeated fiscal stimulus measures, gross government debt increased markedly to become the highest among G7 countries. While the debt situation should be somewhat discounted considering the level of net debt, there is a constraint on increasing the amount of fiscal expenditure and the effects would be limited. Given that, I believe it is now all the more necessary to conduct appropriate fiscal policy management including tax reform and a review of government expenditure so as to activate private demand. Financial system problem and financial intermediary function Let me turn to the second aspect, the role of the financial system in getting Japan's economy back on track. The nonperforming loan problem of the financial system and, on the other side of the coin, the massive debt problem of the corporate sector, constitute a heavy burden for Japan's economy. In such a situation, the prolonged stagnation of the economy has substantially reduced the expected profit growth rate of firms, which have thus been inclined to allot improved cash flows, if any, to debt repayment rather than to capital investment. Such moves are reflected in the declining growth rate of money supply (M2+CDs). Money supply posted 3-4 percent growth last year, but it has now slowed down to around 2 percent. A reason for this slowdown is probably a reaction to the rapid fund shift that was seen two years ago, but it is a fact that the current situation does not warrant high growth for the time being. Money supply is the sum of deposits and cash held by firms and individuals, and deposits, which occupy a large part of it, drive its movement. Since deposits are liabilities of a bank, they are determined as a result of financial intermediary activity on the part of banks and demand for funds on the part of firms. A substantial increase in money supply growth means a large expansion of banks' balance sheets. But, banks' balance sheets do not expand when it is rather difficult to expect an immediate increase in bank lending in the current situation where firms are repaying excess debt, which in itself is a necessary adjustment in the immediate future. In this context, the challenges facing the policymakers, including the bank regulators, are how to activate the financial intermediary function of banks and, simultaneously, how to enhance financial intermediation other than through banks. Significance of capital market development When there are constraints on the credit creation activity of the banking sector, which shoulders the nonperforming loan problem, the use of capital markets, which are alternative channels for financial intermediation, might give an important clue for seeing Japan's economy return to a sustainable growth path. Banks and capital markets ought to complement each other to support a nation's financial system. I believe that the advantage of capital markets lies in their price discovery function in order to realize efficient fund allocation. As the economic environment is constantly changing, such a function is particularly important at the present juncture where the swift reallocation of productive resources is needed and there are increasing public expectations for nurturing and organizing capital markets in which various market participants become engaged in price formation. Japan's capital markets are quite small compared with those of the United States (Chart 3). In terms of corporate sector funding, while the outstanding loan amount extended by commercial banks is some 300 trillion yen, the outstanding balance of corporate bonds and CP issued remains at some 80 trillion yen (Chart 4). Furthermore, Japan's capital markets are not matured and not functioning as efficiently as they should. Generally speaking, risks and returns are evaluated accurately in capital markets, and both investment and fund procurement are carried out based on the calculations derived from such evaluation. However, in Japan, only a limited number of firms issue corporate bonds and, consequently, a sufficient variety of risk-and-return combinations are not available to investors. Investors, for their part, are not keen to pursue optimal risk-and-return combinations. Additionally, the role of public financial institutions needs to be clarified to improve capital markets. The share of public financial institutions in Japan's financial markets is remarkably high, compared with other countries. If the size of public financial institution becomes too big, the risk-and-return combination in the economy may be distorted, and the market economy pricing mechanism may not function sufficiently. I do not deny the role of public financial institutions. In my opinion, there is a definite role public financial institutions should continue to play in the future. Yet, over time, the main role of these institutions might come to be restricted to providing credit enhancement measures in the limited areas where there is a need for policy. For example, public financial institutions could play a supporting role in nurturing securitization markets, such as markets for CP backed by receivables of small to mediumsized firms, by providing credit enhancement measures. Flexibility in the economic system The third aspect is flexibility in the economic system. Policymakers must take appropriate measures on the macroeconomic policy front. They also need to take measures which promote the efficient functioning of financial intermediation. Moreover, the economy itself must respond flexibly to environmental changes and various shocks to return to a sustainable growth path. In this regard, it becomes increasingly important for policymakers to take measures, which support the economy to enhance its flexibility. The structural problems in Japan were induced not only by the asset price bubbles but also because the economic system could not respond flexibly to substantial environmental changes such as globalization and computerization that progressed rapidly from the latter half of the 1980s to the 1990s, in addition to a declining birth rate and an aging society. Responses to environmental changes were repeatedly deferred due to effects of the generation and bursting of asset price bubbles, slow progress of deregulation, and a high degree of intervention of the public sector in the economy. Such deferral constitutes one of the major factors behind the current severe situation Japan's economy finds itself in. In order to bring Japan's economy back onto a sustainable growth path, it is vital to promote structural reform including responses to the nonperforming loan problem. Structural reform is a measure working on the supply side to improve productivity, and to reallocate the factors of production - labor, land, and capital - most efficiently in response to the changing economic environment. At present, the efficient and appropriate reallocation of such resources is required on various levels, such as among firms, among industries, and among regions. While the government does play an important role in promoting structural reform, the main driving force must come from firms and other private economic agents. Efficient resource allocation will be realized only when individual firms pursue their economic activities such as production and investment through market mechanisms. From such a viewpoint, I have been carefully watching the moves of individual firms. I am encouraged to observe that such moves as business reorganization have recently occurred in order to cope with environmental changes like globalization and computerization. I hope such a development will gain momentum in the months ahead. III. Inflation targeting There does not seem to exist any magic remedy for bringing Japan's economy back onto a sustainable growth path. After all, the only way is for economic agents to persistently promote structural reform in their respective fields as well as for policymakers to continue making the utmost efforts on the macroeconomic policy front. We cannot deny that a feeling of no way out has been in the air, and inflation targeting arguments in the context of monetary policy could be seen as a reflection of such feeling. Having said that, the argument which advocates inflation targeting as a remedy for Japan's problems is not appropriate for the following reasons. First, while Japan's economy is experiencing moderate deflation, it is erroneously argued that the biggest problem is the price decline and the situation will improve if price declines are stopped. Such an argument misses the relation between the cause and effect. Looking at empirical analysis, inflation rates have responded to higher growth rates with a 1-2 year time-lag and the reverse relationship has not been observed. Second, inflation targeting is essentially a framework for enhancing the transparency of the conduct of monetary policy. But arguments in Japan are problematic since they regard inflation targeting as a measure to overcome deflation. Many seem to consider that, under inflation targeting, a central bank puts too much priority on attaining the target inflation rate and thus pursues monetary policy in quite a mechanical fashion. However, in countries where inflation targeting is adopted, great value is attached to attaining the target inflation rate over the medium-to-long term, and policy management is pursued with plenty of room for discretion inclusive of allowing the inflation rate to diverge from the target rate in the short run. What matters is a thorough explanation with respect to such short-term divergence from the target, and, in this sense, inflation targeting plays a role as an important communications tool for the central bank to explain the conduct of monetary policy. In contrast, as I previously said, current arguments in Japan regard inflation targeting as a measure to overcome deflation. In my opinion, as interest rates have reached virtually zero percent amid Japan's economy shouldering various structural problems and monetary policy has been hampered to a great extent, it is not appropriate to adopt inflation targeting. To be sure, changing expectations with respect to inflation is one way to lower real interest rates. However, it is unreasonable to expect that public expectations can be so easily changed just by what the authorities say in the absence of effective policy measures and mechanisms. In addition, not only would inflation targeting be ineffective but if its adoption also provoked expectations among the public that the Bank of Japan might adopt extreme measures which impair the creditworthiness of Japan's economic policy as a whole, it would greatly destabilize the markets and the economy. The third reason is that inflation targeting arguments are based on the argument that deflation is a monetary phenomenon. While many tend to justify this assertion by saying it is in every textbook of economics, I believe that, in mapping out policies in Japan, it is necessary to apply theories taking into account the fact that the economy faces the zero interest rate bound and the nonperforming loan problem. Several important chapters about deflation and policy responses could be added to current economic textbooks when the experience of Japan and other countries are thoroughly analyzed. As previously mentioned, the problem is that the mechanism to increase money itself is greatly constrained. As a consequence, any argument that everything will be solved as long as money can be increased avoids the essential policy problem. For these reasons, it is not appropriate to adopt inflation targeting at this point. But this by no means signifies that the Bank of Japan tolerates a decline in prices. The Bank of Japan has been making utmost efforts to promptly bring Japan's economy back onto a sustainable growth path and to realize a situation which enables prices to escape from the declining trend. The Bank's current commitment to continue monetary easing until the Consumer Price Index registers stably zero percent or more indeed represents its strong resolve to overcome deflation. IV. Improving financial market functioning and infrastructure The central bank's contribution to the macroeconomy is not limited to monetary policy. The improvement of financial markets and strengthening of their functions are also important tasks for a central bank. Indeed, financial markets are where a central bank conducts its monetary policy operations and whether they function properly is extremely important in terms of the smooth transmission of policy effects. In addition, as previously mentioned, financial markets themselves play an important role in effecting efficient resource allocation, which is necessary for sustainable economic growth. I will only briefly touch on the Bank's actions, which have a close relationship with monetary policy. Introduction of RTGS One is the introduction of real-time gross settlement - or RTGS - to Bank of Japan current account deposits in January 2001. This now means that when commercial banks request a fund transfer via their current accounts at the transaction-by-transaction basis. Bank of Japan, we will immediately settle it on a Compared with the previous settlement method where unsettled transactions were accumulated and settled in a lump at a designated time, the introduction of RTGS has contributed substantially to reducing risk in that it reduces the amount of unsettled funds as well as limits any chain reaction should a specific bank become illiquid. Through ample liquidity provision, the Bank of Japan has been making efforts to ensure market stability, thereby underpinning the economy. In the process, the reduction of settlement risks through the introduction of RTGS has without doubt also played an important role. Public auction system for FB issuance For the issuance of financing bills (FBs), a public auction system was introduced. Strange as it may sound now, in the financial market of the second largest economy in the world, FBs had long been underwritten by the Bank of Japan until just a few years ago. From such viewpoints as creditworthiness, liquidity, and the homogeneity of products, there was strong demand both domestically and overseas for FBs. Thus they are worthy to be a core product in the short-term money market. If there were insufficient market depth, smooth interest rate and price formation in the short-term money market would become difficult, leading to a serious problem from the viewpoint of securing measures for the Bank's money market operations and the conduct of monetary policy. Taking account of such a situation and after thorough discussion with the parties concerned, the Bank of Japan reached an agreement with the Ministry of Finance in December 1998 to change FB issuance to, in principle, a public auction system. It was implemented in April 1999. Subsequent development of the FB market has been greatly contributing to daily money market operations and the conduct of monetary policy as expected. At present, FBs also play an important role in meeting investor needs for safe and liquid assets. If the underwriting of FBs by the Bank of Japan had continued and there was a shortage of such products in the market, securing financial market stability would have been much more difficult than now. Making ABS and ABCP eligible collateral In relation to financial market improvement, the Bank of Japan made asset-backed securities (ABS) and asset-backed commercial paper (ABCP) eligible collateral for its money market operations. As collateral for bill operations and the Lombard-type lending facility, the Bank selects eligible collateral based mainly on creditworthiness and marketability. Bearing in mind not only the need to diversify measures through which the Bank provides liquidity but also that such selection of eligible collateral contributes indirectly to ensuring smooth corporate financing, the Bank has been making efforts to adopt new financial products including ABS and ABCP as eligible collateral. While the amount of securitized products used as collateral has not been that large so far, we believe there has been some positive impact on the development of their markets through the provision of liquidity by our making such products eligible as collateral. V. Improving transparency Before closing, let me discuss the Bank's efforts to improve monetary policy transparency. As I mentioned, my term as Governor started at about the same time as the new Bank of Japan Law came into effect. The Law has "independence" and "transparency" as its keywords. While the new Bank of Japan Law stands comparison with other central bank laws, it is an important and continuous challenge for the Bank of Japan how to implement the rules and principles it incorporates. As Governor of the Bank of Japan, I have made not a few difficult decisions in navigating monetary policy. At the same time, I have taken pains to improve the ways of how best to discuss, determine, and externally communicate various policies under the framework of the new Bank of Japan Law. For example, since October 2000, the Bank has been publishing the so-called "Outlook Report" semiannually which summarizes the standard scenario and risks pertaining to the economic outlook, as well as giving forecasts of prices and growth rate by Policy Board Members as a reference. The scenario and a list of possible risks given in the report have been useful in terms of both enriching discussion and improving external accountability by providing a common platform for subsequent discussions at Monetary Policy Meetings. With respect to the conduct of monetary policy, the Bank has endeavored to communicate in clear and simple language by employing not only those channels stipulated by law such as the minutes of Monetary Policy Meetings, which are issued about one month after each meeting, and semi-annual reports submitted to the Diet, but also by answering questions in the Diet and at press conferences. For example, the number of times I appeared in the Diet to answer questions during my term of office up to January was 382. In improving transparency, the Bank makes efforts with respect to measures not only directly related to monetary policy but also those related to money market operations. The announcement of criteria for selecting counterparties in money market operations and guidelines on eligible collateral is one example, and we have been publishing the Bank's holding of government bonds by issue since June 2001, and the content of collateral the Bank has received since June 2002. I am convinced that we have established a framework of monetary policy transparency at a level which compares favorably with that of any other central bank in the world. Our self-assessment published last summer, which was based on the IMF's "Code and Good Practice on Transparency in Monetary and Financial Policies," reaffirmed such recognition. Even though a transparency framework has been established, it does not automatically mean that our monetary policy has gained public understanding. In fact, we have also received criticism. This is not because there is a problem with the transparency framework, but, as I explained today, because there have been some factors such as monetary policy being constrained in various ways and not able to produce tangible results, and the Bank being obliged to conduct its policy in the uncharted territory of quantitative easing after facing the zero interest rate bound. In any event, transparency, which is one of the keywords of the new Bank of Japan Law, is not only an important responsibility for a central bank which was given independence under the framework of democracy, but also has significance in increasing the effectiveness of monetary policy. I believe it important to strive to improve transparency as we go forward. VI. Concluding remarks Today I have reviewed my efforts at the Bank of Japan during my term centering on monetary policy. During the past five years, we have been exploring what a central bank can and cannot do in order to get Japan's economy back on track. In exploring the boundary between what a central bank can and cannot do, we have tried to find the right boundary by not being shackled by precedents, thinking hard, and acting with courage. Even after short-term interest rates reached virtually zero percent, we adopted a new framework of quantitative easing and have been providing ample liquidity. This was unprecedented in the central bank history. In addition, we also came up with an extremely unusual measure for a central bank last fall, namely the direct purchase of the shareholdings of banks in the interests of financial system stability. I am nevertheless aware that voices have been heard calling for further efforts on the part of the Bank of Japan for revitalizing Japan's economy. And, let me assure you here that we are committed to making the most of our wisdom and courage to further explore what we are able to do and to carry it out. Thank you for your attention.
|
bank of japan
| 2,003 | 2 |
Bank of Japan, March report of recent economic and financial developments 6 March 2003.
|
Bank of Japan’s March report of recent economic and financial developments1 Bank of Japan, 6 March 2003. * The Bank’s View * * Economic activity remains flat amid substantial uncertainty about the outlook for the economy. With regard to final demand, while business fixed investment has been virtually level, private consumption continues to be weak. Moreover, housing investment remains sluggish and public investment is declining. While domestic demand has yet to show signs of recovery, both exports and imports are increasing at a very modest pace with net exports remaining virtually level. Industrial production continues to be basically level in response to these developments in final demand. As for the employment situation, new job offers are on a gradual rising trend. In addition, the number of employees, which covers various types of employees including non-regular employees such as temporary workers, appears to be declining at a slower pace. However, firms are still maintaining their stance on reducing personnel expenses, and household income continues to decrease significantly due mainly to an ongoing decline in wages. Thus, the employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared view of the prospect for overseas economies in 2003 is that, partly due to the continued firmness in Asian economies, they will follow a gradual recovery path. However, their recovery is likely to be anemic, at least for the time being, given the sluggish improvement in the U.S. economy and further weakness in European economies. In this situation, the increase in exports is expected to remain very modest, and industrial production is likely to be more or less unchanged for the immediate future. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time due to the severe employment and income situation. Business fixed investment is expected to be supported by the improvement in corporate profits to date, but is unlikely to recover clearly for the time being due mainly to substantial uncertainty regarding overseas economies. Overall, assuming that overseas economies will recover in 2003, albeit only at a moderate pace, the increase in exports will accelerate and the uptrend in production will resume sooner or later, which in turn will initiate the momentum for a recovery. However, the economy is unlikely to show clear signs of recovery for some time, since production is expected to be virtually unchanged for the time being while downward pressures such as excessive labor input and debt persist. Furthermore, the downside risk to the economic outlook for overseas economies continues to require attention, given that there are some uncertain factors including geopolitical developments and their economic implications. On the domestic side, stock prices are weak. Hence, careful monitoring is required of progress in the resolution of the nonperforming-loan problem and its effects on stock prices, corporate finance, and the economy. On the price front, import prices are on a rising trend with some fluctuations, reflecting developments in prices of overseas commodities such as crude oil. Domestic corporate goods prices have been declining gradually on the whole with the continued fall in machinery prices, despite the rise in import prices and the improved supply-demand balance in materials industries. Consumer prices and corporate services prices have also been declining gradually. Looking at the conditions influencing price developments, import prices are projected to be firm for the time being due mainly to developments in crude oil prices. On the other hand, factors such as the ongoing technological innovations in machinery and the streamlining of distribution channels will continue to push prices downward. Meanwhile, the overall state of supply and demand is expected to This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on March 4 and 5, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on March 4 and 5, 2003 as the basis for monetary policy decisions. continue exerting downward pressure on prices, with domestic demand continuing to be weak for a while. However, the low levels of inventories and the improvement in the supply-demand balance in materials industries will support prices in corporate transactions. Against this background, the decline in domestic corporate goods prices is likely to be mitigated in the near term. The pace of year-on-year decline in consumer prices is expected to become somewhat slower, as medical costs are projected to rise from April due to public insurance reforms. As for the financial environment, the outstanding balance of current accounts at the Bank of Japan is recently moving at around 20 trillion yen, as the Bank provides ample liquidity. Under these circumstances, in the money markets the overnight call rate continues to hover at very close to zero percent. Moreover, longer-term interest rates continue to be at low levels on the whole, and the markets remain steady to date as the fiscal year-end approaches. Yields on long-term government bonds declined again to the range of 0.7-0.8 percent after moving in the range of 0.8-0.9 percent until mid-February. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are contracting slightly. Stock prices are weakening slightly reflecting the heightened uncertainty about geopolitical developments and uncertainty regarding the domestic economic outlook. The Nikkei 225 Stock Average is recently moving at the 8,000-8,500 yen level. In the foreign exchange market, the yen is currently traded in the range of 117-119 yen to the U.S. dollar, as the dollar continues to be weak due mainly to greater tension in the Middle East. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms, particularly small ones, are severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings is accommodative, but the environment for firms with low credit ratings is severe. Credit demand in the private sector continues to follow a downtrend mainly because business fixed investment remains sluggish and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis. The amount outstanding of corporate bonds and CP issued is moving at around the previous year’s level. Meanwhile, according to business surveys, financial positions of firms, particularly those of small firms, remain severe. The year-on-year growth rate of the monetary base is around 10-15 percent. The year-on-year growth rate of the money stock is around 2.0 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions continue to be extremely easy. Long-term interest rates are declining slightly. The money stock and the monetary base maintain high growth rates relative to that of economic activity as a whole. However, stock prices remain weak. In corporate finance, the fund-raising environment of firms with low credit risks is accommodative on the whole, but with regard to firms with high credit risks, the stance of investors is severe and the lending attitudes of private banks continue to be cautious. Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 3 |
Bank of Japan, 9 April 2003
|
Bank of Japan’s April report of recent economic and financial developments1 Bank of Japan, 9 April 2003 * The Bank’s View * * Economic activity remains flat as a whole, despite some signs of improvement, with greater uncertainty about the economic outlook partly due to Iraq-related developments. With regard to final demand, although business fixed investment is starting to recover, private consumption continues to be weak. Moreover, housing investment remains sluggish and public investment is declining. While domestic demand has not shown clear signs of recovery, both exports and imports are increasing at a very modest pace with net exports remaining virtually level. Industrial production continues to be basically level in response to these developments in final demand. Corporate profits continue to recover, but the improvement in business sentiment as a whole has come to a halt due mainly to substantial uncertainty regarding the economic outlook. As for the employment situation, new job offers are on a gradual rising trend. In addition, the number of employees, which covers various types of employees including non-regular employees such as temporary workers, appears to be declining at a slower pace. However, firms are still maintaining their stance on reducing personnel expenses, and household income continues to decrease with an ongoing decline in wages. The employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared view of the prospect for overseas economies in 2003 is that, partly due to the continued firmness in Asian economies, they will follow a gradual recovery path. However, their recovery is likely to be anemic, at least for the time being, given the recent weakness shown in economic indicators of the U.S. and European economies amid greater uncertainty regarding Iraq-related developments. In this situation, the increase in Japan’s exports is expected to remain very modest, and industrial production is likely to be more or less unchanged for the immediate future. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time due to the severe employment and income situation. Business fixed investment is likely to follow a clear uptrend if exports and production increase clearly again, but for the time being, the increase in business investment is expected to remain very modest. Overall, assuming that overseas economies will recover in 2003, albeit only at a moderate pace, the increase in exports will accelerate and the uptrend in production will resume sooner or later, which in turn will initiate the momentum for a recovery. However, a self-sustaining recovery in domestic demand is unlikely to gain momentum for some time, since production is expected to be virtually unchanged for the time being while downward pressures such as excessive labor input and debt persist. Furthermore, the outlook for overseas economies warrants careful monitoring with more uncertain factors arising such as Iraq-related developments and economic implications of the severe acute respiratory syndrome (SARS). On the domestic side, careful monitoring is required of developments in stock prices and how they affect the financial system, corporate finance, and the economy. On the price front, import prices are rising, reflecting developments in prices of overseas commodities such as crude oil. Domestic corporate goods prices have stopped declining on the whole with the rise in import prices and the improved supply-demand balance in materials industries, despite the This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on April 7 and 8, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on April 7 and 8, 2003 as the basis for monetary policy decisions. continued fall in machinery prices. Meanwhile, consumer prices and corporate services prices have been declining gradually. Looking at the conditions influencing price developments, the outlook for import prices is unclear at present because it largely depends on developments in crude oil prices. On the domestic side, the supply-demand balance in the macroeconomy, ongoing technological innovations in machinery, and the streamlining of distribution channels will continue to exert downward pressure on prices. In contrast, upward pressure is also at work, such as the effects of high crude oil prices to date and the improvement in the supply-demand balance in materials industries. Of these two opposite pressures, the latter will be slightly stronger at the corporate transaction stage for the immediate future, and therefore, domestic corporate goods prices are projected to inch up. As for the outlook, consumer prices are expected to continue decreasing but the pace of year-on-year decline is expected to become somewhat slower, as medical costs are projected to rise from April due to public insurance reforms. As for the financial environment, the Bank of Japan provided further ample liquidity to secure financial market stability, following the commencement of military action against Iraq by the United States and other nations (March 20, Japan Standard Time). As a result, the outstanding balance of current accounts at the Bank rose to 30.9 trillion yen at the end of March. Under these circumstances, the overnight call rate continues to hover at very close to zero percent, although it rose temporarily on March 31. Longer-term interest rates such as TB and FB rates also rose temporarily toward the fiscal year-end, but they are becoming steady again at low levels. Yields on long-term government bonds declined and were temporarily moving below the 0.7 percent level in early April, reflecting uncertainty over the domestic economic outlook. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are contracting. In the stock market, market participants continue to be nervous largely due to uncertainty over the developments in military action against Iraq. The Nikkei 225 Stock Average is recently moving at the 8,000-8,500 yen level. In the foreign exchange market, the yen appreciated in early March as the U.S. dollar weakened on the whole. Since mid-March, however, the yen has been volatile reflecting the developments in military action against Iraq. The yen is currently traded in the range of 119-121 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. The lending attitudes of financial institutions as perceived by firms, particularly small ones, are severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings is accommodative, but the overall environment for firms with low credit ratings remains severe although there seem to be slight improvements. Credit demand in the private sector continues to follow a downtrend mainly because business fixed investment is at low levels and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a year-on-year basis. The amount outstanding of corporate bonds and CP issued is moving at around the previous year’s level. Meanwhile, according to business surveys, financial positions of firms, particularly those of small firms, remain severe. The year-on-year growth rate of the monetary base is about 10 percent. The year-on-year growth rate of the money stock is around 2.0 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions as a whole continue to be extremely easy. Long-term interest rates are declining slightly. The money stock and the monetary base maintain high growth rates relative to that of economic activity as a whole. However, stock prices continue to be weak. In corporate finance, the fund-raising environment of firms with low credit risks is accommodative on the whole, but with regard to firms with high credit risks, the stance of investors is severe and the lending attitudes of private banks continue to be cautious. Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 4 |
Speech by Mr Sakuya Fujiwara, Deputy Governor of the Bank of Japan, at Toyo University, 13 March 2003.
|
Sakuya Fujiwara: Inside a monetary policy meeting Speech by Mr Sakuya Fujiwara, Deputy Governor of the Bank of Japan, at Toyo University, 13 March 2003. * * * Introduction I would like to express my gratitude for the opportunity to give this speech. As you may be aware, my five-year tenure as Deputy Governor of the Bank of Japan is drawing to an end. It is also almost five years since the revised Bank of Japan Law came into effect. The Law was revised comprehensively in 1997, for the first time in its roughly 50 years of existence, in line with a growing trend among central banks around the world to strengthen their autonomy and ensure greater transparency in the implementation of their policies. Previously a journalist, I was appointed as Deputy Governor at a time when the Bank of Japan was to start afresh with the new Bank of Japan Law. It was a truly dramatic change for me. The journalist who had been watching the Bank's policy from the outside, suddenly found himself working inside! Through this, so to speak, switching sides, I discovered many things that were new to me about the Bank. Also, explaining monetary policy, there were many occasions when I was able to gain new insights into the function of the media. The Bank, as the central bank of Japan, conducts various kinds of business - the best known of which I believe is the issuance of banknotes. Today, based on my five years' experience at the Bank, I would like to talk about the process by which monetary policy is decided in accordance with the Bank of Japan Law of 1997. More specifically, I will talk about what happens in Monetary Policy Meetings (MPMs). I. What is monetary policy? First, I would like to briefly explain the basics of monetary policy. The Bank of Japan Law of 1997 mandates that the Bank's monetary policy shall be aimed, through the pursuit of price stability, at contributing to the sound development of the national economy, making it clear that the objective of monetary policy is to achieve price stability. For the satisfactory development of an economy, it is necessary that resources be allocated efficiently. The competitive market mechanism is a great device to achieve this end. To enable the market mechanism to perform this function properly, one must have a grasp of the trend of prices of goods and services - relative prices, to be more precise - or, from the standpoint of firms, the trend in popular demand for products. A correct assessment of such trends is difficult if the yardstick, prices of goods and services, is not stable. What is more, unexpected fluctuations in prices could cause serious losses to savers or borrowers. This would not be fair, and could also have an adverse impact on the general level of economic activity. This is why price stability is important. Textbooks on macroeconomics or financial theory explain how central banks try to achieve price stability. Normally, a central bank targets and controls rates in the money market, where transactions take place between financial institutions. In Japan, the Bank guides money market rates through market operations, providing or absorbing funds in the market by buying or selling Japanese government securities and bills. The resulting changes in short-term interest rates gradually affect interest rates on long- and medium-term government bonds, business loans, and deposits. These changes eventually affect the spending of individuals and firms, leading to changes in the supplydemand balance in goods and services. It is through this roundabout process called the transmission mechanism that the Bank tries to achieve stability in prices. The above textbook theory does not seem to work in Japan's current situation. Due to the prolonged economic slump, money market rates have already fallen to virtually zero percent and thus the traditional practice of easing monetary policy by lowering money market rates is no longer effective. Against this background, the Bank two years ago launched a policy of quantitative easing, shifting the target of money market operations from the overnight call rate to the outstanding balance of current accounts held by financial institutions with the Bank. Financial institutions hold current accounts with the Bank as an instrument of payment as well as to maintain their reserve balances under the reserve requirement system, and the Bank decided to set an operational target for the total outstanding balance of these accounts. The target amount of the current account balance began at "around 5 trillion yen" and has since been raised a number of times. At present, it is "around 15 to 20 trillion yen." The Bank is thus providing ample funds under this framework of quantitative easing. The aim of this policy is to maintain stability in the financial markets, foster economic recovery, and prevent price falls. The consumer price index (CPI) has been declining at a moderate pace of less than 1 percent year on year. The Bank has announced its intention to prevent further deflation by making a commitment to continue with the policy framework of quantitative monetary easing "until the CPI registers stably a zero percent or an increase year on year." Recently, there have been lively discussions on the question of the transmission mechanism of monetary policy I mentioned earlier. I will leave detailed explanation of the mechanism for another time, focusing today on explaining the process of monetary policy decision-making. I will try to describe the scene, and the atmosphere in which monetary policy decisions are formulated. I hope it will help to increase your interest in and understanding of monetary policy. II. Who decides monetary policy? Japan's monetary policy is determined by the Bank's highest decision-making body, the Policy Board. In this regard, there are two important points to note. First, the Bank is independent from the Government and solely responsible for monetary policy. And second, monetary policy is decided by vote by a policy board made up of nine members. I will expand on the first point - the Bank's autonomy in its conduct of monetary policy. Why should monetary policy be conducted by an independent central bank? Because policy action that central banks are often pressured to take from a short-term perspective to stimulate the economy could in the medium to long term trigger sharp fluctuations in the economy and prices, putting at risk the sound development of the economy. In the past, there have been numerous instances where increased currency issuance caused hyperinflation. The experience of Japan just before and after World War II is a case in point. These lessons from history gave rise to the belief that monetary policy should be conducted by a central bank that is independent from the government, a system that had won respect over a period of many years in the United States and Germany. Thus, in the 1990s, many countries, both emerging and developed, started to revise their central banking laws to ensure and strengthen their central banks' autonomy. As I explained earlier, the Bank's autonomy was institutionalized in the Bank of Japan Law of 1997, which states that "The Bank of Japan's autonomy regarding currency and monetary control shall be respected." To ensure the independence of the Bank, members of the Policy Board cannot be dismissed for holding opinions at variance with the Government, and the Government cannot order the Bank to undertake any particular policy action. Needless to say, a central bank should not take advantage of its independent status and act in a self-righteous manner. Moreover, it must strive to clarify to the public the details of and the background to its decisions. This condition is called the accountability or transparency of the central bank in its conduct of monetary policy. The Bank of Japan Law of 1997 contains various provisions to ensure such transparency along with the principal policy objective, which, as mentioned, is to contribute to the sound development of the national economy by maintaining price stability. Furthermore, to ensure that monetary policy is consistent with the Government's basic economic policy framework, the Law states that the Bank should always maintain close contact and exchange views with the Government. As I will discuss later, the Law also allows representatives of the Government to attend MPMs to give their views. Now for the second point, namely the decision of monetary policy by a committee, or a policy board. At the opposite extreme to this system is the framework in which the final decision is entrusted to the central bank governor, and some central banks maintain this system. However, the majority of central banks currently make use of the system where a committee or members of a board decide monetary policy. The Bank's policy decisions are made through a majority vote of the nine members of the Policy Board, which I believe is an excellent method. This makes it possible for Policy Board members, who share the common objective of contributing to the sound development of the national economy through price stability, to reach the right decisions based on the pool of knowledge and learning of the constituent members. It makes for better decisions and contributes to satisfactory conduct of monetary policy. III. What are MPMs? A. The framework of MPMs The Policy Board, which is the Bank's highest decision-making body, discusses a wide range of matters related to the Bank's policy and business operations. Matters related to monetary policy - such as the official discount rate, guidelines and tools for money market operations, and the Bank's assessment of economic and financial developments - are discussed in MPMs. By statute, the procedures for MPMs differ from those of regular Policy Board meetings. The most important item on the agenda at MPMs is deciding on a policy guideline for money market operations for the intermeeting period ahead. For example, the current guideline for money market operations under the quantitative easing policy framework is as follows: "The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 15 to 20 trillion yen." The Policy Board also determines at MPMs the financial assets the Bank should purchase or accept as eligible collateral. For example, it decided to accept as collateral asset-backed securities (ABS) and asset-backed commercial paper (ABCP), for which there is recently an expanding market. The Policy Board is composed of nine members - the Governor, two Deputy Governors including myself, and six other members. At MPMs, the Governor and the Deputy Governors independently express their assessment of the economic and financial situation and the conduct of monetary policy. Article 23 of the Bank of Japan Law stipulates that the six members other than the Governor and two Deputy Governors be appointed from "among those with academic expertise or experience including experts on the economy or finance." These members are often mistakenly thought of as working part-time for the Bank, like the members of Government councils who only attend meetings. In fact, they work full-time at the Bank, and perform a wide variety of duties besides attending MPMs, for example, devising measures to maintain an orderly financial system, administering the business operations of the Bank, and strengthening internal management. Decisions made by the Policy Board are executed by the Bank's staff, comprising the Governor, Deputy Governors, Executive Directors, and other staff. B. The schedule for MPMs MPMs are held once or twice a month, the first meeting of the month being held over two days. At this meeting, Policy Board members decide a guideline for money market operations for the intermeeting period ahead, and formulate the Bank's view of recent economic and financial developments. The second meeting of the month takes one business day, and Policy Board members review the Bank's decision made at the first meeting. The schedule for MPMs is released at the end of each quarter for the six months following the month of the announcement. The Bank of Japan holds meetings on monetary policy more frequently than other major central banks. For example, the Federal Open Market Committee of the U.S. Federal Reserve System has eight regularly scheduled meetings a year. The Governing Council of the European Central Bank meets once a month in principle to decide on monetary policy. The Monetary Policy Committee of the Bank of England holds its meeting once a month. IV. Preparations before MPMs Let me describe how the members of the Policy Board prepare for MPMs. Policy Board members are constantly thinking about how to conduct monetary policy in the most effective way, as they are responsible for deciding matters related to the Bank's policy and business operations. Economic indicators are updated every day and conditions in domestic and overseas financial markets also change constantly, and such information provides the basis for monetary policy decisions. Members of the Policy Board assess these data, the results of the staff's research and analysis, and anecdotal information related to firms and financial institutions collected at the Head Office and branches, as well as read a variety of technical and research papers, both domestic and foreign. In addition, members independently gather anecdotal information, and interview and exchange views with market participants and firms' top management. In this way, Policy Board members gather information related to the overall economy daily. At MPMs, Policy Board members deliberate on this information gathered through daily research and analysis, and reach a consensus on the appropriate direction for policy. At the meeting, the Bank's staff first present oral reports on the current economic and financial situation. These reports are based on the staff's written reports distributed to Policy Board members at least two business days before the meeting concerned. The written reports include a comprehensive analysis of the economy based on both macro- and microeconomic information obtained during the intermeeting period. The volume of written reports is usually large, and the pages including charts and tables number several hundred. During the two business days prior to MPMs, members read through the staff's written reports and formulate their views on the economic and financial situation and the appropriate direction for monetary policy. V. On the day of the MPM A. Members and the staff attending the MPM Let me describe what happens in the first MPM of the month, which is held over two business days. The first day of the meeting starts at 2:00 p.m. The nine members of the Policy Board gather in the policy board room at the Bank's Head Office, ready to present their views on the state of the economy and the course of monetary policy. Pursuant to the new Bank of Japan Law, the Minister of Finance and the Minister of State for Economic and Fiscal Policy may, when necessary, attend and express views at MPMs, or they can designate a staff member from the Ministry of Finance or the Cabinet Office to attend the meeting. Three Executive Directors of the Bank in charge of departments and offices directly concerned with monetary policy, and Directors-General and other senior officials of departments and offices concerned, attend MPMs to present oral reports. Others present at the MPM include the senior official in charge of the Bank's external relations and the staff of the MPM secretariat, which arranges proceedings for MPMs. B. Presentation of the staff’s oral reports on economic and financial developments On the first day of the MPM, the staff present reports on recent economic and financial developments. The staff representing the departments and offices concerned report the results of the Bank's money market operations and developments in the economy and financial markets at home and abroad during the intermeeting period. Policy Board members are also updated on new economic indicators as well as the most recent developments in financial markets that have become available since the distribution of the written reports by the staff prior to the meeting. Occasionally, the staff refer to economic indicators released on the actual day of the MPM. In this way, members absorb all information available at the time of the meeting. The staff also answer questions, if any, from Policy Board members after each report. C. Discussions by Policy Board Members concerning economic and financial developments The second day of the MPM starts at 9:00 a.m. The meeting starts with a discussion on economic and financial developments. First, each Policy Board member in turn expresses his or her views on recent economic and financial developments and the prospects for the future, taking into account the oral reports presented by the Bank's staff on the previous day and other members' views. After all the members have had their turn, they freely exchange views on recent economic and financial developments. During this time, they have further discussions and ask and answer questions and make comments. Let me briefly describe how members' discussions proceed by taking the example of private consumption. First, members discuss typical economic indicators of private consumption, such as sales at department stores, sales of household electrical appliances, and new passenger-car registrations. They also assess, for example, the outcome of winter holiday sales and the effects of unseasonable weather on the economy, taking account of anecdotal information obtained from corporate interviews. They also comment on the outlook for private consumption in relation to the employment and income situation, since the household income situation basically determines the trend of private consumption. In addition, they assess the effects on private consumption of households' debt burden and developments in asset prices, such as land and stock prices. As you can see from this discussion process, the nine members of the Policy Board assess each type of economic data comprehensively and in depth from various perspectives, and thus a wellthought-out assessment of the economy is formulated. D. Deliberations on the conduct of monetary policy Policy Board members then discuss the conduct of monetary policy for the intermeeting period ahead, which is the main item on the agenda at MPMs. Each Policy Board member in turn expresses his or her views, mainly on whether the Bank should maintain or change the guideline for money market operations for the intermeeting period ahead, and the reasons. Members also deliberate on the Bank's conduct of monetary policy in the longer term, beyond the next MPM. Occasionally in the discussions, members express their views on financial system problems and the conduct of overall economic policy including fiscal policy. Members then exchange views freely to gain a better understanding of each other's views and differences in their views. On this basis, members proceed further with the discussion. Through such active discussions, they formulate policy proposals relating to the guideline for money market operations for the intermeeting period ahead. E. Remarks by Government representatives Next, the Governor, who is the chairman of the Policy Board, provides an opportunity for government representatives to make remarks. As I mentioned earlier, the Minister of Finance and the Minister of State for Economic and Fiscal Policy or their designated delegates can attend MPMs. These representatives can express the views of the Ministry of Finance and the Cabinet Office on the state of the economy, the Government's conduct of economic policy, and the Bank's conduct of monetary policy. In addition, the Bank of Japan Law permits government representatives to request a postponement of the Policy Board members' vote on policy proposals to the next MPM. Government representatives may also submit specific proposals for monetary policy measures to be decided by the Policy Board. In any case, it is up to the Policy Board to decide whether to accept such a request to postpone the vote on the Policy Board members' proposal or to adopt any proposal submitted by government representatives. Some may say that this system of allowing government representatives to express their views and submit proposals at MPMs threatens the Bank's autonomy. Needless to say, if the Government tried to use this system to impair the Bank's independence in conducting monetary policy, it would be contrary to the Bank of Japan Law. However, the transparency of monetary policy is increased by the framework of MPMs, in which the Government expresses its views on monetary policy at the meetings and the Bank decides on the conduct of monetary policy independently, and by the publication of the decision-making process in the minutes. Therefore, I believe that MPMs provide a very important opportunity for enhancing communication between the Government and the Bank. F. Votes After thorough discussion, government representatives make remarks, and then Policy Board members take a vote on the proposal relating to the guideline for money market operations. Based on the discussion, the chairman formulates a proposal reflecting the majority view of the Policy Board members. Sometimes other Policy Board members who hold different views submit a proposal separately. A member of the secretariat reads out the proposals, and a vote is taken. The meeting reaches its climax as Policy Board members cast their votes, since a decision on the guideline for money market operations is finally made after an intensive discussion. As mentioned earlier, the proposal is decided by majority vote, and the Policy Board members who have voted against the proposal can state their reasons for opposing it. In this way, the guideline for money market operations for the intermeeting period ahead is decided. G. Decisions on the Bank’s view of recent economic and financial developments At the first MPM of the month, Policy Board members then discuss "The Bank's View" of recent economic and financial developments, which is published in the Monthly Report of Recent Economic and Financial Developments (consisting of "The Bank's View" and "The Background") on the next business day after the meeting. The draft of "The Bank's View" is formulated based on the Policy Board members' discussion, and the discussion becomes extremely active especially at times when it is difficult to make a definite assessment of the direction of the economy. This is because members attach importance to communicating their assessment of the state of the economy correctly to the public. In addition, the minutes of the meeting held around one month earlier are approved in the MPM. The schedule for MPMs for the period six months ahead is approved at the last MPM of every quarter. Policy Board members also approve the release of public statements regarding a decision when there is a change in the guideline for money market operations and when a detailed explanation of the thinking behind a decision is deemed necessary. The MPM finally comes to a close. The ending of MPMs is timed so that Japanese financial markets can digest the decisions made at MPMs within the day of the meeting as much as possible. At present, MPMs usually end at around 1:00 p.m. H. Press release The guideline for money market operations decided at the MPM is released immediately after it ends. After the MPM, the Bank's senior official in charge of external relations quickly enters the Bank's pressroom, where correspondents are waiting. Immediately after the announcement, the media start to report the Bank's decision. Meanwhile, the Bank releases the guideline for money market operations simultaneously in English and Japanese via its Internet Web site. Thus, almost instantaneously, people around the globe can know the Bank's decision. When there is a policy change, the Governor, as the chairman of the Policy Board, holds a press conference about an hour after the MPM to explain the changes carefully to the public. Even when there is no policy change, the Governor holds a monthly press conference two business days after the first MPM of the month. The Japanese and the English version of "The Bank's View" of the Monthly Report of Recent Economic and Financial Developments and the Japanese version of "The Background" are released on the next business day after the approval of "The Bank's View" at the first MPM of the month. The English version of "The Background" is released on the next business day following the release of "The Bank's View." The minutes of the MPMs are approved at the MPM held around one month after the meeting concerned and released after approval. Transcripts of MPMs are published ten years after the meetings concerned. I. Publication of the Outlook and Risk Assessment of the Economy and Prices (The Outlook Report) Now I would like to talk about the Outlook Report, which is a report on the outlook for the economy and prices for the period twelve to 18 months ahead. The Outlook Report is released after it is discussed at the second MPM in April and October. In the report, the standard scenario for Japan's economy and the risk factors that might cause a revision to the standard scenario are explained, and the Policy Board members' forecast of changes in price indexes and real GDP growth rate is included as a reference. At MPMs thereafter, the standard scenario and risk factors in the report are discussed from the longer-term perspective. In short, the report provides a common basis for the members' discussions on the state of the economy. Concluding remarks I have attended nearly 90 MPMs during my term of office as Deputy Governor of the Bank of Japan, the post I was appointed to about the same time the new Bank of Japan Law of 1997 came into effect. As a member of the Policy Board, I have taken part in important decision-making concerning monetary policy, such as changing the level of the target of the policy interest rate and implementing quantitative easing measures unprecedented in the history of central banks. When I look back, each MPM was very intense with active discussion of the Bank's conduct of monetary policy. In concluding my speech, I would like to make three points regarding MPMs based on my five years' experience at the Bank. First, I would like to emphasize the importance of the framework of MPMs in conducting appropriate monetary policy. As I mentioned earlier, members' discussions are based on all available data on the economy and financial markets reported at MPMs. These data include not only macroeconomic data but also anecdotal information regarding financial institutions and firms. This wide range of information is extremely important in monetary policy decision-making, because the Bank must adjust monetary policy to changes in economic activity and financial markets while at the same time forecasting the likely effect of policy measures in the long term. Second, transparency of the Bank's conduct of monetary policy has been enhanced by MPMs. I have attached special importance to increasing the transparency of the Bank's decision-making process, having previously been a journalist who had watched the Bank's conduct of monetary policy closely. Given the faster diffusion of information due to progress in IT, a certain degree of confidentiality is required because there is a risk that people might be misled by rumor, which could lead to disruption of financial markets. However, the Bank needs to promptly release its decisions on monetary policy and explain explicitly to the public and financial markets the thinking behind each decision, including its assessment of the economic situation. This accountability in the conduct of monetary policy is an important responsibility of an independent central bank. I have made a special effort to increase the transparency of not only the details of the Bank's decision but also the thinking behind the decision. This is because, if the Bank's thinking and actions are interpreted correctly by market participants, medium- to long-term interest rates will start to factor in future monetary policy, and this will prevent sharp economic fluctuations. In this regard, the immediate release of decisions made at MPMs, press conferences by the Governor, and the publication of the Monthly Report of Recent Economic and Financial Developments and the minutes of MPMs contribute greatly to enhancing the transparency of the Bank's conduct of monetary policy. And third, I want to emphasize that there is a very active exchange of views among Policy Board members at MPMs. We often hear criticisms outside the Bank when a decision is reached by unanimous vote at MPMs that there must have been very little discussion at the meeting, or the decision must have already been made prior to the MPM. As a member of the Policy Board, I strongly object to these views. As I have repeatedly said, each member is fully prepared to give his or her views on the economic situation and the appropriate direction of monetary policy before attending an MPM. In the period immediately before a meeting, I concentrate on forming the views that I plan to express by using all available information and holding discussions with the staff of departments and offices concerned. There are frequently cases where members disagree, but this is because they take seriously their responsibility as a Policy Board member devising appropriate monetary policy. Members' remarks and proposals on monetary policy measures made at MPMs are released in the minutes and transcripts of MPMs. Members are therefore under the pressure not only of what they have said being constantly examined by market participants, but also of being judged some time in the future on whether they made the right decision on monetary policy. The Policy Board established under the old Bank of Japan Law of 1942 was once criticized as the "silent Board," where there was very little exchange of views. As you can see, this is not at all true. Since a decision is reached after considerable discussion, members attach significant importance to the decisions made at MPMs and are confident in implementing the measures decided at the meeting. As I said at the outset, it has been five years since the first MPM was held under the new Bank of Japan Law. We were pioneers at the time, and since then we have steadily improved various aspects of MPMs, such as the way reports are given by staff and the way members' discussions are held. There is no end to this process of improvement, because the framework of MPMs must be enhanced in line with economic and financial developments and the nature of issues that are discussed at them. I have no doubt that the framework of MPMs will continue to be improved by the new Governor and Deputy Governors along with the six other members of the Policy Board to achieve the goal of contributing to the sound development of the national economy through the pursuit of price stability. Thank you for your attention.
|
bank of japan
| 2,003 | 4 |
Bank of Japan, 21 March 2003.
|
Bank of Japan’s May report of recent economic and financial developments1 Bank of Japan, 21 March 2003. * The Bank’s View * * Economic activity remains flat as a whole, but there is greater uncertainty about the economic outlook. With regard to final demand, business fixed investment is recovering gradually, although one of the leading indicators suggests possible weakness ahead. Meanwhile, private consumption continues to be weak, housing investment also remains sluggish, and public investment is declining. While domestic demand has not shown clear signs of recovery, net exports remain virtually level. Industrial production is basically level in response to these developments in final demand. As for the employment situation, new job offers are on a gradual rising trend. In addition, the number of employees, which covers various types of employees including non-regular employees such as temporary workers, appears to be declining at a slower pace. However, firms are still maintaining their stance on reducing personnel expenses, and household income continues to decrease with the ongoing decline in wages. The employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared view of the prospect for overseas economies is that the growth rate, especially that of the U.S. economy, will accelerate in the second half of this year with diminishing uncertainty regarding Iraq-related developments. For the time being, however, the recovery in the U.S. and European economies is projected to remain very modest. Moreover, there is rising concern that the growth of East Asian economies, which has been well-sustained so far, may slow at least temporarily, influenced by severe acute respiratory syndrome (SARS). In this situation, exports and also industrial production are expected to remain virtually level for the time being. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time due to the severe employment and income situation. Business fixed investment is likely to follow a clear uptrend if exports and production increase clearly again, but for the time being, the increase in business investment is expected to remain very modest. Overall, assuming that the growth rate of overseas economies accelerates in the second half of this year, the uptrend in exports and production will resume sooner or later, which in turn will initiate the momentum for an economic recovery in Japan. However, a self-sustaining recovery in domestic demand is unlikely to gain momentum for some time, since production is expected to be virtually unchanged for the time being while downward pressures such as excessive labor input and debt persist. As to the outlook for the environment for exports, there is greater uncertainty about the effects of SARS within the East Asian region, whose economies are closely linked to Japan’s, as well as uncertainty regarding the recovery in the U.S. and European economies and the developments in the U.S. dollar. On the domestic side, how the developments in the financial system will affect stock prices, corporate finance, and the economy requires careful monitoring. On the price front, import prices are still increasing somewhat, reflecting the rise in crude oil prices until early spring. Domestic corporate goods prices have stopped declining on the whole with the rise in import prices and the improved supply-demand balance in materials industries, despite the continued fall in machinery prices. Meanwhile, consumer prices and corporate services prices have been declining gradually. Looking at the conditions influencing price developments, import prices are expected to start declining, in reaction to the fall in crude oil prices since early spring. On the domestic side, the supply-demand balance in the macroeconomy, ongoing technological innovations in machinery, and the streamlining This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on May 19 and 20, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on May 19 and 20, 2003 as the basis for monetary policy decisions. of distribution channels will continue to exert downward pressure on prices. In addition, the improvement in the supply-demand situation in materials industries has recently come to a halt. Based on these factors, domestic corporate goods prices are projected to return to a gradual decline. Meanwhile, the pace of year-on-year decline in consumer prices is projected to slow somewhat in April with the rise in medical costs due to public insurance reforms. The year-on-year decline in consumer prices thereafter is projected to remain around the April level. While the rise in prices of petroleum products is expected to peak out, the import of consumer goods, which is strongly related to low-price strategies, is not increasing as it once was. As for the financial environment, the outstanding balance of current accounts at the Bank of Japan moved in the range of 25-30 trillion yen during April, as the Bank provided more ample liquidity to secure financial market stability. Since the beginning of May, the Bank has been providing more ample liquidity in accordance with the guideline for money market operations decided at the Monetary Policy Meeting held on April 30. The outstanding balance of current accounts is recently moving at around 25-27 trillion yen. Under these circumstances, the overnight call rate continues to hover at very close to zero percent. Longer-term interest rates remain steady at low levels. Yields on long-term government bonds declined and were temporarily moving at the 0.5-0.6 percent level, as banks and institutional investors have further increased investment in government bonds since the start of the new fiscal year. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are contracting further due mainly to the increase in corporate bond investment by institutional investors. Stock prices plunged temporarily toward the end of April reflecting uncertainty regarding the domestic economic outlook and concern over the worsening supply-demand situation in the stock market, but they have since recovered following the recovery in European and U.S. stock prices. The Nikkei 225 Stock Average is recently moving at around 8,000 yen. In the foreign exchange market, the yen appreciated reflecting the ongoing weakness of the U.S. dollar due mainly to concern about increasing fiscal deficits and current account deficits in the United States. The yen is currently traded in the range of 115-118 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. Recently, their lending attitudes seem to be becoming slightly more accommodative in areas such as interest margin charges. Meanwhile, the lending attitudes of financial institutions as perceived by firms, particularly small ones, remain severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings continues to be accommodative, and the environment for firms with relatively low credit ratings seems to be improving slightly. Credit demand in the private sector continues to follow a downtrend mainly because business fixed investment is at low levels and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2-3 percent on a yearon-year basis, but the rate of decline is contracting slightly. The amount outstanding of corporate bonds and CP issued is moving at around the previous year’s level. Meanwhile, according to business surveys, financial positions of firms, particularly those of small firms, remain severe. The year-on-year growth rate of the monetary base is about 10 percent. The year-on-year growth rate of the money stock slowed somewhat and is around 1.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions continue to be extremely easy due partly to the additional monetary easing by the Bank. Long-term interest rates are declining further. The money stock and the monetary base maintain high growth rates relative to that of economic activity as a whole, although the rates have slowed somewhat. In corporate finance, the fund-raising environment has not changed significantly, that is, the environment for firms, particularly with high credit risks, remains severe, although slight improvements are observed such as in the issuing environment of corporate bonds and CP. Stock prices remain unstable. Under these circumstances, a meeting of the Financial System Management Council was held and it was decided that injection of capital into Resona Bank was necessary. Including the effects arising from the decision, developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 5 |
Statement by Mr Toshihiko Fukui, 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, Tokyo, 18 April 2003.
|
Toshihiko Fukui: A review of the Bank of Japan’s conduct of monetary policy Statement by Mr Toshihiko Fukui, 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, Tokyo, 18 April 2003. * Introduction * * The Bank of Japan (hereafter, the Bank) submitted its Semiannual Report on Currency and Monetary Control for the first half of fiscal 2002 to the Diet in December 2002. I am pleased to have this opportunity to present an overall review of the Bank's conduct of monetary policy. It has been almost a month since I assumed the governorship of the Bank on March 20, 2003. The Bank is determined to utilize all of its intellectual resources and expertise and do its utmost as a central bank, in order to put Japan's economy back on a sustainable growth path and overcome deflation. I. Developments in Japan’s economy Economic activity in Japan remains flat as a whole. This is because, while business fixed investment has started to recover, there has been greater uncertainty about the economic outlook mainly reflecting developments overseas, especially the effects of the situation in Iraq. Looking at the economic outlook in more detail, with overseas economies following a gradual recovery path, exports and production are expected to resume their upward trend, which in turn will initiate the momentum for a recovery. However, there is uncertainty regarding the outlook for the United States and other overseas economies. Japan's economy is very likely to lack the momentum for a self-sustained recovery for some time, taking into account persistent downward pressure on the economy stemming from the excessive labor input and debts. Regarding prices in Japan, with the rise in import prices and an improved supply-demand balance in materials industries, the decline in domestic corporate goods prices has, on the whole, almost come to a halt. Consumer prices have been declining gradually, but looking forward, the pace of decline is expected to become somewhat slower due to the effects of (1) the rise in crude oil prices, and (2) the changes in the system of social security and indirect taxes. II. Financial developments Financial markets have been generally stable, including through the fiscal year-end at the end of March 2003, reflecting ample liquidity provision by the Bank. However, stock prices continue to be volatile, against the background of uncertainty about the economic outlook both at home and abroad. In particular, the weakness in banks' stock prices is becoming conspicuous, mainly reflecting market participants' severe view of the profitability of Japanese financial institutions. In corporate finance, the financing conditions of firms are accommodative on the whole, but the environment continues to be severe for firms of relatively low creditworthiness. Governor Fukui made the same statement regarding the Semiannual Report on Currency and Monetary Control for the first half of fiscal 2002 before the Committee on Financial Affairs, House of Councillors, on April 17, 2003. III. Conduct of monetary policy For almost a month now, I have taken the initiative to address the following two problems: first, to prevent any immediate crisis taking into account the developments in Iraq; second, to strengthen the effectiveness of monetary easing for the longer term. The Bank has been closely monitoring how the development of the situation in Iraq would affect the economy, especially through the stock and foreign exchange markets, and provided a large amount of additional liquidity to ensure financial market stability with the approach of the fiscal year-end. In addition, the Bank has decided for the time being to apply the official discount rate to the Lombard-type lending facility on any business day, suspending the restriction on the maximum number of days for such use. Use of this lending facility enables financial institutions that hold current accounts with the Bank to borrow funds from the Bank at need within the value of collateral submitted. Reflecting the above measures, liquidity concern in the money market has been dispelled, and there was no significant disruption at the turn of the fiscal year. In its future conduct of monetary policy, the Bank considers it an important task to ensure that the provision of ample liquidity leads to a revitalization of economic activity and the overcoming of deflation. Based on this understanding, the Bank is examining the basic framework for the conduct of monetary policy, with a view to enhancing the transparency of monetary policy and strengthening the transmission mechanism of monetary easing. The Bank's current quantitative easing policy has contributed significantly to ensuring financial market stability and to preventing the economy from falling into a deflationary spiral. However, the financial intermediary function of banks has been weak and economic activity has yet to be sufficiently stimulated. It is apparent that the nonperforming-loan (NPL) problem is the largest impediment to the effectiveness of the financial intermediary function in the financial system. Thus, it is essential for the private sector and policymakers to coordinate their efforts to resolve the NPL problem. At the same time, it is very important for the Bank to improve its promotion of smooth corporate financing and its implementation of money market operations to strengthen the transmission mechanism of monetary easing, against the background of the banks' weak financial intermediary function, which is an important route for the transmission of the effects of monetary policy. In light of this, the Bank has decided, as a temporary measure, to examine the possible purchase of asset-backed securities (ABSs), including asset-backed commercial paper, mainly backed by those assets related to small and medium-sized firms. ABSs are marketable securities into which pools of specific assets such as accounts receivable held by firms are converted. The ABS market in Japan is still in the process of development. However, nurturing the development of the ABS market is expected to provide various merits in corporate finance, in particular enabling small and medium-sized firms to exploit an alternative route of raising funds to bank borrowing. The Bank hopes that the transmission mechanism of monetary easing will be strengthened through the Bank's support for the establishment and development of financial markets that will be able to provide new financing channels. The Bank is currently working on a specific design for the ABS purchasing scheme which would contribute to the development of the ABS market, gathering opinions from market participants. Financial markets are basically expected to be initiated by the private sector and to evolve autonomously. For this reason, the Bank's outright purchases of private debts such as ABSs are unprecedented measures for a central bank. Therefore, the Bank will determine the specific design of the purchasing scheme, considering the following: to what extent the purchase will strengthen the transmission mechanism; whether or not the purchase will distort market mechanisms; and how to maintain the financial soundness of the Bank and ensure its ability to conduct monetary policy in the future. IV. Purchase of stocks held by commercial banks Although the measure does not fall directly within the province of monetary policy, the Bank started to purchase stocks held by private banks in November 2002, with a view to further reducing the market risk pertaining to these stocks. The total amount of stocks purchased as of April 10, 2003 was 1,209.0 billion yen. The purchasing of stocks is one of the actions taken by the Bank aimed at the early restoration of the soundness of the financial system. Such restoration of the soundness of the financial system is considered indispensable in strengthening the transmission mechanism of monetary policy. Conclusion Japan's economy is undoubtedly confronting important challenges. The environment surrounding Japan's economy faces significant changes such as progress in information and communication technology and the rapid rise of emerging economies as well as economic maturation and globalization. Faced with such drastic changes, the Bank believes that the existing economic model, which supported Japan's postwar economic growth, needs to be replaced, and that the driving force of the new model should be innovations, both in technology and knowledge. The Bank considers it essential for the private sector, the government, and the Bank to coordinate their efforts toward the same goal in order for Japan's economy to adapt itself boldly to the new environment. The Bank will continue to do its utmost to carry out its mission of achieving price stability and maintaining an orderly financial system.
|
bank of japan
| 2,003 | 5 |
Bank of Japan, 12 June 2003.
|
Bank of Japan’s June report of recent economic and financial developments1 Bank of Japan, 12 June 2003. * * * The Bank’s view2 Economic activity remains virtually flat as a whole, although exports are currently showing some weakness. With regard to final demand, business fixed investment is on a gradual recovery trend, albeit showing some fluctuations. Meanwhile, private consumption continues to be weak, housing investment remains sluggish, and public investment is declining. Net exports are currently somewhat weak, although their underlying trend remains virtually flat. Industrial production continues to be basically level in response to these developments in final demand. Under these circumstances, corporate profits continue to recover, although the pace is moderating. As for the employment situation, the number of employees, which covers various types of employees including non-regular employees such as temporary workers, appears to be declining at a slower pace. However, the increase in the overtime hours worked and new job offers has come to a halt. Firms are still maintaining their stance on reducing personnel expenses, and household income continues to decrease with the ongoing decline in wages. The employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared view of the prospect for overseas economies is that the growth rate, especially that of the U.S. economy, will accelerate in the second half of this year with diminishing uncertainty regarding Iraq-related developments. For the time being, however, the pace of recovery in the U.S. economy is projected to remain very gradual. Moreover, the growth of East Asian economies at present is likely to be slowing at least temporarily, due mainly to the deceleration of domestic demand in South Korea and the epidemic of severe acute respiratory syndrome (SARS). In this situation, for the time being, exports are projected to be slightly weak or flat and industrial production is expected to remain virtually level. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time due to the severe employment and income situation. An uptrend of business fixed investment will be established once exports and production increase clearly again, but for the time being, the increase in business investment is expected to remain very modest. Overall, assuming that the growth rate of overseas economies accelerates in the second half of this year, the uptrend in exports and production will resume sooner or later, which in turn will initiate the momentum for an economic recovery in Japan. However, a self-sustaining recovery in domestic demand is unlikely to gain momentum for some time, since production is expected to be virtually unchanged for the time being while downward pressures such as excessive labor input and debt persist. As for the outlook for the external environment, there continues to be substantial uncertainty about the outlook for the U.S. and European economies as well as the possible effects of the SARS epidemic in the East Asian region, whose economies are closely linked to Japan’s. On the domestic side, developments in the financial system and their influences on stock prices, corporate finance, and the economy continue to require careful monitoring. On the price front, import prices and domestic corporate goods prices have turned to decline, mainly reflecting crude oil prices that fell back in early spring. The rate of decline in corporate services prices This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on June 10 and 11, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on June 10 and 11, 2003 as the basis for monetary policy decisions. expanded in April, as many firms reprice at the beginning of a new fiscal year. Meanwhile, the rate of decline in consumer prices has diminished due mainly to the rise in medical treatment costs in line with the reform of the medical insurance system. Looking at the conditions influencing price developments, import prices are expected to continue declining for the immediate future, due mainly to the lingering effects of the fall in crude oil prices. On the domestic side, the supply-demand balance in the macroeconomy, ongoing technological innovations in machinery, and the streamlining of distribution channels will continue to exert downward pressure on prices. In addition, the increase in commodity prices has peaked out. Based on these factors, domestic corporate goods prices are likely to continue declining. Meanwhile, consumer prices are projected to continue falling at the current moderate pace on a year-on-year basis. While the rise in prices of petroleum products is peaking out, the import of consumer goods, which is strongly related to low-price strategies of firms, is not increasing as it once was. As for the financial environment, the outstanding balance of current accounts at the Bank of Japan is recently moving at around 28-29 trillion yen, as the Bank has been providing more ample liquidity in accordance with the guideline for money market operations decided at the Monetary Policy Meeting held on May 20. Under these circumstances, the overnight call rate continues to move at around zero percent. Longer-term interest rates remain steady at low levels. Yields on long-term government bonds have declined to the 0.4-0.5 percent level, as banks and institutional investors continue to increase investment in government bonds. Yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are at historical lows. Stock prices have risen following the recovery in U.S. and European stock prices. The Nikkei 225 Stock Average is recently moving at the 8,500-9,000 yen level. In the foreign exchange market, the yen depreciated as market participants became sensitive to a possible market intervention and as some U.S. economic indicators improved. The yen is currently traded in the range of 117-119 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue-chip companies. Recently, their lending attitudes seem to be becoming slightly more accommodative in areas such as interest margin charges. Meanwhile, the lending attitudes of financial institutions as perceived by firms, particularly small ones, remain severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings continues to be accommodative, and the environment for firms with relatively low credit ratings is improving. Credit demand in the private sector continues to follow a downtrend mainly because business fixed investment is at low levels and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2.0-2.5 percent on a year-on-year basis. The amount outstanding of corporate bonds and CP issued is moving at around the previous year’s level. Meanwhile, according to business surveys, although there seem to be slight improvements, financial positions of firms, particularly those of small firms, remain severe. The year-on-year growth rate of the monetary base rose somewhat and is around 15 percent. The year-on-year growth rate of the money stock is around 1.5 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions continue to be extremely easy due partly to the additional monetary easing by the Bank. Long-term interest rates are declining further and stock prices are recently recovering. The money stock and the monetary base maintain high growth rates relative to that of economic activity as a whole. In corporate finance, the fund-raising environment has not changed significantly, that is, the environment for firms, particularly with high credit risks, remains severe, although slight improvements are observed such as in the issuing environment of corporate bonds and CP. Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 6 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Spring Meeting of the Japan Society of Monetary Economics, on the occasion of its 60th anniversary, Tokyo, 1 June 2003.
|
Toshihiko Fukui: Challenges for monetary policy in Japan Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Spring Meeting of the Japan Society of Monetary Economics, on the occasion of its 60th anniversary, Tokyo, 1 June 2003. * * * Introduction I am honored to have this opportunity today to address such a distinguished audience. Members of this esteemed society are generous enough to provide us at the Bank with their opinions and the fruits of their researches, which we in our turn take into consideration when we examine our policy measures from all angles. I should like, therefore, at the outset of this speech, to express my sincere gratitude to all of you for continuing to stimulate the intellectual debate in this way. The society and the Bank have a long history of good communication, as indeed is recorded in our Archive, and the first example of this was a speech given by Keizo Shibusawa, then Deputy Governor of the Bank, at the inaugural meeting of the society in June 1943. The meeting was held incidentally a year after the Bank of Japan Law of 1942, modeled on the law governing the Reichsbank, the then central bank of Germany, became effective under wartime legislation. In his speech, Deputy Governor Shibusawa emphasized the principle of maintaining the value of the currency when formulating monetary policy, stating that, although the demands on policy of a given time or situation may exert some influence, the fundamentals of this principle do not change. While I can only guess what was actually in Deputy Governor Shibusawa’s mind at the time he made this statement, my own understanding is that, at a time when the war was producing upheaval in both the economic and the financial environment, he wished to remind his listeners of the importance of orthodox central banking. At the same time, I believe he wished to convey his sincere hope that the society’s members would continue to analyze the fundamentals of the currency system, making full use of their expertise. Another example may be found in a speech given at the 40th anniversary meeting of the society in 1983, when the Japanese economy was at the peak of its postwar prosperity. Discussing the mandate of the Bank of Japan, Governor Haruo Mayekawa stated that, in conducting monetary policy, the highest priority should naturally be placed upon the stability of prices. He concluded his speech by observing that the formulation and execution of successful policy could only be achieved if the policy measures employed had a solid theoretical foundation. Ten years ago in June, I was, as an Executive Director of the Bank, invited to the 50th anniversary meeting of the society and presented a speech titled “Missions and Responsibilities of a Central Bank in a Contemporary Context.” At that time, the economy was deteriorating following the bursting of the asset price bubble, and looking back, as I prepared my speech for today’s occasion, at the path trodden by Japan’s economy over the last decade, I was impressed by the fact that the surrounding environment has become much more severe, although the basic mandate of the central bank, to maintain the stability of prices, has not changed in the least. Even if we restrict our attention to the area of monetary policy, there have undoubtedly been a number of changes worthy of note. The first and most important of these is the change that has taken place in the financial environment, and here the substantial decline in interest rates is most notable. In fact, the level of interest rates was already low a decade ago, as the economy continued to deteriorate following the bursting of the asset price bubble, and weak balance sheets in both the corporate and financial sectors suggested that deep adjustments were inevitable. In these circumstances, the Bank took a series of monetary easing measures, and the official discount rate had declined to the then unprecedented level of 1.75 percent by the end of 1993. The same period saw a moderate decline in the overnight call rate to the range of 2.0-2.5 percent from 3.5-4.0 percent. At that time an official discount rate of 1.75 percent was considered extremely low and was indeed the lowest level of this rate since the Bank began operation in 1882, a period that included the financial crisis of 1927 and the fiscal expansion policy adopted by Finance Minister Korekiyo Takahashi in the 1930s. In retrospect, however, there was an enviable amount of room left for interest rate reductions, and hence interest rates were useful as policy tools. Recently, in contrast, not only the overnight call rate but almost all money market rates have declined to a level close to zero percent. Moreover, since spring 2001, the Bank has moved into territory unexplored by any central bank in history by implementing quantitative easing with interest rates already at the zero bound. I stated at my inaugural press conference that a central bank conducting monetary policy with very little room left for interest rate reductions is like a boxer fighting with his hands tied behind his back. Even with our hands tied, we at the Bank have not given up fighting and are indeed doing the best we can. It was, however, beyond anyone’s imagination in 1993 that the Bank would be fighting against deflation under such a constraint. The second major change concerns the revision of the Bank of Japan Law. A sense that the previous Bank of Japan Law was not quite in tune with the current of change characterizing the world’s central banking systems and financial markets would no doubt have already existed in 1993, but this had not yet advanced to the stage of making specific proposals for revisions to the Law. The situation changed rapidly, and four years later, in 1997, the revised Bank of Japan Law was enacted, and has been in effect since April 1998. The focus of the revision has been greater independence for the Bank in conducting its monetary policy and calls for improved transparency. This in its turn has led to a significant reorganization of the Policy Board, through which the Bank makes monetary policy decisions independently, and the Bank marked a new start with a completely new governing structure. The transparency of the Bank’s policy conduct was also improved by the publication of the minutes of every Monetary Policy Meeting (MPM) of the Bank’s Policy Board. Any visitor to the Bank’s Web site can see that, in addition to the minutes, a significant amount of information is being released including reports of the Governor’s press conferences, texts of speeches given by senior officials, and an abundance of research materials detailing the background to policy decisions. The third and the most recent change concerns the increasing global interest in monetary policy within economies suffering from deflationary trends. In 1993, in spite of the similar background situation, that is, strong downside risks to the world economy and consistently falling inflation rates, there seemed to be no particular concern anywhere in the world about the decline in inflation rates per se. A quick check of the keywords appearing in articles in major newspapers at that time reveals that people’s attention was overwhelmingly focused on inflation rather than deflation. Recently, however, as disinflation has progressed, interest rates have fallen across the world. An international comparison of the levels of money market rates reveals several countries whose current rates lie within the 0-1.0 percent bracket, in particular Switzerland at 0.2 percent and Singapore at 0.5-0.6 percent. In the United States, the policy interest rate currently stands at 1.25 percent, which, if we make a direct comparison, is the level seen in Japan at the beginning of 1995. An increasing number of people are now interested in deflation. Looking back at developments over the last decade, I have been struck anew by how immensely important it is for the central bank to gain reliable insights into the outlook for the economy. At the same time, we clearly cannot be too surprised at the fact that, with the passage of time, changes have taken place in the debate surrounding monetary policy. We at the central bank must continue to make efforts to gain new insights and learn from new ideas, while not allowing ourselves to fall captive to whatever mindset is dominant at a particular point in time. I feel acutely the importance of further interaction with the academic world, because cutting-edge research on financial and economic theory is fundamental to our efforts. Since I assumed the office of Governor in March this year, and indeed before, I have had the opportunity to listen to a wide range of advice, and have learnt much from opinions voiced about the Bank and forwarded to me not only from members of the society but also from other academics both at home and abroad. At the same time, I am afraid that I must admit to feeling a certain degree of frustration, in the light of my long years of experience as a central banker, as I listen to some of the opinions. I cannot help but feel that there is still significant progress to be made in establishing a creative process whereby the Bank first provides academics with sufficient information about the issues it is facing, and then works together with them based on the same information in its search for fresh policy solutions. We are fortunate to have among the current nine members of the Policy Board three members who have spent a number of years in senior academic positions. In addition, there are an increasing number of former Bank staff currently working at academic institutions and devoting their efforts to bridging the gap between theory and practical policy. With their help, we expect to be able to extend our links with the academic world, thus not only gaining the benefit of academics’ advice but also contributing to their research by sharing our practical experiences. This has been a somewhat protracted introduction. My aim today, however, is to share with you, as frankly as possible, my own current thinking with regard to the conduct of monetary policy, which I hope will be of interest to you. I hope also that my remarks will play a part in further strengthening the constructive relationship that already exists between academics and the central bank. I. Functions of the quantitative easing framework First, I would like to briefly explain the basic framework underlying current monetary policy and to describe how monetary policy measures have been implemented within this framework. The current framework we are adopting is called quantitative easing and was introduced on March 19, 2001. It has three main features. I will explain the implications of each point in as contemporary a context as possible. A. Adoption of quantitative indicators in money market operations The first feature of the quantitative easing framework is the change in the operating target for money market operations from the uncollateralized overnight call rate to the outstanding balance of current account deposits at the Bank. Whether it is possible to enhance monetary easing effects even after short-term interest rates reach the zero bound is a major issue that continues to attract debate. Still, it was quite natural for a central bank to pay attention to the amount of liquidity provision and expect effects from a further increase in liquidity provision even when short-term interest rates had fallen to zero percent, or rather for the very reason that they had reached this zero bound. When the quantitative easing framework was introduced in March 2001, the target for the outstanding balance of current account deposits at the Bank was 5 trillion yen, which exceeded the total reserve requirement at the time by slightly less than 1 trillion yen. When I took office as Governor, the target range for the outstanding balance had already been set at “around 17 to 22 trillion yen,” and the Bank has since steadily raised it. At the MPM on April 30, the Bank raised the range by 5 trillion yen to “around 22 to 27 trillion yen,” and then again to “around 27 to 30 trillion yen” at the MPM on May 20. As a result, the outstanding balance has increased sixfold over the course of the last two years. The Bank’s repeated raising of the target for the outstanding balance was decided in view of the economic outlook and the financial market situation. As mentioned in the Bank’s “Outlook and Risk Assessment of the Economy and Prices,” released in April, monetary easing measures have effectively blocked the channels through which various shocks induce liquidity concerns, and have thereby secured financial market stability, helping to prevent the economy from falling into a deflationary spiral. On the other hand, it should also be pointed out that, even though the outstanding balance of current account deposits has increased considerably since the introduction of the quantitative easing framework, the Bank’s drastic quantitative easing has not been quite strong enough by itself to boost the economy and prices. Why is this so? It may have been because the adjustment pressure on the economy was, and is, still quite strong. However, one of the effects expected from the introduction of quantitative easing was the so-called “portfolio rebalancing effect.” The Bank thought that, even when the marginal value of liquidity services became zero, people would start to rebalance their portfolios by investing in assets with higher marginal values whether these were real or financial assets, if the Bank increased further its provision of liquidity. The aim of this process was thus to generate positive economic momentum, acting, for example, to push up asset prices. So far, however, the effect has not been widely observed. It might also be fair to touch upon the issue of the decline in the functioning of financial markets, especially the money market, since the introduction of the quantitative easing framework. With zero interest rates, money market participants have been less willing to invest their funds in the market, because returns from such transactions have not been sufficient to cover their trading costs. Due to the Bank’s ample provision of liquidity, there has been a sharp decrease in trading volume among market participants, with the exception of trading carried out with the Bank. As a result, more market participants have become concerned about whether they will be able to raise funds in the market smoothly in the future even if they offer higher interest rates. Ironically, the decline in the functioning of the money market has increased the precautionary demand of financial institutions for increased current account deposits at the Bank. At the time of the introduction of the quantitative easing framework, there were doubts about whether the Bank would be able to provide sufficient liquidity to achieve its target for the outstanding balance. In fact there were frequent cases of undersubscription, where bids fall short of the Bank’s offers, in the Bank’s fundssupplying operations. However, such undersubscription has not occurred recently, and the Bank has been able to push through substantial increases in its target for the outstanding balance of current account deposits. The more the Bank proceeds with monetary easing to secure financial market stability, the more demand for current account deposits increases due to the impaired functioning of the market. As a result, the Bank will have to meet this increased liquidity demand in order to secure market stability. This is the dilemma the Bank currently faces. All drastic policy measures have negative side effects. The fundamental issue, therefore, is not whether such side effects exist; rather, it is how to make effective use of the stimulative effects of quantitative easing measures on the economy and prices, while giving due consideration to the possible emergence of excessive side effects. Before we move on to deal with this point in more depth, I would like to comment on the remaining two features of the quantitative easing framework. B. Increasing the Bank’s outright purchases of Japanese government bonds (JGBs) The second feature of the quantitative easing framework is the decision to increase the Bank’s outright purchases of JGBs when this is deemed necessary for the smooth provision of funds to meet the target balance of current account deposits at the Bank. At the same time, there is a ceiling on the Bank’s outright purchases of JGBs which prevents the amount of JGBs held by the Bank from exceeding the outstanding amount of banknotes issued. With interest rates on financing bills (FBs) and treasury bills (TBs) close to zero, there emerged a situation for holders of FBs and TBs similar to holding the equivalent amount of current account deposits at the Bank. For this reason, it is likely that the demand for holding current account deposits by selling FBs and TBs will become saturated. Realizing this, the Bank decided to secure smooth provision of liquidity by purchasing JGBs. The effect of these increased purchases of JGBs has been to raise total purchases by the Bank to 1.2 trillion yen per month, up from 400 billion yen until March 2001. As a result, the outstanding amount of JGBs purchased by the Bank is at present equivalent to roughly 60 percent of the monetary base. The Bank’s purchases of JGBs have indeed contributed to the smooth implementation of quantitative easing. However, as long-term interest rates have been declining, even JGBs have almost become substitutes for current account deposits at the Bank. At present, ten-year JGBs have fallen to slightly above 0.5 percent and even 30-year JGBs are below 1.0 percent. The average maturity of newly issued JGBs in Japan is currently about five years. The fact that yields on five-year JGBs are in the range of 0.1 to 0.2 percent indicates that the government has already been raising funds at an interest rate of virtually zero percent. Thus, the Bank’s execution of a market operation that involves exchanging JGBs for current account deposits at the Bank is becoming equivalent to exchanging ten 1,000 yen notes for one 10,000 yen note. In opposition to this view, there is an argument that, as long as long-term interest rates are not in fact zero percent, there is still a difference between current account deposits at the Bank and JGBs. The corollary is that market operations involving the exchange of JGBs for current account deposits are indeed meaningful, and a massive large-scale purchase of JGBs by the Bank would be effective. There is also an argument that it is inappropriate to allow long-term interest rates to decline any closer to zero percent. According to this view, the Bank should enhance the effects of quantitative easing not merely by increasing quantity but also by introducing qualitative improvement of quantitative easing measures through the purchase of other types of assets. C. Policy commitment based on the consumer price index (CPI) The third feature of the quantitative easing framework is the Bank’s explicit commitment based on the year-on-year growth rate of the CPI: namely that the Bank will maintain the current framework for money market operations until the CPI (excluding fresh food, on a nationwide basis) records a yearon-year increase of zero percent or more on a sustainable basis. The idea of the first feature, as I have already explained, is to achieve further increases in the Bank’s provision of liquidity even after short-term interest rates have reached the zero bound. The idea of the third feature is to achieve an easing effect by the Bank’s commitment to keep short-term rates at low levels well into the future. In this way, even if short-term rates come up against the lower bound, the Bank can still “borrow” from the effect of the future low rates. Thus, the fundamental aim of the third feature is to lower longer-term interest rates across the board by “borrowing” future monetary easing through the commitment. This policy commitment shows the Bank’s determination to put a stop to price declines by binding future monetary policy to the actual inflation rate. However, this should not be misunderstood as inflation targeting. I am fully aware of views that the Bank should adopt inflation targeting instead of the current commitment. However, it should be noted that, in a sense, this commitment has significant implications that go beyond those of standard inflation targeting. In a standard inflation targeting regime, a central bank raises the policy interest rate when the expected inflation rate rises above the target inflation rate, even if the actual inflation rate is considerably below the target inflation rate. Given that people’s expectations regarding the inflation rate vary greatly, it may be inevitable that even a slight change in prices triggers speculations at a very early stage about future monetary policy. In contrast, the Bank’s policy commitment states that the Bank will continue to implement drastic quantitative easing until the year-on-year change in the CPI, that is, the change in actual prices, becomes positive. In other words, this policy commitment means that, unless year-on-year changes in the CPI become positive on a sustainable basis, the Bank will continue to implement drastic monetary easing measures even after the economy has started to improve and inflationary expectations are emerging. This is thus an extremely strong policy commitment through which the Bank is implicitly “borrowing” from the effects of future monetary easing. The Bank’s strong policy commitment, which has “borrowed” the effects of low future interest rates and kept long-term interest rates stable at low levels, can be said to have succeeded in keeping real interest rates low enough to prevent the economy, which has been suffering from deflation, from falling into a deflationary spiral. However, the potential growth rate of the economy and the marginal productivity of capital have declined, causing firms to revise downward their forecasts for the GDP growth rate and remain cautious in investing. In accordance with the relationship between the natural and market interest rates defined by Knut Wicksell, while the natural interest rate has been quite low, the market interest rate has continued to be high relative to the natural interest rate, and thus seems to have failed to boost economic activity. Thus, there still remain many issues that must be resolved for the current framework of quantitative easing to become more effective. It is also true, as I mentioned earlier, that monetary easing measures have effectively blocked the channels through which various shocks induce liquidity concerns, and have thereby secured financial market stability, contributing to preventing the economy from falling into a deflationary spiral. The effects of quantitative easing measures should therefore not be underestimated. In 1997-98, the financial crisis in Asia and the failure of a few large Japanese financial institutions triggered concerns among financial institutions about the availability of liquidity, and as a result, there was a sharp credit contraction and the economy deteriorated rapidly. In contrast, although there have been factors causing uncertainty about the Japanese financial system, such as the terrorist attacks in the United States, the military action against Iraq, and the decline in Japanese stock prices, credit contraction stemming from liquidity concerns has not occurred since the introduction of the quantitative easing framework. And thus, any deterioration of the economy that such a contraction might have caused has been avoided. As described above, even after short-term interest rates had reached the zero bound, the Bank did not throw up its hands in defeat but rather continued to make efforts by providing ample liquidity and “borrowing” from the effects of future monetary easing. At present, Japanese financial institutions are still in the process of improving their soundness, and with the globalization of the economy, progress in IT, an extremely rapidly aging society, and an equally rapidly declining birthrate, the economy faces major structural changes. The people of the entire country are struggling to find ways to overcome the difficulties in this unprecedented process of transition. In such a situation, it is natural for the public to have high expectations of the country’s central bank. In order to meet these expectations, I am adamant in my determination to duck no challenges, but to put all my knowledge and experience into overcoming these difficulties. II. Issues on further improvements in monetary policy In order to further improve monetary policy, I think it is important to address various issues related to monetary policy and to discuss them thoroughly. Some of these issues may fall within the scope of conventional economic analysis and may thus be dealt with using the appropriate analytical tools. Other issues, such as defining the purview of the central bank and addressing its position within a democratic society, may however fall outside the scope of conventional economic analysis. Keeping these points in mind, I would like to elaborate in what follows on some issues which need to be clarified with regard to the Bank’s efforts to improve the current quantitative easing framework. Currently, a variety of views are held by people outside the Bank requesting further monetary easing measures. Some of these views are as follows. One view holds that, if the effect of the quantitative easing on the economy and prices is not fairly strong, the Bank should increase the provision of liquidity significantly. This view recommends that, in doing so, the Bank consider the option of purchasing financial assets whose risk profiles differ from JGBs, and which are not, under normal circumstances, the object of central bank purchases. Another view proposes that the Bank seek to exert stronger pressure on public expectations by fundamentally changing the structure of its current policy commitments. A. Changes in the structure of policy commitments I would like to start this section by discussing possible changes in the structure of the Bank’s policy commitments. Here, clearly, the focus of attention must be whether to adopt inflation targeting. As I have already mentioned, by comparison with current policy commitments, one of the problems of adopting inflation targeting is as follows. Assuming that a target has been established (for example, at 2 percent), if the expected inflation rate rises above the target and the Bank does not start tightening at that early stage, the actual inflation rate is likely to go beyond the target. Since the Bank’s current policy commitments do not assume such a tightening at an early stage, they actually run a risk in the direction of greater inflation than in the case of standard inflation targeting. Therefore, the following issues become very important: whether it is truly desirable at this particular juncture to exchange the current policy commitment for one that might require an earlier and more forceful tightening of monetary policy by setting a target; or whether the Bank should allow a temporary overshooting of the inflation rate; and in either situation, how the Bank would be able to restabilize the expected inflation rate. When setting an inflation target, either as a certain range or a level of the inflation rate, the Bank would aim to achieve this target within a specified period, although there would be allowance for some slippage. Clearly a prerequisite for such a policy to be convincing to the public is that the Bank is at least reasonably, if not absolutely, confident that it has at its disposal the policy tools necessary to achieve its goal. In this regard, there are those who maintain that the Bank need only boldly commit itself to taking any unconventional policy measures necessary to achieve the inflation target. Indeed, some economists seem to have formed a critical view that it is the Bank’s own skepticism about the effectiveness of its monetary policy which is preventing it from hammering out a more forceful commitment and from having a more potent influence on the public’s expectations. However, having had their expectations that the economy would return to a sustainable growth path left unfulfilled so often since the bursting of the asset price bubble, people in Japan are not so naive as to trust unconditionally the mere announcement of an inflation targeting policy by the Bank; nor indeed would the rest of the economy respond by taking an immediate turn for the better. Unless Japan’s economy benefits from positive external factors such as a surge in foreign demand, a policy announcement by the Bank aimed at influencing public expectations will become effective only after the Bank has successfully demonstrated that an effective transmission mechanism exists between the Bank’s policy and an actual stimulative effect on economic growth. Therefore, it is important for the Bank not only to pursue further monetary easing, but also to devise and implement a variety of policy measures which contribute directly to improving the transmission mechanism. The Bank is fully aware that inflation targeting enjoys relatively wide support among academics, and that many central banks have adopted inflation targets of one kind or another. It has become one of the important policy tools for central banks to enhance transparency. In that sense, I have no intention of flatly denying the concept behind the policy measures related to inflation targeting. I would like to examine, in the process of reviewing how to make full use of the monetary easing policy in the future, whether we can reorganize the policy framework of the Bank, and whether there will be any room for introducing such a tool as inflation targeting within that framework. I cannot predict honestly what results will be produced by this wide-ranging discussion, or when. B. Additional measures to encourage the effects of monetary easing to permeate through the economy The fundamental policy issue confronting the Bank is what exactly it can and should do in order to encourage the effects of monetary easing to permeate through the economy. The Bank’s quantitative easing policy, by providing ample liquidity in the form of the current account balance at the Bank, aims at improving the overall financial environment for firms and households, and thus at stimulating the economy. If the current quantitative easing does not have a strong effect on the economy, this can be interpreted as follows. The transmission mechanism between the Bank’s ample provision of liquidity and the stimulative effect on firms and households is not functioning properly. To put it another way, the liquidity provided by the Bank is circulating within the financial sector and not flowing out of it, or the stimulative effect of low interest rates is not working in such a way as to permeate through the economy. This phenomenon of a choked or blocked channel in financing is closely related to the fact that the financial institutions’ credit intermediary function is deteriorating due to the nonperforming-loan problem. The most important issue in making the effects of the monetary easing permeate through the economy is to actively support financial institutions’ efforts to reestablish their soundness. At the same time, the Bank believes it is necessary also to apply itself on a second, parallel policy front, exercising its ingenuity in devising its own measures in the area of money market operations and corporate financing. As you are all aware, at the MPM held in early April 2003 the Bank decided to start examining a new scheme to promote smooth corporate financing by nurturing the asset-backed securities (ABSs) market. The Bank’s initiative in this regard is unprecedented in the sense that it will be purchasing ABSs, which are private debts, outright and thus stepping into the realm of credit risk. ABSs possess a number of advantageous characteristics. By pooling risks, they act to reduce the overall level of credit risk, relative to the sum of the individual risks. In addition, by restructuring the overall risk into multiple layers representing different degrees of risk, they can also attract investors who have a variety of different risk preferences. Indeed, the rationale behind the Bank’s decision to examine the feasibility of ABS purchases is as follows. Given the current situation in which financial institutions are performing their credit intermediation function only imperfectly, if the Bank can succeed in making use of these features produced by the process of financial innovation, it will be able to promote the interaction between market-based financing and bank lending. And thus it will contribute to establishing a new channel for smooth corporate financing for firms, especially small and medium-sized firms. Some people argue that the Bank should not restrict its purchases to ABSs but should also boldly purchase a wide range of assets such as those related to stocks and real estate, breaking with the traditional framework. The Bank, of course, is always ready to give serious consideration to any measure that might help bring the economy back to a sustainable growth path. Having said this, I would therefore like now to discuss some of the possible perspectives and criteria important in considering what kind of assets the Bank should and should not purchase. The first criterion, which may overlap somewhat with what I have mentioned earlier, is whether the Bank’s purchases of a particular type of asset will help the monetary easing effects to permeate through the real economy; and whether such a purchase offers any actual improvement over the existing transmission mechanism. The second criterion is related to whether the Bank’s purchases might distort the market mechanism. If the Bank’s decision to take on credit risk, as described above, ends up distorting market evaluations of prices and weakening the reflection of risk contained in credit spreads, the supply of credit will not increase and the effectiveness of monetary easing will suffer as a result. If the Bank dares to take on risk by purchasing new types of assets, it is most desirable that the Bank’s initiative becomes a catalyst in enhancing the development of the market. The background of seeking public comment in examining possible purchases of ABSs by the Bank is that we felt it was important to find a way of participating in this market so that the Bank’s initiative does not distort the price-discovery function of the market and also enhances the development of the market. Now that we have received many valuable comments from market participants, we are working on the concrete plan of the scheme, referring to those comments. C. Role of capital for the central bank I have been discussing how the Bank may be about to expose itself to credit risk by implementing a new measure in starting ABS purchases. The corollary of such a step is the possibility that the Bank might incur a capital loss. Given the current severe economic and financial situation, when the Bank started to purchase stocks held by banks, it was determined to take any measures, even highly risky ones unthinkable under conventional conditions, if and when they were absolutely necessary to fulfil its mandate. At the same time, we set a principle of limiting the Bank’s risk exposure to the level at which it does not impair the Bank’s financial soundness. The Bank gave due consideration to the principle when it decided the stock-purchasing plan, and will also apply the principle in drawing concrete plans of the framework for ABS purchases, particularly in assessing risks. I would like to consider in more detail the subject of a central bank’s financial soundness, particularly the role of its capital. I am aware that there are those who do not fully understand, from an economic perspective, why the central bank should be concerned about the soundness of its capital base. It is, after all, reasonable to assume that, unlike ordinary commercial banks, central banks can continue their operations and avoid bankruptcy, even in the face of insolvency, since they have the authority to issue banknotes. So how can we explain this observation consistently with the fact that most central banks are exerting themselves to maintain substantial capital holdings? Also, how can we explain cases in developing countries where a country’s central bank has fallen into excessive debt on a grand scale, and until its capital position was properly restored, its ability to conduct monetary policy was greatly damaged in practice, even though this phenomenon is not predicted in theory? The above cases of actual behavior of some central banks indicate that central banks’ concern with the soundness of their capital base might not be grounded purely in economic theory but may be motivated rather by the political economic instincts of central bankers. In other words, once the restriction that “the central bank should only take risks consistent with the level of its self-imposed capital base” is violated, the boundary between the functions of the central bank and those of the government may become difficult to discern. Consider a case where, for whatever reason, a central bank’s capital becomes depleted, and the bank requires financial support from the government. The central bank might either run into difficulties in conducting its policy and other business operations or might cause the view to spread that it will, and eventually it will become difficult to maintain public confidence in the currency. This argument brings us to the fundamental issue of how the central bank should function in a democratic society. There are two problems pertaining to a central bank’s significant risk-taking activity of purchasing risk-bearing assets. The first is that it might potentially incur losses, and the burden of this would effectively be transferred to the public through reductions in payments to the national treasury, or, in the worst-case scenario, through injections of public funds to restore the balance sheet of the central bank. The second problem is that such purchases, depending on the central bank’s selection of assets, would inevitably affect the allocation of resources at the microeconomic level. Both problems lead us to the question of the role of a central bank, whether it should approach the territory of fiscal policy. The basic principle underlying the determination of how tax revenue should be spent in a democratic nation is as follows: expenditure should be carried out through fiscal policy, following formal approval of the government budget by the Parliament. If resources are to be allocated outside the market mechanism as part of economic policy, it is the government that should take the initiative, not the central bank. The purchase of risk-bearing assets by the central bank should therefore be very carefully planned and conducted with discipline. Drawing a clear line on such issues is a difficult task. In practice, monetary policy cannot be conducted with any great degree of flexibility and the central bank can only purchase FBs and TBs when there is a strict rule preventing it from taking on any risk, because to do so would involve stepping into the territory of fiscal policy. This is the reason why a more feasible practice has been adopted in many countries whereby the central bank reserves the ability to act flexibly within the level of the risk consistent with maintaining an adequate level of capital in the relatively long term. If the public allows the central bank to take on a certain level of risk within the context of flexible monetary policy, then it would be appropriate for the public to support the risk-taking behavior of the central bank by restoring its capital base should the latter be damaged as a result of taking risks. In such a way, the balance between democracy and a central bank’s flexibility in conducting its monetary policy could be maintained. Concluding remarks When I attended the society’s meeting ten years ago, I concluded my remarks by citing a famous statement by John Maynard Keynes which runs as follows: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” I commented on the quotation that “these words have often been used to describe the evils of inflation and have come to find general acceptance. Yet, I believe that the statement should also be understood to connote the stability of the financial system. I believe that money is truly capable of functioning as the social and economic lifeblood of a country when its value is properly maintained through monetary policy, and also when smooth functioning of the payment and settlement systems is fully ensured.” I still believe in the truth of what I said. I must add here that there is another aspect to the maintenance of price stability that requires particular attention today. That is the necessity of confronting deflation, the new enemy with whom we at the central bank must now engage, and I believe that this should be of equal importance to fighting inflation. Neither macroeconomics nor finance textbooks have yet managed to provide a practical solution to the problems related to the deflation with which we are now faced. On the other hand, the latest research in the United States has started to produce useful theoretical analyses of the fundamental effects of monetary and fiscal policies under the zero interest rate constraint, one of the issues the Bank has been tackling in the last few years. This is an area of study in which we are eagerly awaiting progress. I also believe that the Bank’s deflation-fighting experiences will add important chapters to finance textbooks in the 21st century.
|
bank of japan
| 2,003 | 6 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, on the occasion of dinner in the French Embassy, Tokyo, 11 June 2003.
|
Toshihiko Fukui: Europe's single currency and Japan's contributions to Asian development Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, on the occasion of dinner in the French Embassy, Tokyo, 11 June 2003. * I. * * Fighting deflation I am very happy to be invited to speak at this Euro 50 banquet. My relationship with Europe dates back to thirty years ago. At that time, I was working for the Bank of Japan’s Paris office. I vividly remember those days, especially when I took a walk in the streets of Paris, painted with so much history, culture and esprit, and when I took a rest reading books in the relaxing atmosphere á la Place des Vosges. Actually, I asked Ambassador Montferrant to look at a photograph I had taken there when he visited me recently in my office. I was appointed Governor of the Bank of Japan three months ago. On the same day with my assuming office, the war in Iraq started. As I will explain in more detail later, I am thinking that the globalization could be really fruitful, only if, on its process, we are able to overcome conflicts between different values and jointly to create new values. The outbreak of the war, however, seemed to expose the flip side of this process. Moreover, it increased uncertainty in the world economy, and therefore I had to prepare myself for a rocky start in taking up my new duties. Good news as you see, the Iraqi War came to an end quickly and the accompanying uncertainty is now waning, but the situation remains to be difficult. The governments and central banks all over the world are far from being reassured that the economy will return rapidly to sustained economic growth. We at the Bank of Japan are waging a tough war against deflation. Indeed, it is at the top of our policy agenda. I have spent a total of about 40 years working in the central bank and for virtually all of that period the emphasis has been placed on how to prevent inflation. However, both globalization and the advances in IT have intensified the global trend towards disinflation and created a new awareness among central banks that they must deal symmetrically with both inflation and deflation. We at the Bank of Japan stand on the front line of the war against deflation. However, we have used up the greatest weapon in a central bank’s arsenal, that is interest rates, which have all declined to virtually zero in our short-term markets. Thus, in the spring of 2001 we stepped into new territory, where no central bank has ever ventured, namely “quantitative easing”. Here, there are two important points. The first is to set quantitative targets in the form of outstanding balance of current account deposit with the Bank and then to aggressively supply abundant liquidity into financial markets. The second is to make a commitment to maintain such an accommodative policy stance until the Consumer Price Index registers a year on year increase of zero percent or above on a sustainable basis. The fundamental aim of this point is to lower long-term interest rates across the board by borrowing future monetary easing through the commitment. Furthermore, we are now exploring ways to improve the transmission mechanism of monetary policy so that the beneficial effects of quantitative easing can more smoothly penetrate every corner of the economy. Obviously, the war against deflation will not be won with monetary policy alone. All economic agents must review the legacies of past high growth period and make every effort to enlarge the capacity to create value added. It has become clear to us that we will only find a way out of deflation when the efforts of the private sector, the government, and the Bank of Japan generate synergies in this endeavor. II. Interest in Europe I fear my introductory remarks might have been getting too long, so I will move on. In October 1970, shortly after I arrived in Paris, the Werner Report came out, officially advocating economic and monetary union in Europe. Frankly speaking, as an outsider, I considered the grand idea of the economic and monetary union, however grand it would be, to be no more than an “adventurous experiment”. No one could tell where it would go. Therefore, I was profoundly moved to witness the introduction of the Euro in January 1999 and the conversion of all cash to Euro last year. The EMU was not just another “experiment”. The people of Europe gathered their wisdom and courageously marched forward to turn a dream into reality. In this regard, we must remember in particular the efforts that were made to overcome the “Euro pessimism” of the late seventies and early eighties. To me, the single currency symbolizes many things. The first is the great potentiality that Europe has in terms of “creating history”. I have nothing but respect for the strong leadership and the persistent efforts that were exerted to complete this job, a job requiring 50 or 100 years to accomplish. Second is the strong desire for peace that has been underlying the spirit of solidarity ever since the European Coal and Steel Community. Having suffered through repeated, terrible wars, the people of Europe have a strong resolution never to go to war again. Third is the emphasis on “social discipline” that underpins the solidarity of Europe. I think this is particularly well embodied in the Stability and Growth Pact and the efforts to ensure independence of the ECB. I am also much interested in the future of the enlarged EU. Recently, the “Convention on the Future of Europe” chaired by former French President Valery Giscard d’Estaing, advocated the drafting of a “European Constitution,” the creation of a “European presidency,” and a reduction in the number of seats on the European Commission. Although this recommendation adds weight towards political union, I also find it extremely significant in light of the awareness that our age must “overcome conflicts of values”. And on the economic front, I look forward to seeing how the people of Europe will lead the EU’s integrated market into an ever larger entity in a form that is always open to the outside and in harmony with globalization. III. Japanese contributions to the further development of Asia Compared to Europe’s long history in working towards regional integration, cooperation and coordination in Asia are still at their early stage, and a clear vision for the future has yet to emerge. In this we are different from the Americas, too, which have set a course towards the achievement of the Free Trade Area of the Americas. Asia is characterized by its diversity. We have a large number of ethnic groups, languages, religions, and cultures, and there are considerable differences in our stage of economic development. Asia has a long way to go before it could ever be considered as an “optimum currency area”. But diversity is also Asia’s strength. Economies with their own comparative advantages can and do create layers of linkages through trade and direct investment, which produce a dynamism of growth. And this has enabled Asia to emerge as one of the world’s growth centers. China has achieved remarkable economic growth over the past several years, and it has given new momentum to dynamic international divisions of labor and global economic growth. China has such an enormous production capacity that other countries sometimes perceive it as a “threat,” but, at the same time, it should be noted that the Chinese big domestic markets are increasingly providing demand and business opportunities to the neighboring countries. From this point of view, the sustainability of Chinese economic growth has become an indispensable factor for autonomous expansion of the Asian economy as a whole, particularly the East Asian economy. At present, with the exception of worries about SARS, conditions in Asia look relatively good. Economies in the East Asian region have been growing at an increasingly rapid pace. For example, the ratio of intra-regional trade to nominal GDP for the nine East Asian economies has more than doubled from 8% in the late eighties to 17% today. This ratio is roughly the same as that of the EU. At the beginning of my remarks I said that globalization was a process through which we overcome conflicting values and jointly create new values. The dynamism of Asia seems to embody this. That is, Asia is a place where different values come into contact with each other and create new knowledge in the process. Against this background, Japan is making progress steadily in its structural reforms, aiming at reaching the final goal that it will become a home of high value added, a hub for gathering, creating and transmitting information that will contribute to further development of Asia as a whole. Here, let me discuss again the central bank job. In 1991, Asian central banks established EMEAP (Executives’ Meeting of East Asia-Pacific Central Banks), which serves as a forum for the regular exchange of information and views among them. Over the weekend, I attended my first EMEAP governors’ meeting, and what I took away from that meeting was the increasing complexity of the challenges that face central banks in East Asia, challenges that cannot be solved with domestic remedies alone. Along with this, I also perceived a growing momentum for central banks to pool their wisdom and act together to solve these challenges. These efforts are beginning to bear fruit. At the beginning of this month, EMEAP announced the project of the Asian Bond Fund which will invest part of the foreign reserves held by East Asian central banks in Asian bonds, thereby serving as a catalyst to greater activity on fixed income markets in the region. The Bank of Japan supports this initiative and will actively participate in the fund. Both dialogue and cooperation among East Asian central banks have only just begun. It is too early to tell whether this dialogue and cooperation will eventually lead to regional integration. Even if it does, the orientation of that integration is unlikely to be the same as Europe’s in view of the historical and economic differences between the two regions. However, if we take an optimistic look at the future, our steady efforts may result in the formation of an open, flexible and surprisingly well-organized regional economic zone within the context of “future globalization of complexity”.
|
bank of japan
| 2,003 | 6 |
Speech by Mr Toshiro Muto, Deputy Governor of the Bank of Japan, at the JCIF International Finance Seminar, Tokyo, 17 June 2003.
|
Toshiro Muto: Structural changes in the world economy and challenges facing Japan’s economy Speech by Mr Toshiro Muto, Deputy Governor of the Bank of Japan, at the JCIF International Finance Seminar, Tokyo, 17 June 2003. * * * I. Structural changes in the world economy A. Economic globalization and innovation in information technology (IT) Looking back, after the turn of the century, at the second half of the 20th century, we can assess it as an era marked by the lengthy Cold War after World War II. Before the close of the 20th century, however, the Cold War came to a dramatic end, with the collapse of the Berlin Wall in November 1989. Behind the change in the Cold War structure, the worldwide spread of the market economy worked as a driving force, as seen in the expansion of free markets in the former Soviet Union and Eastern Europe. The end of the Cold War further accelerated globalization of the market economy in the 1990s. Eastern Europe joined the world trade structure and has been playing an increasingly important role as a supply base especially in the euro area. In Asia, China, which had already introduced the market mechanism before the end of the Cold War, has become a giant supply base for developed countries including Japan. Exports from China currently account for approximately 15 percent of world exports after adjusting for purchasing power parity, a rise from around 5 percent in 1990. In the United States, imports from Latin America currently account for approximately 16 percent, an increase from around 11 percent in 1990. These facts vividly illustrate the trend of economic globalization driven by the chemistry of market mechanisms and changes in the international political system. B. Industrialization of emerging economies and development of IT-related industries Against the background of the economic globalization in the 1990s, emerging economies have industrialized rapidly and elevated their importance in the world economy. In the meantime, innovation in IT has also contributed to economic globalization, nurturing the IT-related industries that came to have great influence on the world economy. Since the IT-related industries have a multinational structure involving emerging economies, the growth in IT-related industries inevitably strengthened global economic linkages. Although these changes will help facilitate new economic structures in the long run, they sometimes engender negative aspects. The global inventory adjustments in IT-related areas that began around the end of 2000 are still fresh in our memories. In these developments, not only the United States but also Europe and Japan, as well as East Asian economies, experienced simultaneous stagnation due mainly to the decrease in exports, production, and investment in IT-related areas. C. Globalization of financial markets The expansion of the market economy and technological innovation have encouraged the development of financial markets in emerging economies, as well as realized new financial instruments such as derivatives. They have consequently strengthened global linkages of capital markets. The globalization of financial markets has facilitated the rapid industrialization of emerging economies by promoting capital inflows. On the other hand, financial crises in certain countries or areas could spread more easily than before to other countries, as seen in the Asian currency crisis in 1997, the Russian financial crisis, and the collapse of Long-Term Capital Management in 1998. Central banks in many countries, including the Bank of Japan, have cooperated in various forms of research on this issue recently. D. Worldwide disinflationary trend Structural changes in the world economy also affect the environment for prices. A worldwide disinflationary trend had become conspicuous in the 1990s, reflecting an increase in supply capacity worldwide due to the industrialization of emerging economies, technological innovation, and macroeconomic policies adopted in many countries to restrain inflation. Inflation rates in the G-7 countries averaged about 10 percent during the 1970s and about 5 percent during the 1980s. The simple average of the rates, however, declined to 2-3 percent after the start of the 1990s, and in the second half of the decade remained at 2-3 percent in the United States, United Kingdom, and Italy, and fell below 2 percent in the other G-7 countries. Japan has been experiencing gradual deflation, as consumer prices have ranged from -1 to zero percent year on year since the middle of 1998. In Europe and the United States, this disinflationary trend has brought real economic benefits, by securing a stable foundation for economic activity. The United States enjoyed a long-lasting economic expansion accompanied by price stability during the 1990s. The improvement in productivity reflecting technological innovation in IT-related industries has often been credited with this, particularly in discussion of the so-called “new economy.” In Europe, European Monetary Union was achieved since inflation rates in the countries joining the union declined to levels that satisfied the convergence criteria. On the other hand, central banks in many countries are becoming increasingly concerned with the risk of price declines, which have not occurred in the decades since the Great Depression. The background to this is that inflation rates, particularly those of major industrialized countries, have trended downward to nearly zero percent amid the disinflationary trend worldwide. Although it does have a positive effect on real economy, it has brought about the risk that inflation rates could turn negative if downward pressure on prices increases from either the demand or supply side. The Federal Reserve lowered the federal funds rate gradually from 2001 in response to economic developments, and it has accordingly declined from 6.5 percent at the start of 2001 to 1.25 percent. The European Central Bank (ECB) also gradually reduced the main refinancing operations rate from 4.75 percent at the beginning of 2001 to 2.5 percent, followed by a further reduction to 2.0 percent on June 5, 2003. In line with such monetary policy developments, central banks overseas sometimes refer to the risks of price declines in their statements. The Federal Reserve, for example, commented that “the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level” in its public statement after the meeting of the Federal Open Market Committee on May 6, 2003. In addition, several central bank officials have commented on the manoeuvrability of monetary policy against the background of price declines. Conventional monetary easing calls for reducing short-term interest rates. However, there has been no definite answer yet, either theoretically or empirically, to the question of whether there remains scope for further stimulation of economic activity with monetary policy measures under the “zero lower bound” of short-term interest rates. For this reason, central banks overseas are paying greater attention to the conduct of monetary policy by the Bank of Japan, which has taken unprecedented quantitative easing measures since March 2001. II. Issues facing the Japanese economy A. The catch-up of emerging economies Bearing in mind the structural changes worldwide I have described, I would like to focus on the issues facing the Japanese economy. During the Cold War period, Japan achieved remarkable economic growth, driven mainly by the enhanced competitiveness of the manufacturing sector, to the extent that Japan became known as the “factory of the world.” However, many of the Japanese industries that brought about the economic growth in the postwar era are now facing competition from their counterparts in emerging economies that are rapidly catching up. The share of trading partners in Japanese exports and imports has changed substantially. In the past, the United States took the overwhelming majority of Japanese exports, and a fairly large proportion of imports were from oil producing countries. However, the share of imports from the Middle East, which was nearly 30 percent in the mid-1970s, has been declining, to about 10 percent recently. On the other hand, the share of trade (both exports and imports) with East Asian economies, which was around 25 percent in the mid-1980s, recently exceeded 40 percent. In particular, the share of imports from China in total Japanese imports expanded to 18 percent in 2002 from 5 percent in 1990. The share of imports from China has overtaken that from the United States, making China the largest importer for Japan. An examination of imports reveals that the character of Japan’s trade structure - importing raw materials for manufacturing and exporting products - has changed. For instance, the share of raw materials in total imports from East Asian economies has declined to about 15 percent recently, from about 35 percent in 1990. In the meantime, that of machinery and textile goods has exceeded 50 percent recently, compared with around 25 percent in 1990. The degree of penetration of imported products in the domestic market illustrates a rise in the value added to imported products. In the 1990s, the growth in penetration of textile goods was conspicuous, but since 2000 it has leveled off at around 30 percent. The penetration of electrical and general machinery has increased to nearly 30 percent very recently, from 17-18 percent in 2000. These changes reflect progress in industrialization and the accumulation of technology in East Asian economies since 1990. They are also attributable to Japanese firms’ activities to transfer production sites overseas. At the same time, these changes make us consider what kinds of industries we should nurture and what types of economic value we can create as sources of Japan’s future growth. B. The aging economy Japan is shifting from a growing economy to a mature one at an unprecedentedly fast pace. Since the second half of the 1980s, Japan’s birthrate has been declining significantly and the aging of the population pyramid has accelerated. The nation’s population is expected to decrease from 2006. Given these circumstances, the Japanese socioeconomic system, including the employment system, social security, local budget and tax systems, needs to be drastically reconstructed from one based on a growing economy to one suited to a mature economy. The reforms of the system comprising the economy and society of a nation inevitably entail conflicts of interest, and it is becoming increasingly difficult to resolve such conflicts through the benefits from economic expansion. Thus, it is a very difficult challenge indeed for Japan to implement reconstruction of its socioeconomic system in order to catch up with changes in economic and social environments, while achieving a national consensus. C. Emergence and bursting of the bubble economy Given the various changes I have mentioned, from the second half of the 1980s through the 1990s it was necessary for Japan to embark on nurturing new industries that could be the leading industries in the 21st century, as well as implementing fundamental changes in its socioeconomic system. However, during that period the bubble emerged and burst, and caused serious delay in such structural changes. Overheating of domestic demand and a sharp rise in asset prices due to the bubble allowed inefficient sectors to be preserved and permitted unprofitable investment businesses to expand. In the financial sector, a substantial rise in land prices caused an expansion of bank lending in a period when more emphasis should have been placed on financing through capital markets and securitization. Furthermore, the bursting of the bubble combined with characteristics of the financial system indigenous to Japan - a high proportion of bank lending - caused serious problems that restrained economic activity for a long time, such as the problems of nonperforming loans (NPLs) and firms’ debt overhang. Efficient reallocation of resources through structural adjustments should have been realized as a result of risk-taking activities of various economic entities to explore business frontiers. However, the financial strength of banks and firms and hence their risk-taking capacity were damaged significantly. Against this background, macroeconomic policies in the 1990s had to continuously deal with downward pressure on the economy stemming from the bursting of the bubble. D. Recent developments in the economy Now I would like to touch briefly on the recent developments in the economy. In the first half of 2002, Japan’s economy recorded relatively high growth supported by an increase in exports that reflected global inventory restocking in IT-related goods. Since the second half of 2002, however, economic activity in Japan has been basically flat. Despite the fact that corporate profits have recovered reflecting the increase in exports and production, firms have not yet embarked on active investment due to uncertainty about the economic outlook. The employment and income situation of households remains severe, as firms have continued to reduce personnel costs. In this situation, private consumption, which constitutes a major part of aggregate demand, remains flat, although it is fairly firm relative to the level of income. With regard to the outlook, Japan’s exports are expected to start increasing at a moderate pace, based on the assumption of a gradual recovery in overseas economies. However, the pace of the recovery in Europe and the United States is likely to be moderate. In addition, it seems likely that the growth in East Asian economies, which has been fairly rapid so far, has slowed at least for the time being due to the impact of severe acute respiratory syndrome (SARS). We must continue careful monitoring of Japan’s economy, taking into account the effects from the developments in overseas economies and Japan’s financial system. III. Monetary policy of the Bank of Japan A. Conduct of monetary policy In order to place the economy back on a sustainable growth path and overcome deflation as soon as possible, the Bank has been implementing extraordinary monetary easing measures, which far exceed the category of “conventional” monetary policy. In March 2001, the Bank implemented the “quantitative easing” framework to increase further its liquidity provision to the money market in a situation where short-term interest rates had declined to virtually zero. The outstanding balance of current account deposits at the Bank expanded from 4 trillion yen at the time to close to 30 trillion yen at present. The Bank announced that it would continue the framework of the quantitative easing until the consumer price index (CPI) records a yearon-year increase of zero percent or more on a sustainable basis. The Bank also steadily increased its purchases of Japanese government bonds (JGBs), and is currently purchasing a little less than 15 trillion yen worth of JGBs annually, which is roughly equivalent to half the total value of newly issued government bonds. The Bank also introduced the Lombard-type lending facility whereby financial institutions can borrow funds, within the eligible collateral pledged, from the Bank at the official discount rate that is now 0.1 percent. The Bank has widened the range of eligible collateral to asset-backed securities (ABSs) and many other new financial assets. As I mentioned earlier, several central bank officials overseas have commented recently on conceivable options of monetary easing under the “zero lower bound” of short-term interest rates. As possible measures to be taken solely by the central bank, they raised the increase of liquidity provision, the announcement to continue monetary easing into the future, the increase of the outright purchases of government securities, extending the central bank’s discount windows to commercial banks with low interest rates, and widening the range of eligible collateral. The Bank has already implemented most of these unconventional measures in its quantitative easing framework. The effects of extraordinary easing measures by the Bank of Japan have been observed in financial markets. Even when there were various shocks due to problems in the domestic financial system, the terrorist attacks in the United States, and the military action against Iraq, a liquidity shortage did not materialize in the money market, and short-term interest rates have continued to be virtually zero, including longer-term rates such as those on term instruments. This situation is a marked contrast with that in 1997-98 when the failure of a few large financial institutions triggered concerns about the availability of liquidity at Japanese banks, and as a result, the so-called “Japan premium” expanded and a sharp credit contraction occurred in corporate financing. The Bank’s policy commitment - that it will continue the current framework of monetary easing until the CPI records a year-on-year increase of zero percent or more on a sustainable basis - leads market participants to believe that short-term interest rates will continue to be zero at least until the actual inflation rate turns positive. As a result, risk premiums reflecting future fluctuations in interest rates have declined considerably, and the decline in interest rates has spread to even longer-term rates. The yields on five-year JGBs are in the range of 0.1 and 0.2 percent, those on ten-year JGBs have fallen below 0.5 percent, and those on 30-year JGBs are around 1 percent. Thus, the government is able to raise funds at almost zero or an extremely low cost. The cost for the private sector of raising funds has also declined. However, despite drastic monetary easing by the Bank, economic activity and price developments have not been influenced much so far. This is due to various factors. First, there was originally very little room for interest rates to decline further. As a consequence of the Bank’s large-scale monetary easing since the bursting of the bubble, the overnight call rate was already below 0.5 percent in 1995, and long-term interest rates were already at around 1.5 percent at the time of the introduction of the quantitative easing framework. In this situation, the effects of various additional easing measures have remained marginal, especially when the economy has been under substantial adjustment pressures. The concern of many central banks about the risks of a price decline is based on a reflection of such uncertainty and limitation of the effectiveness of monetary easing under the “zero lower bound” of short-term interest rates. The second factor, as I mentioned earlier, is that the risk-taking capability of private entities, such as commercial banks and firms, has been greatly impaired. The transmission mechanism of monetary easing effects depends heavily on private entities’ risk-taking activity. In a normal situation, liquidity provision by a central bank to commercial banks encourages more lending because their liquidity constraints are eased. However, at present, the capital constraints arising mainly from the NPL problem, not liquidity constraints, bind commercial banks’ lending capacities. This is the major reason why bank lending has continued to decline and the growth in the money stock has been sluggish, although the monetary base has been expanding. Furthermore, whether the portfolio rebalancing effect - that is, the mechanism whereby a central bank’s increase of liquidity provision still increases financial institutions’ investment in risk assets even after short-term interest rates reach the zero bound - occurs also depends on the extent to which financial institutions actively take risks. So far, they have been reluctant to take risks, and have mostly invested funds provided by the Bank in credit-risk-free assets such as cash, excess reserves, and government securities. As I have mentioned, the Bank is struggling under many constraints, not only the “zero lower bound” on interest rates which is a fundamental problem in monetary easing, but also the impaired risk-taking capability of the private sector, and malfunctioning of the transmission mechanism of monetary easing. This has been an issue not only in monetary policy but also in recent macroeconomic policy as a whole in Japan. Throughout the 1990s, I was in charge of executing fiscal policy. During the period, Japan has taken substantial measures both in monetary and fiscal fronts. However, given that fiscal policy is determined in the political situation at the time, and since the growth expectation has been declining and the private sector’s risk-taking capability has been impaired, multiplier effects of public investment and tax cuts have also been constrained. As the central bank has been struggling with the problem of malfunctioning of the transmission mechanism, the fiscal authorities have also been struggling with the problem that fiscal expenditure has not led to vigorous spending by the private sector. B. Issues regarding further policy measures There are various debates outside the Bank about further policy options, and the Bank is always examining a wide range of imaginable options. I would like to raise some points that I think are important in discussing future policy conduct. First of all, we must bear in mind that Japan’s efforts to overcome deflation ultimately aim at realizing the sound and continuous prosperity of its economy. With a growing number of countries shifting to a market-led economy and economic globalization advancing, it is essential to make full use of the private sector’s initiatives and market mechanisms as well as maintain favorable relationships with other economies for Japan to continue enjoying economic prosperity in the future. If Japan took policy measures that distorted market mechanisms in the medium to long term, caused inefficiencies in the economy, or greatly impaired relationships overseas, the prospects for economic prosperity in the 21st century would be substantially narrowed. It is important that various policy options be consistent with the direction desired for the economy. Furthermore, in conducting economic policies, it is essential to maintain the capacities to respond to various shocks and uncertainties, which are often unpredictable because of imperfect knowledge, in order to secure economic stability. Once the confidence of the public and market participants in such capacities of economic policies is lost, this can cause serious instability in the economy and financial markets. Past experience tells us that public confidence in policy entities, once lost, is extremely difficult to restore in a short period of time. As an independent central bank, the Bank should bear in mind its accountability to the public for its policy measures. There have been the arguments outside the Bank that the Bank purchases risky assets that central banks normally do not purchase. In this respect, we must bear in mind that the central bank ultimately belongs to the people. If a central bank buys some assets, it virtually means that it uses the people’s money to buy them. In the current situation where short-term interest rates have reached the zero bound and conventional monetary easing tools have been exhausted, the Bank must consider measures that go beyond the boundaries of traditional monetary policy and sometimes approach the realm of fiscal policy. However, it is vital for the Bank to evaluate policy options from the perspective of whether they are consistent with the Bank’s accountability to the public and thus make a balanced judgment. This point becomes all the more serious as policy options could have greater influence on the distribution of income and risks in the private sector. C. Issues of inflation targeting I would like to briefly talk about issues of inflation targeting. Inflation targeting is a policy framework adopted in several countries in which a state of price stability, the goal of monetary policy, is expressed in terms of a desirable rate of inflation in numerical values. I think that the background of the argument regarding inflation targeting in Japan differs somewhat from the original thinking that I have described. The thinking that underlines the current argument advocating the adoption of inflation targeting in Japan seems to be as follows: real interest rates, which are derived by subtracting the inflation expectation rate from nominal interest rates, might be reduced if the inflation expectation rate increased, and declaration of a numerical target might contribute even when there is virtually no room for further reduction in nominal interest rates. Whether inflation targeting brings about its intended benefit, that is, to enhance the transparency of monetary policy and to stabilize people’s expectation, largely depends on the following: how credible is the target? That is to say, to what extent are the tools and mechanism to achieve the target assured? As of now at least, it is hard to say that we are sufficiently equipped, considering the several constraints surrounding the current conduct of monetary policy. Like any other central bank, the Bank needs to examine every possible measure to enhance the transparency of its conduct of monetary policy. The Bank fully recognizes the fact that inflation targeting could be an important policy tool for the purpose, once we enter the stage where manoeuvrability is restored to monetary policy and the transmission mechanism recovers its function. The Bank will continue to examine the issue in the future. Bearing the lack of such manoeuvrability and the malfunctioning of transmission mechanism at present, however, I think it is critically important and urgent to take practical steps to restore the effectiveness of the transmission mechanism through which monetary easing influences economic activity and prices. I would like to emphasize that it would be a complete misunderstanding of the Bank’s policy intention to conclude that the Bank is not actively implementing monetary policy to overcome deflation, based solely on the fact that the Bank does not adopt inflation targeting at this juncture. The Bank is willing to bring the inflation rate back to above zero percent, that is, a slightly positive rate, by doing its utmost and to maintain it at around that level. D. Enhancing transmission mechanism of monetary easing Amid various constraints imposed on its policy as I have mentioned, the important policy task of the Bank is to enhance the transmission mechanism of monetary easing. As the credit intermediary function of banks is not working properly, one of the contributions of the central bank to enhance the transmission mechanism is to encourage the development of securitized financing tools and capital markets that could complement and substitute for bank lending, and improve the financing environment for small firms. The relatively high share of bank lending, which is one of the features of Japan’s financial structure, contributed to absorbing shocks from the downturn in economic activity within banks’ assets, and thus succeeded in diminishing their effects on the economy as long as the impacts of the shocks were limited. However, when significant shocks such as those accompanying asset price falls occurred, the concentration of the loss to the banking sector caused substantial damage to its capital base and risktaking capability. This, in turn, amplified the effects of the shocks through tightening of corporate financing conditions. This problem could be partially resolved if alternative financial markets substituting for bank lending were developed to a significant degree. The development of such markets would not only contribute to smooth corporate financing, it would also work as a discipline on banks’ lending activities, for example, by encouraging banks to formulate lending rates which reflect credit risks more accurately. In addition, broadening the scope of economic entities that take credit risks attached to the corporate sector could enlarge the risk-taking capacity of banks. Investors would be able to realize portfolios by utilizing a broader range of instruments with various combinations of risks and returns. A new financing channel of this kind is imperative to cope with the financing needs of the corporate sector, as the economy becomes mature. Based on this thinking I have described, this April the Bank started examining the policy option of temporary purchase of ABSs with underlying assets such as receivables and loans related to small to medium-sized firms. The Bank decided the purchasing scheme at the Monetary Policy Meeting on June 11, 2003, taking into account various comments from market participants. Although it is an unconventional measure for a central bank to directly take on private-sector credit risk, we thought it necessary to promote smooth corporate financing by nurturing the ABS market and to enhance the effectiveness of monetary easing, giving due consideration to the required functions of Japan’s financial system in the future and the current weakness in the credit intermediary function of the banking system. At the same time, the Bank will pay careful attention to avoid distortion of the ABS market and to maintain the soundness of the Bank’s balance sheet. IV. For the revitalizing of Japan’s economy A. The need for efforts by a wide range of economic entities I would like to briefly discuss my thinking on the efforts necessary to revitalize Japan’s economy. As I mentioned at the outset, the world economy is undergoing structural change and industrialization in emerging economies is advancing. In this situation, Japan should foster new industries that will lead the economy in the 21st century with high productivity and value-added that are suitable to a developed nation. Such efforts are indispensable to ensure economic prosperity in the future, since we will not be able to count on an increase in the population as a source of economic growth and an improvement in productivity is virtually the only way to create growth. At the same time, it is necessary to drastically reconstruct the socioeconomic system, which has been based on an expanding economy, into one fitted to a mature economy. It is very difficult to achieve a national consensus regarding changes in the system itself. If the changes in the socioeconomic system cannot catch up with the actual economic and social developments, however, economic revitalization will be hampered through the effects of the disincentives. There is another problem regarding private economic entities: the risk-taking capability of financial institutions and firms is impaired because of the sluggish growth expectation after the bursting of the bubble. This problem undermines the effect of various policy actions. Therefore, the efforts of the government, the private sector, and the central bank must be concerted to overcome such complex issues facing the economy. As part of this, Japan should present a vision of the future socioeconomic system it seeks to attain, including the social security system and the relationship between the central and local governments, and seek to continuously take actions in accordance with this vision. Japan’s prosperity in the 21st century should be achieved through maximum utilization of privatesector initiatives and market mechanisms, as for example an investment and funds intermediary, throughout the economy. At present, the private sector cannot fulfill the role to the utmost because of its limited financial strength, and in some cases public authorities are required to support privatesector initiatives. The Industrial Revitalization Corporation of Japan established last month is a major example of a public initiative to support private activities, and I hope it will be utilized effectively and contribute to the revitalization of the economy. At the same time, such policies and support as a whole must be in line with the nation’s vision, that is, an economy exploiting the full benefits of private-sector initiatives and market mechanisms. Continuing to take these policy actions in harmony with the future visions will heighten the growth expectation of the private sector and induce demand. B. Reviving the financial system Finally, I would like to comment more specifically on issues concerning the Japanese financial system. In order to revive the economy, it is indispensable to realize a situation in which Japan’s financial system performs the credit intermediary function fully. Discussion on putting the financial system on a sounder basis often focuses attention on the disposal of NPLs. Although this issue is very important, the disposal of NPLs is just one of the prerequisites for achieving the much broader task of reviving the financial system. The most vital necessity in the medium to long term is to construct a new financial infrastructure, which can play a key role in the economy in the 21st century. After World War II, Japanese financial institutions raised their profitability by maintaining a certain asset size, supported by high economic growth and private savings. In undertaking risk management, a basic function of commercial banks, most of the work associated with assessing the profitability and risk of each individual project was often substituted by monitoring the price of real estate that had been pledged as collateral. This system was based on the condition that real estate prices continued to rise. Market participants are now keenly watching whether Japanese financial institutions can generate a new business model and establish a sufficient foundation for profitability in the future, now that the external environment that supported their profitability in the postwar era has drastically changed. The value-added and the profit of financial institutions are ultimately generated from their activities of taking and controlling various risks such as credit risk, interest rate risk, and liquidity risk. For the Japanese financial system and economy to revive, it is extremely important that Japanese financial institutions create a new business model that ensures a foundation for profitability while supporting the Japanese economy in the 21st century. I think it is essential for financial institutions to make further efforts in this respect. The Bank of Japan will make its best effort on various fronts, such as enhancing the transmission mechanism of monetary easing, promoting the permeation of the easing effects through the economy, as well as ensuring financial market stability. As other developed countries are keenly watching our monetary policy conduct, it is my sincere hope that Japan realizes sustainable economic growth accompanying price stability, and succeeds in recording a victory over deflation.
|
bank of japan
| 2,003 | 6 |
Bank of Japan¿s July report of recent economic and financial developments, July 2003
|
Bank of Japan’s July report of recent economic and financial developments1 Bank of Japan, 16 July 2003. * * * The Bank’s view Economic activity remains virtually flat. With regard to final demand, business fixed investment is on a gradual recovery trend, albeit showing some fluctuations. Meanwhile, private consumption continues to be weak, housing investment remains sluggish, and public investment is declining. Net exports are virtually flat. Industrial production continues to be basically level in response to these developments in final demand. Corporate profits continue to recover, although the pace is moderating. Under these circumstances, uncertainty regarding the economic outlook is diminishing somewhat, and business sentiment is improving to some extent, mainly among large manufacturing firms. As for the employment situation, the number of employees including non-regular employees such as temporary workers has almost stopped declining. However, the increase in the overtime hours worked and new job offers has come to a halt. Firms are maintaining their stance on reducing personnel expenses, and household income still continues to decrease as wages are on a downtrend, albeit gradual. Thus the employment and income situation of households overall remains severe. Turning to the economic outlook, a widely shared view of the prospect for overseas economies is that the growth rate, especially that of the U.S. economy, will accelerate in the second half of this year reflecting diminished geopolitical risks. For the time being, however, the pace of recovery in the U.S. economy is projected to remain very gradual. Moreover, economic activity in East Asia has decelerated somewhat, due partly to the slower growth of domestic demand in South Korea and the epidemic of severe acute respiratory syndrome (SARS). In this situation, both exports and industrial production are projected to remain virtually flat for the time being. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time due to the severe employment and income situation. Meanwhile, the uptrend of business fixed investment is expected to become established in the period ahead, mainly in large manufacturing firms, whose investment has been thus far significantly restrained despite the recovery in their profits. However, the pace of increase in overall business investment is likely to remain modest, as long as uncertainty regarding a recovery in exports and production remains. Overall, assuming that the growth rate of overseas economies accelerates in the second half of this year, the uptrend in exports and production will resume gradually, which in turn will initiate the momentum for an economic recovery in Japan. However, a self-sustaining recovery in domestic demand is unlikely to gain momentum for some time, since production is expected to be virtually unchanged for the time being while downward pressures such as excessive labor input and debt persist. As for the outlook for the external environment, although the downside risk has subsided slightly with the SARS epidemic coming to an end, there still continues to be substantial uncertainty about the recovery of the U.S. economy. On the domestic side, the recovery in stock prices is a positive factor. However, given the fragility of the financial system, attention should be paid to the possibility of a further upsurge in long-term interest rates and its influences. On the price front, import prices and domestic corporate goods prices are declining, mainly reflecting crude oil prices that fell back in early spring. Corporate services prices continue a year-on-year This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on July 14 and 15, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on July 14 and 15, 2003 as the basis for monetary policy decisions. decrease of slightly over 1 percent; the rate of decline expanded in April, as many firms reprice at the beginning of a new fiscal year. The rate of decline in consumer prices remains virtually unchanged from April, when the rate diminished due mainly to the rise in medical treatment costs in line with the reform of the medical insurance system. Looking at the conditions influencing price developments, import prices are expected to continue declining for the immediate future, but are likely to stop declining before long since crude oil prices have recently been firm after they fell back in early spring. On the other hand, turning to the domestic side, the supply-demand balance in the macroeconomy, ongoing technological innovations in machinery, and the streamlining of distribution channels will continue to exert downward pressure on prices. In addition, the increase in domestic commodity prices has peaked out. Based on these factors, domestic corporate goods prices are likely to continue declining. Meanwhile, consumer prices are projected to continue falling at the current moderate pace on a year-on-year basis. As for the financial environment, the outstanding balance of current accounts at the Bank of Japan is moving at around 29 trillion yen, as the Bank has been providing ample liquidity. Under these circumstances, the overnight call rate continues to move at around zero percent. Longer-term interest rates remain steady at low levels. Yields on long-term government bonds declined further until mid-June, as investors increased their demand for the bonds. After that, the yields rose sharply partly because the bonds were sold at a profit on a large scale. Recently, they are moving at around 1.0 percent. Meanwhile, yield spreads between private bonds (bank bonds and corporate bonds) and government bonds continue to be at low levels. Stock prices are recovering, reflecting a gradual improvement in market participants’ view on the outlook for Japan’s economy and foreign investors’ active investment stance on Japanese stocks. The Nikkei 225 Stock Average is recently moving at the 9,500-10,000 yen level. In the foreign exchange market, the yen depreciated toward the end of the month, due mainly to an improvement in some U.S. economic indicators. After that, the yen rebounded reflecting further investment in Japanese stocks by foreign investors, and is currently traded in the range of 117-119 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks, while they continue to be more active in extending loans to blue-chip companies. Their lending attitudes seem to be becoming slightly more accommodative in areas such as interest margin charges. Meanwhile, the lending attitudes of financial institutions as perceived by firms are improving somewhat, although small firms continue to perceive them as severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings continues to be favorable on the whole, although some firms seem to be taking a wait-and-see stance in the corporate bond issuance market in view of the rise in long-term interest rates. Credit demand in the private sector continues to follow a downtrend mainly because business fixed investment is at low levels and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2.0-2.5 percent on a year-on-year basis. The amount outstanding of corporate bonds and CP issued is slightly above the previous year’s level. Meanwhile, according to business surveys, financial positions of firms are improving slightly, although those of small firms in particular remain severe. The year-on-year growth rate of the monetary base rose and is around 20 percent. The year-on-year growth rate of the money stock is somewhat less than 2 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions continue to be extremely easy. Meanwhile, long-term interest rates are rising and stock prices continue to recover. The money stock and the monetary base maintain high growth rates relative to that of economic activity as a whole. In corporate finance, the fund-raising environment has not changed significantly, that is, the environment for firms, particularly with high credit risks, remains severe, although the issuing environment of corporate bonds and CP continues to be favorable, mainly for firms with low credit risks. Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 7 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Kisaragi-kai, Tokyo, 23 July 2003.
|
Toshihiko Fukui: Prospects for the future of Japan’s economy Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Kisaragi-kai, Tokyo, 23 July 2003. * * * When I was appointed Governor of the Bank of Japan four months ago, I made a pledge that I would do my best to contribute to reviving the Japanese economy. As we all know, Japan’s economy is currently beset with a number of formidable problems. By resolving each of these problems steadily and patiently, I believe, prospects for the future of Japan’s economy will be improved. With such a vision in mind, today, I would like to talk about these problems and the steps the Bank has been taking to address them. 1. Current situation and challenges facing Japan’s economy Current condition Let me begin by briefly talking about the current condition of Japan’s economy. Economic activity, as a whole, remains flat. On the bright side, corporate profits continue to improve, and business fixed investment is on a gradual upturn. Indeed, according to the Bank’s Tankan Survey released in early July, the ratio of profits to sales is expected to hit a record high in fiscal 2003 since the bursting of the bubble, surpassing the past highs of 1996 and 2000. And, the business fixed investment plan for fiscal 2003 is the largest since fiscal 2000. But, on a more subdued note, personal consumption remains lackluster. High corporate profitability despite anemic sales implies that the effect of corporate restructuring in reducing labor and other costs has been quite substantial. This, in turn, means that the household sector has been faced with harsh labor and income conditions, which have adversely affected consumption. Meanwhile, Japan’s exports have not shown any clear movement either to rise or to decline. Thus, as I described at the outset, economic activity overall remains flat. But recently, uncertainties surrounding Japan’s economy have been gradually abating. The uncertainty surrounding overseas economies, an important factor for exports, has been declining in the wake of the end of the war in Iraq and the containment of severe acute respiratory syndrome (SARS). It is the prevailing view that despite lingering uncertainties, the growth of overseas economies will pick up in the second half of this year. Under such circumstances, we expect that a cyclical upswing in Japan’s economy will begin to materialize in tandem with the gradual improvement in exports and production. And, in the financial and capital markets in and outside Japan, pessimism regarding the future course of the economy and prices has been receding with the rise in stock prices. Problems facing Japan’s economy Yet, there remain a host of long-term problems that must be overcome. Though the growth of Japan’s economy has been forced down at a lower rate since the bursting of the bubble, there have, in fact, been several recovery phases. However, these nascent recoveries repeatedly failed to lead to a full-fledged growth path because of recession overseas and concern about financial instability at home. One of the factors responsible is that such structural problems as debt overhang and excess labor have yet to be resolved. For example, when production and corporate earnings increased amid vibrant overseas economies, firms were forced to make, or strategically effected, the repayment of outstanding debt, and there was no expansion of business fixed investment. And, efforts on the part of the corporate sector to shed excess labor kept employment and income conditions severe, thereby restraining personal consumption. In a nutshell, pressures to correct past excesses hampered domestic demand from achieving a self-sustained recovery. But, are these sufficient reasons explaining the prolonged stagnation of Japan’s economy? Looking at past history a little more closely, we have come to realize that the problems are more than just the aftermath of the bursting of the bubble, such as debt overhang and excess labor. We are actually facing more deep-rooted and difficult problems. Since the late 1980s, the world economy has witnessed a sea change in the form of globalization and revolution in information and communications technology. Thus, before we discuss possible resolutions to the problems facing Japan’s economy, it may be a useful exercise to put them in a global and historical context. On a global scale, a disinflationary trend is intensifying. For example, the average growth rate of the consumer price index in G7 countries decreased from around 7 percent in the first half of the 1980s to the 3 percent level in the second half, and to a less than 2 percent level between 1996 and 2002. This certainly shows that central banks’ conduct of monetary policy has successfully contained inflation. More fundamentally, this trend may reflect the impact on price determination of globalization and the revolution in information and communications technology. The transition of emerging countries to market economies has greatly expanded global supply capacity. Furthermore, firms with a dominant power in setting prices in various markets segmented by region or by product no longer exist amid the advance of globalization and information and communications technology. Consequently, firms in industrialized countries have become increasingly under pressure to create high-value-added products amid global competition. Coming back home, there have also been conspicuous changes in the conditions underlying Japan’s economy. They include the transition to a mature economy and demographic change. These changes make it impossible for Japan’s economy to revive high growth seen in the past, and, in this sense, tend to lower prospects for its future. On an individual firm level, they tend to nullify old business models established in the high-growth period, and also to force firms to construct new and more innovative business models. There are quite a few firms, mainly in the manufacturing sector, that are not plagued by debt overhang and excess labor. But they also find it difficult to increase their production and investment until such time as they become confident about their competitiveness. The challenges facing Japan’s economy are enormously complex and difficult because it is faced with such idiosyncratic problems as the transition to a mature economy, demographic change, and the aftermath of the bursting of the bubble, in addition to global issues. Looking at prices, Japan’s economy has passed a disinflationary stage, and has fallen into a deflationary situation. Deflation will cause various distortions in the economy and society, in a different way from inflation, even if modest. To resolve the problems To resolve the problems facing Japan’s economy, we must construct a new and dynamic economic system in which firms and individuals can have positive expectations for the future and boost their economic activity. In addition, we must construct a mutually beneficial, new interdependent relationship with neighboring countries in Asia. Here, I think there are two key concepts to keep in mind. One is Japan’s economy, which can create high-value-added, and the other is more unified regional cooperation among Asian economies. Moving forward, we need to metamorphose Japan’s economy and society into one which is more flexible so that resources will be smoothly reallocated to creative areas. Unfortunately, in Japan we do not yet have frameworks that can reallocate various resources efficiently. In the private sector, procrastination in the relaxation and abolition of regulations has been a major impediment. In the public sector, the accumulation of vested interests has hampered budget reallocation. There is a problem with the framework of corporate finance. In Japan, as a result of prolonged high growth in the past, corporate finance has become extremely dependent on bank borrowing. In fact, it has come to a point where borrowers hardly make any distinction between funds for risk-taking and those for running operations. This is directly related to a distortion of corporate governance. And, I think debt overhang can be considered as an extension of this problem. Furthermore, productivity-related wages and a flexible labor market are essential elements for the future of Japan’s economy. It will be quite a challenge to balance these with the traditional system of seniority-based wages and lifetime employment. Needless to say, we must expand business opportunities. And, in the process, we need to create a framework in which individuals and firms will be rewarded with commensurate returns when they take on risks. It seems that the various systems that underpinned post-war growth such as corporate governance, labor and wage practices, and the role of government and public institutions, can no longer provide a sufficient risk-return incentive. Finally, let me mention the relationship with other Asian economies. Japanese firms have already dramatically changed their business strategy for Asia. These days, they not only use Asian countries as a production base for exports, but also try to penetrate local domestic markets. In the last decade or so, intra-regional trade has greatly expanded in Asia as evidenced by the ratio of such trade to the nominal GDP for nine East Asian countries more than doubling, from 8 percent in the latter half of the 1980s to 17 percent recently. This ratio is almost comparable to that of the European Union (EU). But, with regard to free trade agreements, Japan has fallen behind other countries. I thus hope the government will make efforts to promote free trade agreements which would support the efforts of the private sector. There is another important issue to deal with when we create an environment in which economic dynamism works, and that is to minimize future anxieties. For example, if individuals are uneasy about their financial situation after retirement, including pensions, or if firms are concerned about potential financial instability, they will be discouraged from aggressively taking on risks. Paradoxically speaking, it is important to enable economic agents to take on risks without paying undue attention to future anxieties. In this regard, the government has a critical role. It can enhance incentives for risk-taking in the private sector by eliminating impediments in regulatory and tax systems. On the budgetary front, it can promote resource reallocation in the private sector by fundamentally reviewing government expenditure. Furthermore, it can assuage future anxieties related to pension and other social security systems. We thus need to promote broad-based reform, covering the socio-economic system at large. Last month, the Council on Economic and Fiscal Policy decided to adopt “Basic Policies for Economic and Fiscal Management and Structural Reform 2003” (the so-called third main reform guidelines). I think it vital to accelerate the implementation of reform measures while taking account of these guidelines. As far as monetary policy is concerned, I think the Bank of Japan has a very important role to play in this process, the details of which I am going to take up later. Given that the government and the Bank of Japan do their best in providing a favorable environment, firms are the main player in constructing a new and dynamic economic system. Or, to be more precise, individuals could ultimately be perceived as the main player, since they own and manage firms, they work at firms, and they monitor firms directly or indirectly. What lie at the core of a market economy are the activities of firms and individuals in discovering new value-added demand, and turning such into attractive goods and services and shouldering risks attached. These days, profit opportunities are not something obtained just by following others as in the past, but something created before others do. Let me elaborate a little on this. After World War II, Japan’s economic policies focused on sustaining high growth and promoting exports, and firms vied for larger sales and higher market share rather than higher profitability. As a result, a low-profit and high-cost structure took hold. Then, with the prolonged high-growth period, this structure became so deeply embedded in the economy that firms found it extremely difficult to find ways to correct the high-cost structure and create new competitiveness. And, more recently, the bursting of the bubble economy in the early 1990s led to debt overhang and excess labor, which further increased the burden of such adjustment. We hear anecdotes that the delay in corporate restructuring has kept competent human resources in existing firms, and this is one of the main reasons for the low rate of new business openings in Japan. All these are formidable challenges. However, I believe they can be overcome, no matter how difficult they may be, as long as the private sector makes steady efforts to display its creative power, and the government and the Bank of Japan give strong support to such efforts. Contributions of the Bank The Bank of Japan would like to make a positive contribution to extricating the economy from a deflationary situation and putting it on a sustainable recovery path, as well as to creating an environment in which both firms and individuals will be able to realize their potential and economic dynamism will work more effectively. Let me explain the policy measures the Bank has taken in three areas. First, our easy monetary policy. Here, we have made efforts to provide a financial environment in which firms will be able to embark on as many forward-looking activities as possible even under the continuing severe economic situation. Second, we have been urging financial institutions to enhance their soundness. Financial institutions are supposed to assume a pivotal role in the financial system, but its intermediary function has been somewhat weak. Under such circumstances, firms might become reluctant to aggressively take on risks as they are concerned about future funding or a recession in the wake of financial instability. Third, we have been working to improve financial and capital markets. The key here is to improve the market mechanism so that interest rates will be determined competitively. In other words, we should strengthen the price discovery function of the market. An improved market mechanism would induce firms to actively invest, thereby spurring economic dynamism. Let me elaborate on these three contributions. 2. Maintaining easy monetary policy Ample and flexible liquidity provision The first contribution of the Bank is its maintenance of an easy monetary policy. The Bank has aggressively pursued an easy monetary policy under the framework of quantitative easing by changing its operational policy target from the short-term money market rate to the balance of current accounts held by financial institutions at the Bank since the spring of 2001 when the short-term money market rate declined to almost zero. Since I became Governor, the Bank decided to substantially increase liquidity provision as an emergency measure to respond to heightened uncertainties in the wake of the war in Iraq, the spread of SARS, unstable movements in stock prices and foreign exchange rates, and the injection of public funds into Resona Bank. (In April and May, the Bank increased the target balance of current accounts in the total amount of 8 trillion yen, with the upper limit rising to 30 trillion yen.) Such quantitative easing has been extremely effective in maintaining financial market stability while we recognize its side effects, including a deterioration in the market mechanism. It has also been effective in facilitating corporate funding. Looking back at the 1997-98 period, a series of collapses of financial institutions triggered a credit crunch. At the time, being concerned about their own funding, there were cases where financial institutions could not respond even to the funding needs of large blue-chip firms. However, we have not confronted such a situation since we adopted quantitative easing. I think the probability that a similar situation will occur is much smaller compared with the 1997-98 period. Through these channels, quantitative easing has been firmly supporting economic activity. But, we should never be complacent. We are determined to make further efforts to improve the transmission mechanism so that the effect of quantitative easing will permeate the economy to the fullest extent possible. As part of such efforts, the Bank recently decided to purchase asset-backed securities (ABSs). The necessary preparations having been completed, we will be ready to purchase the securities in the near future. Policy commitment There are other measures to stabilize financial markets. For example, the Bank has committed itself to continuing its current monetary easing framework until the growth rate of the consumer price index (CPI) stably registers zero percent or above. This can be termed the “policy duration effect.” With such a commitment as a backdrop, interest rates for overnight to several years have been stable at very low levels. In fact, the rise in medium-term interest rates has recently been relatively moderate despite the substantial increase in long-term rates. We fully recognize the importance of stabilizing public expectations about future policy directions, and we will make further efforts to enhance transparency regarding the conduct of monetary policy. 3. Promoting financial system stability The second contribution of the Bank is to secure financial system stability by urging financial institutions to enhance their soundness. For the past ten years, the financial system problem in Japan has been almost synonymous with the nonperforming-loan (NPL) problem. However, it goes without saying that what is really important is for financial institutions to overcome the NPL problem and transform themselves into a new financial service industry equipped with renewed competitiveness. Major financial institutions must quickly become competitive in the international financial market, and regional financial institutions should provide new financial services to small firms which undertake or develop new businesses that contribute to the development of local economies. Having said this, it is true that the NPL problem is still formidable. In the paper titled “Japan’s Nonperforming Loan Problem” published in October 2002, the Bank pointed out that a comprehensive approach would be indispensable to promote the resolution of this problem, centering on a more appropriate evaluation of the economic value of NPLs, more stringent provisioning, and more vigorous corporate rehabilitation. Subsequent efforts by financial institutions have more or less been in line with this recommendation. Regarding the past-due and restructured large loan assets of major financial institutions, provisions have been made on a discounted cash flow basis, and the extent of provisions as a whole was also raised. Disposal of NPLs by way of write-offs and sales has accelerated considerably, and the outstanding balance has been substantially reduced. Furthermore, we have seen new initiatives aiming at corporate rehabilitation, including the establishment of the Industrial Revitalization Corporation of Japan. Recently, many financial institutions, including regional institutions, have established special sections devoted to industrial rehabilitation. In addition to the NPL problem, stock price volatility also poses a significant risk to the management of financial institutions. It is the view of the Bank of Japan that the unwinding of cross-shareholdings is an inevitable trend, and, as far as the shares held by banks are concerned, it is quite appropriate to insulate the risk due to stock price volatility by expediting the sale of these shares. Since the latter part of last year when stock prices began to fall, the Bank of Japan began purchasing stocks. By partly utilizing our stock purchasing scheme, banks have been reducing their shareholdings, and a couple of major banks have already reduced their shareholdings to below an amount equivalent to Tier 1 capital as stipulated by regulation. Needless to say, in view of the remaining problems, financial institutions need to continue making best efforts to overcome them. At the same time, in addition to such backward-looking tasks, they must strengthen their earnings power by reconstructing lending and other types of businesses. Like firms must create value-added, financial institutions must provide high-value-added financial services, which is the ultimate key determining their future. It cannot be denied that the financial authorities tend to take the initiative in securing financial system stability in view of the magnitude of the problem as well as inherent time constraint. While the severity of the problem might have justified such a course of action in the past, it should be the private sector, with its creative power, which deals with such problems as the disposal of NPLs, raising capital, and corporate rehabilitation. The Bank has consistently been sending this message to financial institutions so that they will be able to take the maximum initiative in tackling these problems. If financial institutions put more weight on improving profitability, they will find it all the more difficult to achieve without managerial independence. Through on-site supervision and monitoring, the Bank will strongly support such a direction while urging financial institutions to make utmost efforts. 4. Steps toward future financial and capital markets The third contribution of the Bank is the effort to improve financial and capital markets. Here I would like to emphasize the importance of credit markets such as corporate bond and CP markets as well as stock and other markets for risk money. The current structure of corporate finance in Japan exhibits a heavy dependence on bank borrowing. However, looking forward, we need to diversify financial intermediation channels to cope with the various needs of investors and fund-raisers. In this regard, what is most important is that interest rates will be determined competitively in the market. In other words, we must take full advantage of the price discovery function of the market. It is the intrinsic role of the market to display the risk-return relationship perceived by market participants in the form of market price--interest rates in the case of credit markets. If the market develops to the extent that it can fully perform the price discovery function, we will establish a framework where we can obtain return commensurate with the risk involved in financial transactions. At the same time, it will induce active investment on the part of firms, thereby spurring economic dynamism. Japan’s financial and capital markets, particularly credit markets such as the lending, corporate bond, and CP markets, do not seem to be performing a sufficient price discovery function in evaluating the credit risks of borrowers. This is attributable to a variety of factors. Under the main bank system, credit has been made mostly in the form of loans. Another factor might be the assumption of an evergrowing economy in which loans have been extended based on the value of real estate collateral rather than the stringent evaluation of firms themselves and the project under consideration. Some say that corporate bonds and CP are sometimes regarded as another form of loans. Recently, however, we have seen the expansion of new markets, including syndicated loans, ABSs, and credit derivative markets, which seems to signal the transformation of credit markets in Japan. It is anticipated that active credit markets will facilitate the intermediation of funds and risks, contributing to the more efficient allocation of resources in the economy as a whole. Undoubtedly, market improvements will lay an important groundwork for the future. Moreover, considering that the intermediary function of financial institutions is far from perfect due to such factors as the burden of NPLs, it is an important problem that is worthwhile tackling from the viewpoint of further enhancing the effect of monetary easing as well as facilitating corporate funding. Based on this thinking, the Bank of Japan, in cooperation with market participants, has made various grass-roots efforts to improve the market by refining master transaction contracts and trading practices as well as by compiling and publishing market-related statistics. Furthermore, the Bank chose ABSs as an instrument with important monetary policy implications, and will begin purchasing them shortly. We believe that because of their product characteristics, ABSs will play an important role in the future of financial and capital markets in Japan. ABSs is a generic term for any product that comprises several types of bonds based on cash flows created by the most advanced financial engineering techniques from a pool of relatively small-lot obligations, such as loans and leases extended to small and medium-sized firms and the account receivables of these firms. By pooling the number of obligations, risk will be reduced. ABSs qualify in meeting the needs of investors with a variety of risk tolerance as securities can be issued in various combinations of high-risk, high-return and low-risk, low-return bonds. This product suits the current situation in Japan. For example, financial institutions play a central role in originating these products, and the risk is borne directly by end-investors. In the case of Japanese firms, small and medium-sized firms in particular, main banks and other similar financial institutions are in the best position to grasp funding needs. One of the characteristics of ABSs is that while banks originate these securities, the risk is shouldered by investors so that they are not susceptible to banks’ risk-taking ability. By using their own networks and assessment ability, financial institutions will act as manufacturers and distributors by creating such products as ABSs and selling them. We thus believe that ABSs will be the best candidate to build a bridge from the current bank-centered system to next-generation financial and capital markets. In fostering the market for ABSs, the Bank decided to shoulder the credit risk of private debt obligations by directly purchasing such securities. This is mainly because the market is still in an embryonic stage and hence there are very few participants willing to take on risks and, moreover, it is difficult to originate the securities. As long as the central bank effects purchases in the market, such action inevitably entails a sense of intervention. And, there is always the danger that it might distort the price discovery function of the market, thereby jeopardizing its sound development. However, judging from the information we have obtained so far, there is a possibility that purchases by the Bank may act rather as a catalyst to increase both transactions and market participants so that the market function is expected to strengthen in a self-generating way. We hope that such a virtuous cycle will be engendered. Concluding remarks For Japan’s economy to resolve the problems it faces and move forward, firms and individuals must become active in seeking new value-added by taking on risks. It is the task of the Bank of Japan to provide a financial environment favorable to the people who create the future course. The more difficult the problems facing Japan’s economy, the more aggressively the Bank of Japan should pursue new policy options without being held hostage by precedent. Quantitative easing is a policy option that no other central bank has ever taken and we also recognize that the purchase of stocks held by banks is a policy option that is not conceivable under normal circumstances. Indeed, the purchase of asset-backed securities is an extremely unusual policy option in the sense that the central bank directly shoulders the credit risk of private debt obligations. Traditional monetary policy usually focuses on money, which sits on the liability side of banks’ balance sheets, and hardly looks at credit as an independent item. However, in the situation Japan faces, credit, which sits on the asset side of banks’ balance sheets, has become critically important in the conduct of monetary policy, and it is in this area that the Bank of Japan is exploring new policy options. We will continue to effect the appropriate conduct of monetary policy by always bearing in mind the future vision of the economy. Let me close by stating my firm belief that Japan’s economy will reveal its true potential and we will be able to build a bright future, and also once again pledging that the Bank of Japan will make every possible effort to revitalize the economy.
|
bank of japan
| 2,003 | 8 |
Bank of Japan¿s August report of recent economic and financial developments
|
Bank of Japan’s August report of recent economic and financial developments1 Bank of Japan, 11 August 2003. * * * The Bank’s view Economic activity remains virtually flat. With regard to final demand, business fixed investment is on a gradual recovery trend, albeit showing some fluctuations. Meanwhile, private consumption continues to be weak, housing investment remains sluggish, and public investment is declining. Net exports are virtually flat. Industrial production continues to be basically level in response to these developments in final demand. As for the employment situation, the number of employees including non-regular employees such as temporary workers has almost stopped falling, and the pace of decline in wages has also slowed. However, the increase in the overtime hours worked and new job offers has come to a halt, and the number of regular employees continues to decline. Thus household income still seems to be on a gradual downtrend on average, and the employment and income situation of households overall remains severe. Turning to the economic outlook, it is fairly possible that the growth rate of overseas economies, especially that of the U.S. economy, will accelerate in the second half of this year. However, as for the U.S. economy, although improvements have been observed in some recent economic indicators, careful examination is still required to judge to what extent business fixed investment and employment will increase following these developments. The pace of economic expansion in East Asia still remains slow compared to what it was a while ago, although there seem to be signs of recovery. In this situation, both exports and industrial production are projected to remain virtually flat for the immediate future. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time since the employment and income situation is unlikely to improve markedly. Meanwhile, the uptrend of business fixed investment is expected to become established in the period ahead, mainly in large manufacturing firms, whose investment has been thus far significantly restrained despite the recovery in their profits. However, the pace of increase in overall business investment is likely to remain modest, as long as uncertainty regarding a recovery in exports and production remains. Overall, with the anticipation that the growth rate of overseas economies will accelerate in the second half of this year, the uptrend in exports and production will resume gradually, which in turn will initiate the momentum for an economic recovery in Japan. However, a self-sustaining recovery in domestic demand is unlikely to gain momentum for some time, since production is expected to be virtually unchanged for the immediate future while downward pressures such as excessive labor input and debt persist. In addition, as for the outlook for the external environment, there still remains uncertainty about, among other things, the recovery of the U.S. economy. On the domestic side, given the fragility of the financial system, continued attention should be paid to developments in stock prices and longterm interest rates. On the price front, import prices and domestic corporate goods prices are declining, mainly reflecting crude oil prices that fell back in early spring. Corporate services prices continue a year-on-year decrease of slightly over 1 percent; the rate of decline expanded in April, as many firms reprice at the This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on August 7 and 8, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on August 7 and 8, 2003 as the basis for monetary policy decisions. 1/3 beginning of a new fiscal year. The rate of decline in consumer prices remains virtually unchanged from April, when the rate diminished due mainly to the rise in medical treatment costs in line with the reform of the medical insurance system. Looking at the conditions influencing price developments, import prices are expected to continue declining for the immediate future, but are likely to stop declining before long since crude oil prices have recently been firm after they fell back in early spring. On the other hand, turning to the domestic side, the supply-demand balance in the macroeconomy, ongoing technological innovations in machinery, and the streamlining of distribution channels will continue to exert downward pressure on prices. Hence domestic corporate goods prices are likely to continue a gradual downtrend, although the pace of decline will slow with the halt in the decline in import prices gradually having effects. Meanwhile, consumer prices are projected to continue falling at the current moderate pace on a yearon-year basis. As for the financial environment, the outstanding balance of current accounts at the Bank of Japan is moving at around 29 trillion yen, as the Bank has been providing ample liquidity. Under these circumstances, the overnight call rate continues to move at around zero percent. Interest rates on term instruments remain steady at low levels. Yields on long-term government bonds have been declining gradually partly because investors bought medium- and long-term bonds on dips, and are recently moving at around 0.9 percent. Meanwhile, yield spreads between private bonds (bank bonds and corporate bonds) and government bonds continue to be at low levels on the whole, although those between bank bonds and government bonds are widening slightly. Stock prices have become weak due mainly to a concern over the rapid increase in stock prices, even though market participants’ view on the outlook for Japan’s economy has been improving gradually. The Nikkei 225 Stock Average is recently moving at the 9,000-9,500 yen level. In the foreign exchange market, the yen appreciated toward mid-July as foreign investors kept on investing in Japanese stocks, but it fell back as the dollar was purchased reflecting expectations for a recovery in the U.S. economy. The yen is currently traded in the range of 119-121 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks, while they continue to be more active in extending loans to blue-chip companies. Their lending attitudes seem to be becoming slightly more accommodative in areas such as terms and conditions for lending. Meanwhile, the lending attitudes of financial institutions as perceived by firms are improving somewhat, although small firms continue to perceive them as severe. In the corporate bond and CP markets, the issuing environment for firms with high credit ratings continues to be favorable on the whole, although some firms still seem to be taking a wait-and-see stance in the corporate bond issuance market. Credit demand in the private sector continues to follow a downtrend mainly because business fixed investment is at low levels and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline by about 2.0-2.5 percent on a year-on-year basis. The amount outstanding of corporate bonds issued is slightly below the previous year’s level. Meanwhile, according to business surveys, financial positions of firms are improving slightly, although those of small firms in particular remain severe. The year-on-year growth rate of the monetary base is around 20 percent. The year-on-year growth rate of the money stock is somewhat less than 2 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions continue to be extremely easy. Meanwhile, long-term interest rates and stock prices are slightly declining. The money stock and the monetary base maintain high growth rates relative to that of economic activity as a whole. In corporate finance, the fund-raising environment has not changed significantly, that is, the environment for firms, particularly with high credit risks, remains severe, although the issuing environment of corporate bonds and CP continues to be favorable on the whole, especially for firms with low credit risks. Developments in the financial and capital markets, the 2/3 behavior of financial institutions, and the situation of corporate finance continue to require close monitoring. 3/3
|
bank of japan
| 2,003 | 8 |
Statement by Mr Toshihiko Fukui, 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 Councillors, Tokyo, 24 July 2003.
|
Toshihiko Fukui: An overall review of the Bank of Japan’s conduct of monetary policy Statement by Mr Toshihiko Fukui, 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 Councillors, Tokyo, 24 July 2003. * Introduction * * The Bank of Japan (hereafter, the Bank) submitted its Semiannual Report on Currency and Monetary Control for the second half of fiscal 2002 to the Diet in June 2003. I am pleased to have this opportunity to present an overall review of the Bank’s conduct of monetary policy. Today, I would like to make some remarks on the Bank’s view of recent economic and financial developments and on the thinking behind our recent conduct of monetary policy. I. Developments in Japan’s economy Economic activity remains virtually flat. Private consumption continues to be weak due to the severe employment and income situation. On the other hand, business fixed investment is on a gradual recovery trend, albeit showing some fluctuations, reflecting the improvement in corporate profits. Net exports are virtually flat. Looking at the economic outlook, it is expected that the uptrend in exports and production will gradually resume, and this in turn will initiate the momentum for an economic recovery. This reflected expectations that growth rates in overseas economies will accelerate in the second half of 2003 partly due to diminishing uncertainty over the situation in Iraq and severe acute respiratory syndrome (SARS). The June Tankan (Short-Term Economic Survey of Enterprises in Japan) released by the Bank at the beginning of July 2003 showed that corporate profits were projected to continue their uptrend and also confirmed that business fixed investment was on a recovery trend. However, the recovery in domestic demand is likely to remain modest for some time, since excessive labor input and debts continue to exert downward pressure. As for the environment for exports, there continues to be substantial uncertainty about the recovery of the U.S. economy, while on the domestic front, developments in the financial system and the financial and capital markets continue to require close monitoring. Regarding prices, consumer prices are projected to continue falling at the current moderate pace for the time being due to the following factors. First, the weakness in demand, technological innovation, and the streamlining of distribution channels continue to exert downward pressure on prices. Second, imports of low-priced consumer goods are still increasing, although only very gradually. Developments in financial markets have been stable on the whole as the Bank has been providing ample liquidity. In capital markets, stock prices have risen considerably and long-term interest rates have risen, as market participants’ pessimistic view of the outlook for the economy and prices has subsided slightly across the world. In corporate finance, the fund-raising environment continues to be easy on the whole. However, the environment for firms with relatively high credit risk remains severe. II. Conduct of monetary policy It has been three months since I presented my previous statement regarding the Semiannual Report on Currency and Monetary Control. Since then, the Bank has implemented monetary policy measures Governor Fukui made almost the same statement regarding the Semiannual Report on Currency and Monetary Control for the second half of fiscal 2002 before the Committee on Financial Affairs, House of Representatives, on July 16, 2003. in a timely manner against the background of increasing uncertainty about the outlook for the Japanese economy. At the Monetary Policy Meeting on April 30, 2003, the target for the outstanding balance of current accounts held at the Bank was raised by 5 trillion yen. At that time, there was still considerable uncertainty about the prospects for recovery in the U.S. and European economies and the impact of SARS was a matter of concern for East Asian economies. On the financial side, stock prices in Japan, especially for bank stocks, remained weak and volatile. Taking account of this increasing economic and financial uncertainty, the Bank decided to raise the target for the outstanding balance of current accounts to maintain financial market stability and thereby strengthen support for economic recovery. In the middle of May 2003, the Bank implemented further policy measures to provide support from the financial side after the emergence of problems at Resona Bank. The Bank decided to provide liquidity to Resona Bank when necessary, including loans pursuant to Article 38 of the Bank of Japan Law, which do not require submission of collateral. Furthermore, regarding its money market operations, the Bank decided to further raise its target for the outstanding balance of current accounts by 3 trillion yen to ensure an ample provision of funds. This reflected greater uncertainty about the outlook for the Japanese economy due partly to instability in the stock and foreign exchange markets, in addition to uncertainty about overseas economies. With such significant uncertainties, the risk of further instability in financial markets adversely affecting economic activity was a cause for concern. However, owing to the timely implementation of a series of measures by the Bank, overall conditions in financial markets have remained calm and no funding problems have been observed at Resona Bank. Subsequent developments seem to suggest that uncertainty about the outlook for the Japanese economy has become somewhat less pronounced. Regarding developments in overseas economies, which have a considerable effect on Japan’s exports, the uncertainty about the U.S. economy has subsided to some degree, and the SARS problem in East Asian economies has been coming to an end. Against this background, in Japan’s capital markets, participants’ pessimism with regard to the economy and prices has decreased slightly, and stock prices have risen considerably. Bank stock prices in particular have rebounded significantly. In this situation, long-term interest rates rose after falling to their historic lows of 0.4-0.5 percent. As mentioned, some positive developments were observed, but there remained various structural problems in the Japanese economy. The Bank will continue its efforts to conduct monetary policy in a timely manner, monitoring carefully the strength of the recovery in overseas economies, the state of the financial system, and developments in financial and capital markets. The Bank is working to strengthen the transmission mechanism to ensure that the effects of monetary easing permeate throughout the economy. As part of its efforts in this regard, the Bank has been preparing to commence purchases of asset-backed securities (ABSs) from July 29, 2003. Although it is unusual for a central bank to directly take on the credit risk of private debt obligations, the Bank considers that, with the weakness of banks’ financial intermediary function, it is important to encourage the development of the ABS market. In formulating the specific details of ABS purchases, the Bank has paid due attention to contributing to the smooth financing of small and medium-sized firms. With regard to underlying assets, a broad range of assets will be deemed eligible, including receivables, loans, and lease claims. Furthermore, the Bank has decided to purchase securities with a BB rating or higher. This decision is based on the fact that there have been only a few investors purchasing securities with lower credit ratings, and this has been impeding development of the ABS market. The ceiling on the Bank’s purchases is to be set at 1 trillion yen for the time being. The ABS market is expected to become one of the most important financial markets in Japan in the future. The Bank hopes that the Bank’s purchase of securities will contribute to the autonomous development of the market. III. Purchases of stocks held by commercial banks The Bank started to purchase stocks held by commercial banks from November 2002 to reduce the risk that stock price fluctuations might impact negatively upon the business management of individual financial institutions, potentially resulting in instability of the financial system as a whole. The total amount of stocks purchased by the Bank as of July 20, 2003 was 1,505.9 billion yen. Conclusion As mentioned, in response to the severe economic situation, the Bank has been bold in its implementation of measures deemed necessary, including measures that are unusual for a central bank. At the same time, the Bank is making efforts to ensure its financial soundness by appropriately assessing the risk associated with holding new assets. The Bank considers its financial soundness to be fundamental to ensuring its ability to conduct monetary policy into the future and to maintaining the public’s confidence in the currency. Japan’s economy is still striving to construct a new system to accommodate the significant changes that have occurred since the late 1980s, such as globalization, innovations in information and communication technology, and societal aging and the declining birth rate. Given the various constraints involved, this is a formidable challenge. Nevertheless I believe that, by putting to use the high levels of technology and creativity at Japanese firms, our economy will ultimately succeed in realizing this goal. While taking into account the private sector’s efforts, the Bank, for its own part, will continue to do its utmost to overcome deflation and put the economy back on a sustainable growth path.
|
bank of japan
| 2,003 | 8 |
Speech by Mr Toshiro Muto, Deputy Governor of the Bank of Japan, on the occasion of a meeting with participants in market operations, Tokyo, 23 July 2003.
|
Toshiro Muto: What have we learned from “unconventional” market operations? Speech by Mr Toshiro Muto, Deputy Governor of the Bank of Japan, on the occasion of a meeting with participants in market operations, Tokyo, 23 July 2003. * I. * * Monetary policy in uncharted territory As the Japanese economy has been facing severe adjustment in recent years, the Bank of Japan has effected various measures that are unprecedented for any central bank, including the zero interest rate policy, quantitative easing, and a commitment to continuing the current policy until the consumer price index stably reaches zero or above. Moreover, the Bank will be able to purchase asset-backed securities from the end of July, thus expanding the scope of the assets it purchases. People often talk about the so-called “unconventional monetary policy” under deflation. All of the above measures can be considered unconventional in light of traditional central banking. Until recently, it appears that the zero interest rate policy and quantitative easing have been considered a special case for Japan, a country suffering from deflation. However, there are now several countries whose policy interest rates are approaching zero. For example, the short-term policy rate is 1 percent in the United States and zero to 0.75 percent in Switzerland. As a result, the zero interest rate policy and quantitative easing have been increasingly attracting the attention of other countries. Since the Bank began to conduct monetary policy in uncharted territory, it has constantly made new findings in the area of financial markets and money market operations. As the pioneering central bank in this uncharted territory, the Bank is in a unique position to explain to the audience both at home and abroad the experience under the zero interest rate policy and quantitative easing. As all of you here are experts in market operations and other financial market transactions, I feel it may be stimulating to focus my talk on the issues of mutual interest related to market operations and financial markets, rather than talking about developments in the economy and monetary policy in general. It is often said that the devil is in the details. Therefore, I believe it is useful for fruitful discussion on monetary policy that we share a few findings from market operations under quantitative easing, even though these findings may appear rather technical. II. Findings in the area of market operations There are a few important pillars in the current quantitative easing framework. Among them, the most important is to use the outstanding balance of current account deposits at the Bank as the main operating target and to provide ample funds through market operations. A. Increase in demand for current account deposits Obviously, if we provide ample funds to the market, short-term interest rates will fall to zero. If shortterm interest rates are significantly above zero, financial institutions will limit the amount of funds in their current account deposits, which pay no interest, roughly to the required reserves. Such behavior has been familiar to many central banks for many years. But what would happen if short-term interest rates were to decline to zero? A little more than two years ago when the target for market operations was changed from the overnight call rate to the outstanding balance of current account deposits, both market participants and the Bank doubted whether it was really possible for the Bank to provide the current account deposits with funds far in excess of around 4 trillion yen, the required reserves at the time. In fact, in the month of May 2001, only two months after a new target of 5 trillion yen for the current account deposits was introduced, we frequently observed undersubscription in market operations where bids fell short of the Bank’s offers. You may recall that undersubscription occurred repeatedly also in subsequent market operations. However, since autumn 2002 when the target for the current account deposits was raised from “around 10 to 15 trillion yen” to “around 15 to 20 trillion yen,” undersubscription has rarely occurred. The target has been raised since then, and now stands at “around 27 to 30 trillion yen.” Indeed, this high level of the target was unthinkable when quantitative easing was first introduced. With the caveat that there is probably a limit to increasing the target since it is inconceivable that all financial institutions hold their assets in the current account deposits at the Bank, the first of the findings from our experience of more than two years of quantitative easing is that a central bank can provide a fairly large amount of funds even under zero interest rates. Among the factors that enabled the provision of a large amount of funds, initially considered almost impossible, the following two factors stand out in significantly increasing the financial institutions’ demand for current account deposits at the Bank. One factor is the growing conviction of many financial institutions that they would not have a problem holding current account deposits substantially exceeding the required reserves, as a result of the virtual disappearance of the opportunity cost for holding the current account deposits. At present, not only major banks but also regional banks and foreign banks’ branches in Japan hold sizable current account deposits at the Bank. The interest income earned in the money market is so small that financial institutions keep their daily excess funds in the current account deposits at the Bank rather than invest them in the money market in view of administrative costs and possible losses, however unlikely, due to the defaults of counterparties. Another factor relates to the periodic rise of concern over financial system stability triggered by such events as the fall in stock prices. When the availability of funds tends to be tight as at the end of the financial year, including the mid-year book closing, or the calendar-year end, financial institutions try to smooth out their funding. This will increase the demand for holding current account deposits at the Bank. In fact, during the financial crisis of 1997-98, the money market shrank, and the liquidity shortage forced a number of financial institutions with rapidly deteriorating creditworthiness into bankruptcy. It may be quite natural that renewed memories of this period prompted extremely strong demand for current account deposits at the Bank. B. Factors leading to undersubscription Such an increase in the demand for current account deposits by market participants must somehow be met by supply. Otherwise, interest rates will rise. As you all know, supply is being made in the form of the Bank’s funds-supplying operations, where market participants place bids against the Bank’s offers. Thus, the second finding under quantitative easing is that the Bank needs to devise a variety of measures to provide ample funds. For example, even when some market operations resulted in undersubscription, others were successful. Also, the extent of undersubscription varied depending on the time of year. It is not easy to deduce these situations from the theoretical analysis of aggregate supply of and demand for the current account deposits. Having said this, one of the main reasons for undersubscription was the growing sense of a surfeit of funds in the market. This was the case in May 2001, soon after the target for current account deposits was introduced, when sentiment that the additional supply of funds was redundant seemed to be growing stronger day by day. The undersubscription in February and March 2002 and the summer of 2002 was caused in part by such sentiment, but other factors were also at work. Undersubscription is likely to occur when there is an increase in market participants’ demand for the financial assets the Bank offers to purchase in its market operations. Funds-supplying operations are the transaction where a central bank provides funds to the current account deposits of financial institutions against its purchase of a specific financial asset. For example, during February and March 2002, uncertainty about financial system stability was heightening as full protection of time deposits was about to be lifted from April. Moreover, the demand for such risk-free assets as treasury bills (TBs) and financing bills (FBs) by all economic agents, including financial institutions, increased significantly in the market. In such circumstances, the Bank’s offers to purchase TBs and FBs failed to attract a sufficient number of bids, and undersubscription ensued. A change in the long-standing skewed distribution of funds across financial institutions also contributed to undersubscription. In the past, major banks had a balance-sheet structure in which the deposits they received fell short of their loans. At present, the deposits at these major banks are in excess of their loans reflecting an inflow of deposits. As a result, their funding needs in the market have been reduced. It is not certain whether undersubscription will recur in the future. But what is certain is that the success of the central bank in providing a massive amount of funds under zero interest rates will depend on micro-level factors, including the funding position of individual financial institutions and the demand for specific assets used in the Bank’s market operations, in addition to the overall supply of and demand for current account deposits at the central bank. In this regard, by closely monitoring the changes in each financial market, the Bank has been carefully selecting the means by which it carries out market operations for the smooth provision of funds. For example, the Bank has recently expanded the scope of acceptable bills by lengthening the maturity period up to 12 months as well as the range of eligible counterparties for its bill purchasing operations. It has also conducted a combination of longer-term funds-providing operations and shorter-term funds-absorbing operations. III. Challenges under quantitative easing A. Criteria for assessing financial market stability The first challenge under quantitative easing is to select the criteria by which the Bank should assess the state of financial markets when conducting market operations. Some economists may argue that the quantitative easing framework requires the Bank to do no more than mechanically maintain the target balance for current account deposits every day. Unfortunately, this is not necessarily the case. Even when the Bank maintains the target balance, there are cases in which financial markets remain unstable. In these cases, ensuring financial market stability becomes most important. Then, the question is how to assess subtle changes in financial markets in light of maintaining their stability. In the money market, a tightening of the market will not necessarily be translated into a change in overnight interest rates, as these rates have been at around zero. For example, even when concern about financial system stability intensified in autumn 2002, the unsecured overnight call rate stayed at 0.001 percent. However, the repo rate on forward transactions, the yield on TBs with longer maturity, and the offer rate of the Bank’s funds-supplying operations all increased. Thus, when conducting market operations under such circumstances, it becomes important to judge how and to what extent the target balance for current account deposits should be achieved and various interest rates should be stabilized to ensure financial market stability. Moreover, the criteria for such judgment differ depending on the economic and financial conditions. Therefore, it has become very challenging to judge whether financial market stability is being maintained. B. How to evaluate the functioning of financial markets The second challenge is to maintain the functioning of financial markets. The word “call” in the money market derives from the phrase “money at call,” referring to the money available on demand. The amount outstanding of the call market decreased substantially after financial institutions felt that it would not be a problem to hold reserves far in excess of required reserves. Since the call market is the market in which participants lend and borrow short-term funds, the shrinking of the market implies a possibility that financial institutions may not be able to appropriately perform their banking activity. Therefore, the Bank inevitably has a serious concern about maintaining the functioning of the market. Lenders in the money market are reluctant to lend when market rates fall to virtually zero. Some regional banks have closed down their Tokyo branches. It has also been pointed out that, with liquidity in the call market declining as a result of less market participation, the market may not function effectively in funds procurement in times of emergency. Let me elaborate by illustrating these points with examples. The amount outstanding of the call market stood at 26.5 trillion yen at the end of February 2001 just before the introduction of quantitative easing. This amount fell by roughly 10 trillion yen in two years to 16.5 trillion yen at the end of February 2003. In addition to the introduction of quantitative easing, two factors among others are considered to have contributed to this reduction: one is the progress in consolidation among large financial institutions, and the other is the shift of deposits to large banks, which are usually on the funding side in the call market, as a result of the partial removal of blanket deposit insurance. Let us look at the contrast between call transactions involving overnight instruments and those involving term instruments. The amount outstanding of overnight transactions fell by some 20 percent, from 15.3 trillion yen at the end of February 2001 to 12.3 trillion yen at the end of February 2003. During the same period, the amount outstanding of transactions involving term instruments decreased from 11.2 trillion yen to 4.2 trillion yen, about one-third the level at the end of February 2001. Looking at the money market in terms of secured transactions, the total amount of bond gensaki and repo transactions hardly changed, remaining at around 18 trillion yen per business day during the same period. In fact, the amount outstanding of the secured call market now is even larger than before the introduction of quantitative easing. These facts suggest that the deterioration in the functioning of the money market is a phenomenon related not only to zero interest rates, but also to the extremely cautious attitude of market participants in taking on credit risks. I have just mentioned that in Japan, with short-term market rates declining virtually to zero, lenders become reluctant to lend, and that some regional banks have closed down their Tokyo branches. Similarly, in the United States, with the decline in the federal funds rates, there is heated discussion as to how far the interest rate on money management funds could decline relative to the returns on trust funds, and whether the decline in interest rates would interfere with the effective functioning of this major channel of funds intermediation. In essence, the discussions in the United States and Japan have something in common. The transaction and settlement of funds and securities as well as the assessment of credit risks always entail some fixed costs. And when short-term market rates approach zero, interest revenues may fall short of these costs. This tends to hinder the smooth implementation of various financial transactions. The relationship between the zero interest rate policy or quantitative easing and the market functioning requires a multifaceted examination. Thus, we would like to examine this issue from a broader perspective, not focusing narrowly just on the decline in the amount outstanding of the call market. IV. Outright purchase of long-term Japanese government bonds (JGBs) I commented earlier that one of the findings under quantitative easing was the need for the Bank to devise a variety of measures to provide ample funds. I have also just mentioned financial market stability and the deterioration of market functioning in the context of concern and challenges under quantitative easing. As an application of these discussions, I would now like to turn to the outright purchase of long-term JGBs by the Bank. Many central banks in major industrialized countries conduct monetary policy mainly through money market operations. It is only those in the United States and Japan that also conduct the outright purchase of long-term government bonds on a large scale. Even before the Bank began quantitative easing, it was effecting the outright purchase of long-term JGBs to provide liquidity for sustainable growth in line with the long-term trend increase in banknotes. When introducing quantitative easing, the Bank adopted a new framework for market operations according to which it would increase the amount of its outright purchase of long-term JGBs when it considered such an increase necessary for the smooth provision of liquidity, subject to the limitation that the outstanding amount of long-term JGBs effectively held by the Bank should be kept below the outstanding balance of banknotes issued. Based on such thinking, the Bank increased the amount of its outright purchase of long-term JGBs four times, from an initial 400 billion yen per month to the current 1.2 trillion yen per month. As a result, the Bank now holds more than 60 trillion yen of long-term JGBs, which accounts for about 60 percent of the monetary base. From the viewpoint of conducting market operations, the outright purchase of long-term JGBs, after the adoption of quantitative easing, has greatly contributed to achieving smoothly the target outstanding balance of current account deposits at the Bank. Undersubscription has not yet been repeated in the Bank’s market operations. However, should such cases arise again, it would be highly reassuring from a practical standpoint that the Bank has a means of securing a fixed amount of increase in the outstanding balance every month. Let me share with you some observations in relation to the significant increase in the outright purchase of long-term JGBs. The first observation is that we regard the outright purchase of long-term JGBs as a market operation that does not result in undersubscription. The question is why market participants take the trouble to bid on the Bank’s offers for the outright purchase of long-term JGBs when they can sell these bonds in the market. If asked, market participants give the following explanations to this question. First, the Bank requires market participants to bid actively against its offers, which is one of the Bank’s requirements for participation in market operations. Second, selling a large amount of long-term JGBs through the Bank’s outright purchase has a smaller effect on market prices than selling them in the market. And third, unlike short-term interest rates, interest rates on long-term JGBs have not yet reached zero. All these explanations appear plausible, but cannot be conclusive. The first explanation also applies to the Bank’s market operations for providing short-term funds, and these operations have actually experienced undersubscription. The second one may hold true to some extent. The third explanation that interest rates on long-term JGBs have not yet reached zero seems the most convincing. Whatever the explanations, from the viewpoint of providing ample funds and analyzing the effect on market prices of JGBs, we should pay more attention to the motivation of market participants for bidding on the Bank’s offers. The second observation is that the provision of funds dependent largely on the outright purchase of long-term JGBs has created concern in the Bank’s market operations. The Bank is currently conducting the outright purchase of long-term JGBs at a high rate of 1.2 trillion yen per month. Its balance sheets at the end of March 2003 revealed that the total of banknotes and current account deposits increased by about 6.5 trillion yen from a year earlier on the liability side. On the asset side, the outright purchase of long-term JGBs increased substantially, while money market operations decreased. In fact, the amount outstanding of long-term JGBs held by the Bank at the end of March 2003 increased by roughly 9 trillion yen from a year earlier, while the amount of funds provided by money market operations decreased by about 7 trillion yen. The difference of about 3 trillion yen between the increase in the total of banknotes and current account deposits and the amount of funds provided by the Bank is explained by the decrease in government excess funds, which were paid to the private sector. If the decrease in the volume of transactions in the money market were to cause difficulties to financial institutions in smoothly raising short-term funds, the Bank’s money market operations may provide an alternative means of securing smooth funding. In this context, a decrease in the Bank’s money market operations could be a destabilizing factor for financial markets. Even when there is a surplus of funds in the money market as a whole, money market rates could rise slightly due to a decrease in the supply of short-term funds by the Bank. If money market rates were sufficiently positive and there were no concern about financial system stability, the Bank would be free to use any assets for its operations, because a surplus or shortage of funds would ultimately be adjusted in the market. However, this is not currently the case in Japan. The outright purchase of long-term JGBs is a means to smoothly increase the outstanding balance of current account deposits, and has played a significant role in securing financial market stability. At the same time, such a purchase has engendered some unexpected side effects, such as fewer opportunities for the Bank to conduct money market operations, which has in some cases led to a slight rise in money market rates. Let me briefly touch upon the relationship between long-term interest rates and the outright purchase of long-term JGBs. Market participants often point out that the decline in long-term interest rates up until mid-June was partly due to the Bank’s outright purchase of long-term JGBs. The outright purchase of long-term JGBs of 1.2 trillion yen per month could facilitate the adjustment of dealers’ position in the market. And it appears easy to understand that when long-term interest rates fall for some reason, the existence of such a purchase would make dealers more bullish than otherwise. But, based on the observation that the yield on ten-year JGBs has been fluctuating between 0.4 percent and 1.4 percent for the past month or so, the relationship between long-term interest rates and the outright purchase of long-term JGBs may not be as simple as it appears. V. Relationship between the Bank and its counterparties in market operations A. Findings in the area of supply and demand for funds The number of counterparties in the Bank’s market operations is close to 150 at present. When financial institutions become eligible as a counterparty in the Bank’s market operations, they are requested to bid actively against the Bank’s offers for market operations, process transactions accurately and swiftly, and provide the Bank with market information and analyses useful in conducting monetary policy. In addition, the Bank recently began considering the amount of successful bids in the previous year as a criterion for the selection of counterparties for market operations in the following year. These requests are being made because the central bank needs to effect monetary operations through the smooth provision of funds. Also, the eligibility criteria for counterparties must be as transparent as possible since it is impossible to conduct transactions with all market participants. Having said all this, let me note that the Bank and its counterparties in market operations are important to each other as trading parties in financial markets. In my opinion, the term “trading party” has two significant implications. The first implication is that both the Bank and its counterparties aim to achieve their respective goals through the transactions in funds and JGBs. The Bank controls the amount of money in the market or the level of interest rates, while the Bank’s counterparties adjust their position in funds and JGB holdings and improve profitability. Let me take the example of undersubscription. Undersubscription in the Bank’s funds-supplying operations occurs in the following cases: financial institutions have already secured enough funds to satisfy reserve requirements for the period; they have managed to raise sufficient funds in the market to cover themselves over interim and fiscal year-end book closings; and, they can sell any TBs or FBs or CP they hold to end-investors without difficulties. Thus, undersubscription occurs when counterparties do not need the Bank’s market operations. This implies that, in order to smoothly conduct market operations, the Bank must understand and satisfy its counterparties’ need for market operations. It also means that the Bank must devise market operations that create such a need. This rather obvious point was not clearly recognized under the past framework where interest rates were the target. In that framework, the Bank was rather passive. It provided funds when interest rates rose higher than the target, and absorbed funds when interest rates fell below the target. In contrast, under the present framework where funds are amply provided to achieve the target balance of current account deposits, the Bank has been under pressure to increase funds held in current account deposits in line with the target. This has increased more than ever our awareness of the significance of transactions in financial markets. For example, if for some reason we observe a tightening of the conditions in a certain market in the money markets, the Financial Markets Department of the Bank will consider providing funds to that market. Given its responsibility to ensure market stability, the provision of funds in such a circumstance would clearly be an appropriate decision. Looking at this differently, a tightening of market conditions suggests that there is a demand for funds in that particular market. As the Bank is trying to maintain the balance of current account deposits at unprecedentedly high levels, it should take advantage of such a demand for the smooth provision of funds. B. Exchange of information through market operations The second implication of a trading party is that the Bank and its counterparties exchange information. As is suggested by the term “market intelligence,” we may be able to obtain a variety of information and knowledge by carefully monitoring market movements. This is the reason why we request the counterparties to provide us with market information and analyses useful in conducting monetary policy. We conduct market operations daily, and the results of these operations are a very important source of information for us in gaining insight into the counterparties’ assessment of our offers. Of course, this is not a one-way flow of information. Presumably the results of market operations offer the counterparties valuable information on overall market conditions, including insight into the action of other participating players. It may perhaps seem counterintuitive, but the results of market operations have come to play an increasingly important role, given the reduced number of transactions taking place in the money market. I would like to add that, as players in the same market, the Bank and its counterparties in market operations should exchange information and ideas on how to improve the market infrastructure and make the market function more smoothly. Concluding remarks My talk today has focused on technical aspects of market operations conducted under quantitative easing. It includes a number of issues that are of fundamental importance when thinking about the conduct of monetary policy. Market functioning, which I touched upon, is one of these important issues. We at the Bank will continue to exert every effort to enhance the transmission mechanism of monetary policy, while ensuring the smooth provision of funds within the framework of quantitative easing. We are closely monitoring the market for even the slightest change through various channels, including daily market operations. However, we believe it is major market players like yourselves who possess the most reliable information and insight into market conditions through direct dealing with a variety of customers. As we are now in uncharted territory for monetary policy, we appreciate your sharing with us your insight so that we can together navigate these waters safely.
|
bank of japan
| 2,003 | 8 |
Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting with business people in Nagoya, 3 September 2003.
|
Toshihiko Fukui: Economic activity and recent financial developments in Japan Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting with business people in Nagoya, 3 September 2003. * * * I. Current situation of the Japanese economy and policy focuses A. Current conditions Economic activity as a whole has been flat since February this year, as has been described in the Bank of Japan's Monthly Report of Recent Economic and Financial Developments. Recently, however, we have gradually begun to observe some signs of improvement. For example, machinery orders and the second-quarter GDP have turned out to be better than anticipated, and stock prices continue to rise. Such domestic developments should be understood in a global context, as economic globalization progresses and the Japanese economy deepens its ties with overseas economies even further. As you all know, during the first half of this year, the world economy was mired in the adjustment process that followed the IT boom of the 1990s, which came to an end in the fall of 2000. Furthermore, uncertainty about the economic outlook was amplified by the war in Iraq and severe acute respiratory syndrome (SARS) in East Asia. Uncertainty about the financial system problem in Japan persisted, and the fall in stock prices, including bank shares, became rather marked. Fortunately, these uncertainties have decreased since the early summer. The actual operation of the war in Iraq concluded relatively early, and the effects of SARS have been less than many people feared. We have even begun to observe some signs of recovery in the demand for IT-related goods, although we have not yet fully confirmed the extent of their adjustment. In these circumstances, pessimistic views on the economic outlook have receded, and an increasing number of people have become confident about a rebound of world economic growth from the second half of this year. For example, in the United States the so-called central tendency of projected real GDP growth for 2003 among members of the Federal Open Market Committee (FOMC) has been revised upward, to 2.5 to 2.75 percent. This projection implies that real GDP growth would rise to the 3 percent level for the second half of 2003, from around 2 percent for the first half. For 2004, the FOMC members predict further acceleration of real GDP growth to 3.75 to 4.75 percent. In Asia, China is most likely to return to a stable growth path after overcoming the negative impact of SARS. With higher dependence on information technologies, the NIEs will expand production as the global demand for IT-related goods recovers, in the United States in particular. There is little likelihood that Europe will be a drag on the global economic recovery, although its economic outlook still seems rather unclear. Given these overseas developments, the Japanese economy is expected to gradually increase exports and production. In addition to the possible increase in external demand, domestic demand also shows some favorable signs. Planned business fixed investment for fiscal 2003 at the moment is the largest since fiscal 2000, against the backdrop of a substantial increase in corporate profits. Moreover, we see a slightly favorable change in direction in the job and income situation of the household sector, although the situation remains severe. B. Policy focuses Such a path for Japan's economic recovery has been within our standard scenario since this spring, and it appears increasingly likely that this scenario will be realized. However, questions remain as to the strength and breadth of the economic recovery once it is achieved, as well as the risk that the standard scenario may not be realized. In tackling these questions, we should keep three points in focus. The first focus is the outlook for overseas economies, the U.S. economy in particular. In this regard, we should also pay attention to the global demand for IT-related goods. Although the U.S. economy is on a mild recovery path led by private consumption, business fixed investment and production generally remain weak, and the labor market condition continues to be severe. With residual adjustment pressure after the bursting of the IT bubble, firms are still rather restrained in their business expansion. In spite of these subdued conditions, we have recently begun to see changes and hopes for improvement. Global demand for PCs, semiconductors, and other IT-related goods is increasing. People strongly hope that a substantial tax reduction and monetary easing will work to accelerate recovery. We will monitor how these changes and hopes are translated into improving business activity and the labor market condition in the United States, and subsequently whether such an improvement has a positive impact on the world economy. The second focus is the financial market in Japan. Stock prices rebounded from around May, and the Nikkei 225 Stock Average regained the 10,000 level after August 18 as views about the economic outlook turned slightly more favorable. Long-term interest rates also rose. In my view, these movements could be interpreted as the correction of overly pessimistic market expectations in the first half of 2003 amid various uncertainties. Fundamentally, stock prices and long-term interest rates reflect market views about the economic outlook, so we should strive to correctly understand these views. Having said this, it is also true that markets can often move irregularly in response to a variety of factors. For example, in the United States, the 10-year long-term interest rate rebounded to the mid-4 percent level after falling to around 3 percent in June. As factors behind this gyration, many point to the deterioration of the fiscal balance and the hedging activity of investors in mortgage securities, in addition to changing views about the economic outlook. In Japan, people have already begun to talk about the possibility of overshooting of long-term interest rates, which cannot be justified by economic fundamentals. We will closely monitor financial market developments, including the possibility of large swings in long-term interest rates due to factors other than economic fundamentals. The third focus is the extent of economic recovery spurred by exports and production amid the persisting problem of excess debt and labor. The problem of excess debt differs from firm to firm, and industry to industry, but broadly speaking, it is largely a problem for the nonmanufacturing industry. For example, the ratio of net debt to sales has been declining significantly for the past ten years in the manufacturing industry, but remains high in the nonmanufacturing industry due to the delay in adjustment. The nonmanufacturing industry tends to retain various inefficiencies mainly because it has been traditionally less exposed to international competition than the manufacturing industry. The manufacturing industry is the driving force behind the economic recovery if it is led by exports and production. But, to achieve sustainable growth, it is critically important whether such an initial recovery will lead to the dynamic and forward-looking improvement of the nonmanufacturing industry. The problem of excess labor is important when we judge whether the recovery of the corporate sector might lead to an increase in private consumption through a rise in income. The Tankan (Short-Term Economic Survey of Enterprises in Japan) has been showing a consistent pattern of excess labor for both the manufacturing and nonmanufacturing industry since the bursting of the bubble economy. Recent labor statistics also show a continued decline in regular employment. These data suggest persistent pressure for labor market adjustment and continued severe conditions for employment and income. Looking closely at the latest statistics, it should be noted that we have begun to observe some signs of favorable changes in the labor market. The level of employment ceases to fall if part-time workers are included, and the decline in wages is bottoming out if bonus payments for the summer are taken into account. II. Conduct of monetary policy In these economic conditions, the Bank has been conducting a quantitative easing policy, maintaining financial market stability and strengthening the momentum for recovery by flexibly providing ample liquidity. Since I became Governor, the Bank has raised the quantitative target for the outstanding balance of current accounts held at the Bank twice, in April and May. Faced with a number of uncertainties, including the war in Iraq, SARS, stock prices, exchange rates, and the problem related to Resona Bank since this spring, we have taken a preemptive approach to monetary policy so that these uncertainties do not jeopardize the not very robust foundation for economic recovery. The Bank has also made a strong commitment to continue the current monetary easing until the year-on-year increase in the consumer price index (CPI) becomes stably zero or above. This commitment strengthens the policy effect on interest rate stability, as participants in financial markets can anticipate monetary easing as long as the year-on-year increase in the CPI remains negative. Furthermore, the Bank has been strengthening the transmission mechanism of monetary policy so that the effect of monetary easing permeates through the economy. As part of such efforts, it began purchasing asset-backed securities in August. Underlying assets included not only receivables but also lease and loan assets, which we hope facilitate the funding of small to medium-sized firms. It was quite unusual for the central bank to directly assume the credit risk of the private sector, but we thought such a measure was necessary in light of the prevailing economic conditions, and the state of the financial system and markets. The Bank has been taking necessary measures, without undue regard for precedent, to return to sustainable growth and overcome deflation, and it will continue to do so. We should also emphasize stronger global linkage when we examine the problem of deflation, in the same way as economic activity. Inflation has been declining globally, due mainly to the appropriate conduct of monetary policy and the increasing penetration of emerging countries into market economies. This phenomenon is termed “global disinflation.” Even if the world economy recovers, there is a strong possibility that inflation will stay at a relatively low level, while the growth rate will increase. In fact, various private-sector forecasts show that for 2004 growth will be higher compared to 2003, and inflation will remain under 2 percent in the United States, Europe, and Asia. In such circumstances, central banks have been implementing monetary policy with more attention to the risk of deflation. For example, the Federal Reserve Board announced in its FOMC statement in August that “policy accommodation can be maintained for a considerable period.” Japan is suffering from deflation, a worse problem than disinflation. This makes a stronger case for the Bank to continue implementing an easy monetary policy, compared to other central banks. III. Revitalization of the corporate sector Stronger global linkage has some bearing on the commonly observed facts that business sentiment has been slow to improve and fixed investment has not become as active as anticipated in various countries under monetary conditions that are easier than in the comparable stage of past business cycles. This partly reflects residual pressure for adjustment. But it also reflects more intensified competition in the corporate sector together with the progress in globalization, as well as increasing difficulties firms face in sustaining pricing power under the new conditions in which prices are being determined. We may be approaching a stage where corporate profits can only be increased by creating new value-added goods and services, and the investment opportunities for such creation are becoming more difficult to find. For example, in Japan, the corporate management and economic framework established during the high-growth period are so firmly embedded that it is a very difficult and challenging task to transform them. In this regard, I have been advocating three directions for firms to pursue with a view to building a new framework for the Japanese economy. The first is to boost their competitiveness and generate new consumer demand by creating new value-added goods and services. The second is to increase their business activity in the expanding Chinese and other Asian markets, and further deepen economic interdependence with them. And the third is to address global challenges such as the development of sustainable energy sources and environmental protection. If firms can make positive contributions in these directions, they will certainly be able to expand the frontier of innovation to revitalize the Japanese economy. I hope that such efforts will place the Japanese economy in a unique position in terms of the sustainable development of the world economy. IV. Current situation of the financial system and challenges The Japanese financial system, although still facing severe conditions as a whole, is steadily moving toward restoring its effective functioning. Since last fall, there has been a growing recognition among financial institutions and related parties that an appropriate evaluation of the economic value of nonperforming loans (NPLs), and higher provisioning and more aggressive write-offs of these loans based on such an evaluation, are important in accelerating the disposal of NPLs. Further efforts have been made in this direction. In fiscal 2002, Japanese banks recorded a large net loss for the second consecutive year. This result clearly reflected the severe conditions faced by the Japanese financial system. At the same time, it signified the aggressive disposal of NPLs as shown by the substantial decrease in NPLs outstanding at major banks. The time has now come to move to the final stage to restore the effective functioning of the financial system, keeping in mind the complete removal of blanket deposit protection scheduled in April 2005. This removal, in my view, should not be perceived simply as a change in the type of coverage of deposit insurance protection. Instead, it should be recognized as a turning point for financial institutions in the reform of their management. Protection has been provided as a temporary buffer to avoid potential confusion. Following the complete removal, financial institutions must pursue a dynamic management strategy based on their own judgment. To this end, it is the financial institutions themselves, not the regulatory authorities, that should take the initiative in dealing with NPLs. Moreover, they should redouble their efforts to strengthen their earnings power besides accelerating the disposal of NPLs. V. Disposal of NPLs and corporate revitalization In addition to the appropriate evaluation, higher provisioning, and more aggressive write-offs in the disposal of NPLs, increasing attention is being paid to the importance of corporate revitalization from the viewpoint of promoting the reform of industrial structure. The Industrial Revitalization Corporation of Japan (IRCJ), which began operation in May this year, recently decided to support four firms. The IRCJ will subsequently purchase the loan assets of these four firms from lenders other than their main bank, decide on a restructuring plan and then implement it. Individual financial institutions, major banks in particular, are establishing a subsidiary specializing in corporate revitalization. Moreover, we observe an increasing number of cases in which financial institutions set up an internal section specifically devoted to corporate revitalization, and form an alliance with outside experts like lawyers and certified accountants. The success of corporate revitalization requires a speedy and decisive response on the part of both firms and financial institutions. Some firms with useful technology and expertise find it difficult to improve their business performance because of the large financial legacy from the past. Often these firms, in collaboration with financial institutions, can solve their problem by boldly eliminating unprofitable businesses and concentrating their managerial resources on core businesses. In this regard, it is mutually beneficial for both firms and financial institutions to promote a sufficient dialogue and reach a shared recognition about the present and future of the firms' management. To smoothly promote corporate revitalization, we need to improve and expand the market for loan asset liquidation, including NPLs. The expansion would help banks take NPLs off their balance sheets, but it would also invite a variety of investors with diversified risk preferences and expertise into the corporate revitalization business. If the market expands and prices for loan assets are formed efficiently, these prices will indicate the market's evaluation of corporate revitalization. VI. Earnings power of financial institutions and a stronger capital position When the effective functioning of the financial system is finally restored, major banks will enjoy strong international competitiveness, and local banks will be able to provide new financial services for regional development. These benefits will only be possible with the strengthening of earnings power. To strengthen earnings power, individual financial institutions must form their own judgments on a number of issues. For example, how should they change their traditional practice for transactions? What kind of new businesses should they develop? How should they reorganize their business model? The Bank would like to support the efforts of financial institutions toward this end by providing appropriate advice through on-site examinations and daily monitoring. In this process, financial institutions must ask themselves whether their capital position is sufficient to pursue a new business model, and if not, they of course need to boost their capital position. Needless to say, financial institutions should raise capital in the markets. In the limited time before the complete removal of blanket deposit protection, however, some may not be able to do so sufficiently. In this case, fundamentally there are two options: either reducing their business scope in line with their existing capital position or accepting the public injection of capital. I think the latter option is desirable under the current conditions in Japan. In other words, we should facilitate the process of restoring the effective functioning of the financial system through a new system of capital injection, which differs from the existing system that seeks to preempt crises. Conclusion A number of developments indicate that the Japanese economy is moving in a desirable direction, even though it continues to face severe conditions. I believe it is the competitiveness of the private sector, both firms and financial institutions with progressive technology and expertise, that will bring about the reemergence of a truly strong Japanese economy. The Bank stands ready to provide full support to the private sector's efforts toward this end by maintaining an easy monetary policy.
|
bank of japan
| 2,003 | 9 |
Bank of Japan, 16 September 2003.
|
Bank of Japan’s September report of recent economic and financial developments1 Bank of Japan, 16 September 2003. * The Bank’s view * * Economic activity still continues to be virtually flat as a whole, although signs of improvement have been observed in such areas as the environment for exports. With regard to final demand, business fixed investment is recovering gradually. Meanwhile, private consumption continues to be weak, housing investment remains sluggish, and public investment is declining. Net exports are virtually flat. Industrial production continues to be basically level in response to these developments in final demand, and corporate profits are on a moderate uptrend. As for the employment situation, although the number of regular employees continues to decline, the total number of employees including both regular and non-regular employees has stopped falling. The pace of decline in wages has also slowed, and thus the decline in household income is gradually coming to a halt. However, the unemployment rate continues to be high, and hence the employment and income situation of households overall still remains severe. Turning to the economic outlook, with respect to overseas economies, the likelihood is gradually increasing that the growth rate of the U.S. economy will accelerate and that the East Asian economies as a whole will resume a growth trend. Hence, exports and industrial production are likely to turn up gradually. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time since the employment and income situation is unlikely to improve markedly. Meanwhile, the recovery trend in business fixed investment is expected to become clearer in the period ahead, mainly in large manufacturing firms, whose investment has been thus far significantly restrained despite the recovery in their profits. However, as long as the pace of increase in exports and production continues to be gradual, the recovery in business fixed investment is likely to remain moderate. Overall, with the recovery in overseas economies, the uptrend in exports and production will resume gradually, which in turn will initiate the momentum for an economic recovery in Japan. However, a selfsustaining recovery in domestic demand is unlikely to gain momentum for some time due to persisting downward pressures from structural adjustments, such as firms’ reduction of excess debt and labor costs. In addition, as for the outlook for the environment for exports, there still remains uncertainty overall, as the employment situation in the United States continues to be sluggish and the pace of recovery in some East Asian economies such as South Korea is slow. On the domestic side, continued attention should be paid to the developments in financial markets such as the volatile movements in long-term interest rates. On the price front, import prices have recently stopped declining, reflecting the uptrend in international commodity prices, especially crude oil prices. Under these circumstances, domestic corporate goods prices are more or less flat, which is also partly due to the rise in tobacco tax. Meanwhile, corporate services prices continue a year-on-year decrease of slightly over 1 percent. Consumer prices also continue to decline, but the year-on-year rate of decrease has diminished to 0.2 percent due to special factors, such as the rise in medical treatment costs in April in line with the reform of the medical insurance system and the rise in tobacco tax in July. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on September 11 and 12, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on September 11 and 12, 2003 as the basis for monetary policy decisions. Looking at the conditions influencing price developments, the outlook for import prices is unclear at present because it largely depends on developments in the foreign exchange rate. Turning to the domestic side, the basic conditions surrounding prices, such as the supply-demand balance in the macroeconomy, technological innovations, streamlining of distribution channels, and pricing strategies of firms, are unlikely to change significantly for the time being. Under these circumstances, domestic corporate goods prices are likely to remain more or less flat for the time being. Consumer prices are basically projected to continue falling at the current moderate pace on a year-on-year basis, although there are possibilities that the rate of decline may temporarily diminish further depending on future special factors. As for the financial environment, the outstanding balance of current accounts at the Bank of Japan is moving at the 29-30 trillion yen level, as the Bank has been providing ample liquidity. Under these circumstances, the overnight call rate continues to move at around zero percent. Interest rates on term instruments remain steady. Meanwhile, interest rates on Euroyen futures are recently declining gradually after rising noticeably from late August. Yields on long-term government bonds rose rapidly reflecting an improved outlook for Japan’s economy, and are recently moving in the range of 1.4-1.6 percent. Meanwhile, yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are widening slightly after the rebound in long-term interest rates. Stock prices have been rising sharply as foreign investors continue to invest in Japanese stocks. The Nikkei 225 Stock Average is recently moving at around 10,500 yen. In the foreign exchange market, the yen appreciated as foreign investors continued to invest in Japanese stocks. The yen is currently traded in the range of 116-118 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks, while they continue to be more active in extending loans to blue-chip companies. Their lending attitudes seem to be becoming slightly more accommodative in areas such as terms and conditions for lending. Meanwhile, the lending attitudes of financial institutions as perceived by firms in general are improving somewhat, although those perceived by small firms remain severe. In the corporate bond and CP markets, the issuance spreads remain steady and the favorable issuing environment is virtually unchanged on the whole, especially for firms with high credit ratings, although some firms seem to be taking a wait-and-see stance in the corporate bond issuance market in view of the rise in long-term interest rates. Credit demand in the private sector continues to follow a downtrend mainly because firms’ cash flow remains above business fixed investment and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline at around 2 percent on a year-on-year basis. The amount outstanding of corporate bonds issued is around the previous year’s level. Meanwhile, according to business surveys, financial positions of firms in general are improving slightly, although those of small firms remain severe. The year-on-year growth rate of the monetary base continues to be around 20 percent. The year-onyear growth rate of the money stock rose slightly and is at around 2 percent. Funding costs for firms continue to be at extremely low levels on the whole. Against the above background, the financial developments are summarized as follows. Money market conditions continue to be extremely easy. Meanwhile, long-term interest rates and stock prices are rising. Growth rates of the money stock and the monetary base relative to economic activity remain high. In corporate finance, the favorable issuing environment of corporate bonds and CP is virtually unchanged on the whole, especially for firms with low credit risks. However, there has been no significant change in the severity of fund-raising environment for firms, particularly with firms with high credit risks. Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 9 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Asian Affairs Research Council, Tokyo, 26 September 2003.
|
Toshihiko Fukui: The Japanese economy and Asia Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Asian Affairs Research Council, Tokyo, 26 September 2003. * * * It is a great pleasure to have this opportunity to address the Asian Affairs Research Council. Today, after touching briefly on the current state of the Japanese economy, I would like to share with you my thinking on the following topics: the deepening interdependence between Japan and the rest of East Asia under globalization; the implications of this deepening interdependence; and the improvement of financial and capital markets in the region as a key factor for East Asia's economic growth. Before I start, let me note that in today's remarks I focus on East Asia, primarily the newly industrializing economies (NIEs), ASEAN, and China, not Asia in general, which would include India and other South Asian countries. I. Current State of the Japanese Economy In the Bank of Japan's semiannual economic outlook published in April 2003, the standard scenario was that as exports and production increased with the recovery of overseas economies, a selfsustaining recovery would gradually gain momentum in the second half of fiscal 2003. There were a number of uncertainties in this standard scenario. In fact, since spring 2003, the uncertainty about the economic outlook was amplified against the background of the war in Iraq, severe acute respiratory syndrome (SARS), volatile movements in the stock and foreign exchange markets, and persistent concern about financial system stability. As a result, an excessively pessimistic view on the economic outlook seemed to have spread toward the summer. Such an excessively pessimistic view, however, has been receding since the summer. Domestic demand has begun to show some signs of improvement. Corporate profits continue to increase, and the ratio of current profits to sales for this fiscal year is likely to reach the highest level since the collapse of the bubble economy. Judging from various survey results and in light of recent machinery orders, a leading indicator, the trend of recovery in business spending, by large manufacturing companies in particular, is anticipated to become more evident. Despite continuing weakness in private consumption as shown in sales statistics, we have also begun to observe some favorable signs of change on the employment and income front. Wages and employment figures, including those for part-time workers, have stopped falling. Overseas economies appear to be showing signs of gradual improvement. The U.S. economy is likely to pick up as private consumption remains firm partly due to the large tax cuts, and orders and shipments of IT-related goods are increasing. East Asian economies are also returning to a recovery path after a temporary decline in private consumption caused by the spread of SARS in the spring. A rebound in global IT demand, especially in the United States, seems to have given an additional impetus to the East Asian economies, which are heavily dependent on IT-related industries. Against this favorable background to overseas economies, Japan's exports are likely to return to a moderate recovery path in the second half of this fiscal year. The Nikkei 225 Stock Average has regained the 10,000 yen level since the middle of August, reflecting improved corporate profits and better economic prospects. In view of these developments, there is an increasing probability that the Bank's standard scenario released in April, a virtuous cycle of recovery in which an increase in exports leads to an increase in production and profits, will materialize. Yet, considering structural adjustment pressure stemming from excess debt and labor, uncertainty still exists with respect to the strength and breadth of the expected recovery. Hong Kong, Korea, Singapore, and Taiwan. Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. By maintaining quantitative easing, the Bank has strived to ensure that economic recovery continues, thereby overcoming deflation and putting the economy back on a sustainable growth path. In this regard, I would like to emphasize that the Bank has made a strong commitment to continuing quantitative easing until the year-on-year increase in the consumer price index (CPI) becomes stably zero or above. So far, I have discussed the cyclical problem of the Japanese economy, where economic activity remains below its potential due to lack of demand. But, the Japanese economy also suffers from a longer-term problem of the potential growth rate being on a downward trend amid such changes as the IT revolution, economic globalization, and an aging society. Although it is not yet clear how the potential growth rate can be raised, I believe that the keys to higher growth can be found in such traditional concepts as competition, the division of labor, free trade, education, and the capital markets. The deepening of interdependence between the Japanese and other Asian economies should be examined in this context. More than 200 years ago, Adam Smith emphasized the advantage of the division of labor, saying that "the division of labor is limited by the extent of the market." The expansion of an economy or its market size, for example, from a village to a city, or from a city to a nation, promotes the division of labor and increases production capacity. At the same time, market expansion and the associated increase in purchasing power induce new entry into the market, which leads to more intensified competition and higher efficiency. This mechanism applies equally to economic globalization. The division of labor through international trade and the efficient use of managerial resources through direct investment are indispensable for economic development. II. Interdependence between Japan and the Rest of East Asia East Asian economies are the high-growth center of the world, with an average annual growth rate of more than 7 percent during the past ten years, which is significantly higher than that of industrialized countries. The NIEs first achieved high growth in the second half of the 1970s, closely following Japan. Then, from the mid-1980s, East Asia as a whole exhibited remarkable economic growth as the ASEAN and Chinese economies joined the advance. The mid-1980s were the period when Japanese companies took major steps toward globalization. At that time, many of them struggled to find new opportunities in their overseas business strategies such as building factories abroad and undertaking foreign direct investment to cope with the rapid appreciation of the yen and intensifying trade friction with the United States. In expanding into NIEs, Japanese companies aimed at substantially reducing production costs, and maintaining or enhancing their competitiveness by taking advantage of the inexpensive and abundant local labor force in their processing and assembly bases. These activities of Japanese companies contributed significantly to the creation of employment opportunities in East Asia as well as the region's economic growth. In the 1990s, companies from all over the world, including Europe and the United States, boosted their direct investment in East Asia. They first invested in the ASEAN countries, and then expanded to China. In terms of industries, IT-related companies made significant inroads into the region as the IT revolution progressed. Although direct investment was temporarily halted by the Asian currency crisis in 1997-98, it resumed as regional growth regained momentum. Recently, Japanese companies, not only manufacturing but also nonmanufacturing companies such as retailers, distributors, trading houses, and financial institutions, are actively engaged in businesses in East Asia, particularly those related to China. These businesses include not only the relocation of labor-intensive production but also the expansion of new business aiming at technology transfer, marketing, and sales enhancement. Such business expansion promotes the further globalization of Japanese companies. These developments are reflected in trade. For example, the total amount of trade by the NIEs, the four major countries of ASEAN, and China increased 2.3 times from 1991 to 2002. And, East Asia's share in the world trade increased from 14 percent to 17 percent over the same time span, exceeding Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book 1, Chapter 3, 1776. Indonesia, Malaysia, the Philippines, and Thailand. that of the United States. The salient feature of East Asia's trade expansion is the rise in the trade of IT-related goods. In fact, IT-related goods account for about 30 percent of the exports of East Asian economies, which is higher than the figure for traditional export items such as clothing. In terms of the share in the world trade of IT-related goods, Asia, excluding Japan, accounts for more than 30 percent, which is higher than that for Japan, the United States, and Europe. East Asia plays an important role as the global supplier of IT-related goods. Trade between Japan and the rest of East Asia is also on an upward trend. From 1991 to 2002, exports from Japan to the rest of East Asia increased 1.6 times, and imports from the rest of East Asia to Japan 1.9 times. In particular, trade with China posted a significant increase. Both exports to and imports from China rose more than fourfold from 1991 to 2002. In terms of Japan's exports and imports classified by region, the rest of East Asia now accounts for more than 40 percent, up from about 30 percent in the first half of the 1990s, which is significantly higher than that for the United States and the European Union. With the increasing trade volume, the trade items between Japan and the rest of East Asia have changed. A significant part of exports from Japan consists of capital goods and intermediate goods shipped to production and processing bases in East Asia. Among such exports, those of IT-related electronic parts to China have recently displayed a marked increase. A large part of imports from the rest of East Asia to Japan used to consist of labor-intensive goods, including clothing and light manufactured products. But, lately, imports of these labor-intensive goods have been leveling off, and instead those of high value-added goods such as IT-related and capital goods have been on an increasing trend. The rise in IT-related goods in both exports and imports indicates that Japan and the rest of East Asia are in the process of establishing a vertical international division of labor under ongoing economic globalization. III. Implications of a Deeper Interdependent Relationship As I mentioned, Japanese companies need to open themselves further to global competition and transform themselves to enhance their vitality under globalization. Given that Japan and the rest of East Asia have already established significant economic interdependence, I would like to consider further the implications of deeper regional interdependence in the context of the transformation of Japanese companies. Under globalization, countries and regions naturally deepen their economic linkages with each other. With the advance in transportation and IT, it is a global economic trend that people, goods, money, and information move freely across borders, and that countries and regions deepen their mutual dependence by promoting the international division of labor based on their comparative advantages. In light of this trend, it is very important for Japan and the rest of East Asia to further deepen the already established interdependence, for the following reasons. The first is geographical proximity. Simply put, Japan adjoins the rest of East Asia, and vice versa. Despite the significant advances in transportation, geographical proximity and a small time difference still offer substantial advantages in terms of the movement of people and goods. The IT revolution enables inventory control without actually having to carry a large amount of inventories. In addition, the prompt and timely delivery of goods from suppliers to customers becomes important in responding swiftly to changes in demand. The merits of such geographical proximity have been shown clearly in Europe as well as North and South Americas, where mutual dependence with neighboring countries is first strengthened. The second is the large economic size of East Asia, excluding Japan. In fact, in terms of nominal GDP, it is about 70 percent of Japan's economy as measured in current foreign exchange rates. The economic size of Latin America is a little less than 20 percent of the United States, and that of Eastern Europe is less than 10 percent of the Euro area. Such a comparison clearly shows the huge advantage for Japan to have an enormous and fast-growing market such as East Asia as a neighbor. A further expansion of the markets in East Asia is expected, especially China. Currently in China, a rise in income is enlarging consumer demand. Moreover, we now observe an increase in investment demand for enhancing production and product development capacity as well as construction investment demand related to the Beijing Olympic Games and the Shanghai Exposition. The third is the complementary nature of the relationship between Japan and the rest of East Asia. East Asia is endowed with an abundant labor force that is diligent and relatively inexpensive. It is thus quite an effective strategy for Japanese companies shouldering high labor costs to make use of such a labor force to strengthen their competitiveness. Accordingly, many Japanese manufacturing firms have moved their production and processing bases to East Asia which has been welcomed by the host countries as these moves create employment and increase income. Furthermore, they look forward to the transfer from Japan of production and product development techniques as well as managerial expertise that will help them move to a more sophisticated industrial structure. It is clear that all these reasons lead naturally to the formation of interdependent relationships between Japan and the rest of East Asia. In fact, I see it as an encouraging trend that momentum is growing among Japanese companies to seize a variety of new and challenging business opportunities in East Asia, in China in particular. Having said this, there is concern in Japan that the expansion of Japanese companies to East Asia engenders a hollowing-out of Japanese industry, which adversely affects domestic production and employment. There exists a deeply embedded view that rapid growth in East Asia, especially in China, may constitute a threat to the Japanese economy. However, faced with intensifying global competition, due partly to the increased consolidation of East Asia in the global economy, Japanese companies must strive to increase their ability to create high value-added goods and services, while raising productivity and correcting their high cost structure. Not only companies expanding their overseas operations, but also those remaining in Japan, need to enhance their competitiveness through innovation and the reallocation of resources. In addition to people, such intangible assets as information, knowledge, and expertise move freely across borders. By effectively utilizing these assets and human resources, Japanese companies should be able to generate a self-sustained virtuous cycle of creating high value-added goods and services in Japan. As economic globalization progresses, deeper interdependence between Japan and the rest of East Asia is of great significance. One of the driving forces behind this interdependence is the prevalence of free trade agreements (FTAs) in East Asia. FTAs expand trade and direct investment by eliminating trade barriers among the parties to such agreements. Although recognizing such merits, we should bear in mind the exclusiveness of FTAs to parties outside the agreements. Thus, in the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003" announced in June 2003, the Japanese government emphasizes the need to promote the current round of World Trade Organization (WTO) negotiations as well as FTAs. IV. Improvement of Financial and Capital Markets in East Asia With the deeper interdependence between Japan and the rest of East Asia through business and trade, there is a growing need to improve the financial infrastructure to underpin these activities. Under globalization, money travels across borders much faster than people and goods do. To take advantage of the market mechanisms and enhance competitiveness, developing convenient and efficient financial and capital markets is indispensable. The importance of a healthy financial infrastructure is one of the valuable lessons learned from the Asian currency crisis of 1997-98. During the crisis, companies in East Asia suddenly faced difficulties in their funding as they relied heavily on U.S. dollar-denominated short-term debt. Concerns about financial stability developed into a serious economic crisis. As a result, many economies in the region suffered negative economic growth. With this experience in mind, after the crisis East Asian governments reformed the banking sector, and companies in the region switched their funding to longterm debt and direct investment as well as to domestic currency-denominated debt. Although these efforts have been gradually bearing fruit, it is vital to further develop financial and capital markets to respond to growing credit demand and achieve the efficient allocation of resources. To this end, it is useful to strengthen the functioning of bond markets in East Asia. Deep and liquid bond markets can satisfy various funding and investment needs in the region. Furthermore, the fair assessment of credit risk in bond markets contributes greatly to strengthening the financial intermediation function of the banking system. Japan has made a variety of contributions to the development of Asian bond markets. I will return to this subject later when I discuss the role of the Bank of Japan. Strengthening the functioning of Japan's financial system also helps to stimulate and diversify capital flows in East Asia. Recently, however, loans by Japanese banks to the region have been declining, and companies in East Asia do not issue a large number of bonds in the samurai bond market. To improve the situation, it is necessary to revitalize the Japanese securities market, and at the same time, to strengthen the intermediation function of the Japanese financial institutions. Let me touch briefly upon the foreign exchange rate system in East Asia. For companies vigorously engaged in business in East Asia, the stability of East Asian currencies is a prerequisite for expansion. As I have often stated elsewhere, foreign exchange rates should be determined in a stable manner reflecting economic fundamentals. In an open economy, we cannot simultaneously achieve a fixed foreign exchange rate, free capital flows, and independent monetary policy. For example, many industrialized countries, including Japan, enjoy free capital flows and independent monetary policy at the expense of having floating foreign exchange rates. On the other hand, China seeks a de facto fixed foreign exchange rate and independent monetary policy at the expense of regulated capital flows. Although China is gradually easing regulations on capital outflows, the deregulation of capital flows may cause instability if unaccompanied by reform of the domestic banking system, as the experience of the Asian currency crisis shows clearly. One orthodox way to achieve sustainable economic growth is to gradually remove capital controls and make the foreign exchange rate system more flexible in tandem with reform of the domestic banking system and strengthening of the financial system. V. Role of the Bank of Japan Finally, let me discuss the role of the Bank of Japan in the context of deeper interdependence between Japan and the rest of East Asia. In brief, what the Bank can do is to provide Japanese companies with a stable financial and economic environment to support their innovative business activities under globalization. Let me elaborate. First, needless to say, the sound development of the Japanese economy is one of the most important prerequisites for stable economic growth in East Asia. To this end, the Bank is working to overcome deflation and put the economy back onto a sustainable growth path by maintaining the current quantitative easing policy. Second, the Bank is strengthening regional financial cooperation with central banks in the rest of East Asia. Such a direction has gained further momentum since the Asian currency crisis of 1997-98. In the wider context of ensuring the stability of the international financial system, the importance of establishing a collective and regional financial support system has been widely recognized among East Asian economies. In this regard, Japan has already entered into currency swap agreements, in the form of liquidity support, with Korea, Thailand, the Philippines, Malaysia, China, and Indonesia. Discussion on developing bond markets in East Asia is underway in various international forums. The Bank has taken an initiative in such discussions in close cooperation with the Japanese government. Recent examples include the Bank's decision to participate in the Asian Bond Fund, which is a fund for investment in U.S. dollar-denominated East Asian sovereign bonds. This is part of central bank cooperation to further develop Asian bond markets, which was discussed at the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP). The initial size of the Asian Bond Fund is only about U.S.$1 billion. We hope that with an increase in trading volume and liquidity as well as an expansion in the number of investors not only from the region but also from all over the world, the Asian Bond Fund will generate momentum for the further expansion of Asian bond markets. This would certainly contribute to facilitating funding by Japanese companies in East Asia. We also strongly hope that such cooperation among central banks in East Asia will strengthen financial systems in the region. Third, the Bank is further improving the quality of information and analysis relating to economic and financial developments in East Asia. Particularly noteworthy are the rapid development of the Chinese economy and the expansion of Japanese companies into China-related businesses. In light of such developments, the Bank is preparing to establish a representative office in Beijing by the end of the year. Through this office, the Bank aims to gather more detailed information about the East Asian economy. Bearing in mind the relationship between Japan and the rest of East Asia that I have described, we will make our utmost efforts to meet the challenges facing the Japanese economy in the broader context of ongoing globalization.
|
bank of japan
| 2,003 | 10 |
Summary of remarks by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the National Securities Industry Convention, Tokyo, 18 September 2003.
|
Toshihiko Fukui: The Japanese economy Summary of remarks by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the National Securities Industry Convention, Tokyo, 18 September 2003. * * * As you are aware, economic activity in Japan continues to be virtually flat. Recently, however, some signs of apparent recovery are being observed. Business fixed investment is recovering gradually against the background of an upturn in corporate performance--a trend evident particularly among large manufacturers. As for the export environment, the likelihood is gradually increasing that the growth rate of the U.S. economy will accelerate and that the East Asian economies as a whole will resume a growth trend. Furthermore, business and household sentiment is getting a boost from the substantial rise in stock prices from their low levels during the early spring. Thus, it is likely that exports and production will gradually resume an upward trend, triggering a virtuous circle leading to a moderate self-sustained recovery in domestic demand. The extent and strength of recovery based on this scenario of export and production growth need to be monitored closely, as they could be affected adversely by ongoing structural adjustments, such as firms' reduction of excess debts and labor costs. With regard to financial markets, long-term interest rates are increasing along with the rise in stock prices. Long-term rates normally move in response to market participants' prospects for the economy. In the short term, however, they may move erratically in response to various other factors. The Bank of Japan, for its part, will monitor closely the overall trend of financial markets, watching, for example, any developments in long-term rates that are not in line with economic activity. Next I will touch on the Bank's monetary policy. The Bank has provided liquidity in a flexible and proactive manner in response to various cases of rising uncertainty under the framework of quantitative monetary easing. As a result, I believe the Bank has been able to prevent various risk factors from exerting a negative impact on the economy through heightened liquidity concerns. Needless to say, the Bank will do its utmost to support the Japanese economy. It will maintain the policy of quantitative monetary easing to ensure the progress of economic recovery, supplying sufficient liquidity and strengthening the working of the transmission mechanism of monetary easing. The Bank remains firmly committed to maintaining the current quantitative easing policy until the yearon-year increase in the consumer price index (CPI) becomes stably zero or above. This is a clear and specific pledge aimed at actual CPI data made public each month, and not the prospect of it. I would like to emphasize this point, although I am aware that it has been stated explicitly on several occasions in the past. As I have explained, the Bank's commitment to easy monetary policy is unequivocal. However, the role of financial markets in delivering its commitment effect through the entire economy is equally great and not to be discounted. A key factor behind their role, I believe, is the "price discovery function." In other words, the determination of market prices and interest rates at levels that reflect the degree of relevant risks is the most important premise for the efficient distribution of funds required by firms and households. Further refinement of the price discovery function through development of innovative transactional techniques in an environment of enhanced market liquidity should lead to more efficient funds allocation and, hopefully, more active investment by the private sector. In this connection, markets for new securitization products such as asset-backed securities (ABSs) have grown in recent years. I strongly hope that securities firms, the main players in the securities market, and other relevant institutions will continue to utilize their ingenuity in developing new and innovative financial instruments that will further invigorate financial markets. The Bank, for its part, has recently started purchasing ABSs to help support this market. It is unprecedented for a central bank to directly accept the credit risk pertaining to private-sector debt, and this is, therefore, a move that we hope will act as a "catalyst" for the autonomous development of the ABS market. Next, I would like to turn to Japan's financial system, which, though still under serious strain, appears to be gradually improving its soundness. Nonperforming loans (NPLs) held by financial institutions as a whole remain the most crucial issue. The economic value of loans is being appropriately evaluated. And based on this evaluation, appropriate provisioning and write-offs are being promoted. Currently, efforts are being made to enhance concerted action by both the financial and industrial communities. It is notable that parties concerned are becoming increasingly aware of the necessity to utilize corporate managerial resources in achieving structural reforms, rather than wastefully abandoning them. While the work of the Industrial Revitalization Corporation, a public entity, is getting into full swing, unassisted and voluntary actions on the part of the private sector are also growing more widespread. Moreover, from the viewpoint of reforming Japan's economy and industrial structure, which forms the basis of the economy, it is essential that new and innovative value-added products and services be created. It is important, therefore, for large numbers of entrepreneurs, the creators of new businesses, to emerge. The price discovery function of the market, pointed out earlier, comes into play in this connection. As a part of facilitating the environment, it is essential that risk capital be provided through the channel of the price discovery function to such entrepreneurs. The mediation of risk capital between investors and industries is one of the fundamental roles performed by the securities industry. Needless to say, herein also lie major business opportunities. I would like to add here my expectation that the securities industry takes a further step forward in this regard now that there is felt to be an ever-increasing need for industrial restructuring. At the same time, there exists an undiminished expectation that the securities industry, as a major player in the financial markets, will continue in its efforts to further invigorate the markets. One of the means to achieve this objective would be the improvement in transparency and smooth functioning of the market by enhancing clarity in presenting risk-return relationships to customers of the securities firms. I believe that increased competition between securities companies and other financial institutions in providing varied and dependable credit intermediation services strengthens the financial system as a whole and thereby helps improve the structure of the economy. It is evident that securities companies themselves must improve their managerial capabilities if they are successfully to perform such an important role. At present, the stock market is showing some buoyancy in terms of both price and volume. I trust, however, that the securities industry will not loosen its resolve and that it will continue to target creativity and higher efficiency. The Japanese economy as well as the financial system is still burdened with a number of difficulties. Nevertheless, lights of hope, though dim at present, are on the horizon. The Bank, for its part, will continue to do its utmost to ensure that these lights do not fade.
|
bank of japan
| 2,003 | 10 |
Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting with business leaders in Sendai, 1 October 2003.
|
Toshihiko Fukui: An overview of Japan's economy and financial system Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting with business leaders in Sendai, 1 October 2003. The speech was delivered by Kazumasa Iwata, Deputy Governor of the Bank of Japan, on behalf of the Governor. * I. * * Current State of the Japanese Economy and Developments in Financial Markets Let me begin by discussing the world economy. The U.S. economy has spurred a moderate recovery supported by personal consumption. Recovery is beginning to spread to orders received by manufacturers and capital spending with the rise in world demand for IT-related products. The large-scale tax cuts are beginning to have a positive impact on personal consumption. Growth seems increasingly likely to start accelerating, while pressure on labor adjustment remains. Economic activity in East Asia is also heading for recovery. In China, the adverse effects arising from severe acute respiratory syndrome (SARS) have virtually ended, and exports of the NIEs and ASEAN are expected to increase with the worldwide recovery in IT-related demand. In Europe, there are signs of improvement in corporate sentiment, although the impetus for recovery is not yet evident. The above assessment of the global economy was endorsed at the G-7 meeting last month in Dubai. Turning to the domestic arena, capital spending is recovering gradually as corporate profits increase. Largely thanks to this recovery, real GDP posted an annualized growth rate of 3.9 percent in the AprilJune quarter, far exceeding market expectations. The Tankan survey released on October 1 shows that the capital spending plans of large manufacturers for fiscal 2003 are expected to increase 11 percent on a year-on-year basis, and that of all enterprises is slightly larger than the figure in the previous year. Thus, the recovery of capital spending is expected to become more certain. Personal consumption has been weak recently due partly to the cold summer. However, signs of favorable change are emerging on the employment and income front. Although overall economic activity remains virtually flat, signs of recovery are gradually being observed. The likelihood seems to be increasing that, with the recovery of exports and capital spending leading to an increase in production and corporate profits, the Japanese economy will return to a self-sustained, though moderate, recovery path. According to the Tankan survey released on October 1, corporate sentiment is generally improving, as is shown by the fact that the judgment of business conditions by large manufacturers has turned to "favorable" for the first time since December 2000. This result is more or less in line with the assessment of Japan's economy that I have just described. It should be noted that there still remain persistent structural adjustment pressures stemming from excess debt and labor. Therefore, the extent and strength of the likely recovery permeating through the economy are uncertain, and must continue to be monitored carefully. In the stock market, the Nikkei 225 Stock Average is moving above the 10,000 yen level, about 30 percent above the recent bottom in the spring, although the market is slightly bearish recently due to the appreciation of the yen. We consider that such movements reflect the signs of recovery that I have just described. Yields on 10-year Japanese government bonds have risen significantly above their June levels of below 0.5 percent. Long-term interest rates reflect market participants' prospects of the economy. Thus, higher long-term interest rates after June are basically the reflection of improved prospects. Such observation can be reinforced by the simultaneous rise in long-term interest rates and stock prices. Markets respond to various factors, and thus they are subject to overshooting in the short term. For example, some point out that the recent volatile movement of long-term interest rates was partly due to the speculation over the Bank's monetary policy. In this regard, let me reiterate that the Bank has made a firm commitment to maintaining the current policy of quantitative easing until the year-on-year increase in the consumer price index (CPI) becomes stably zero or above. This is a clear and specific commitment based on the published monthly data of the CPI, not its forecast. Once the significance of this commitment is fully digested in the market, I believe it will contribute greatly to market stability. Let me reassure you that the Bank continues with this commitment, and communicates its policy stance to the market as and when necessary. The yen has been appreciating since around the time of the G-7 meeting last month. It appears that such movement has been affected partly by misinterpretations by market participants regarding the G7 statement. There is no change in the view held by the finance ministers and central bank governors of the G-7 countries that exchange rates should move in a stable manner reflecting economic fundamentals, and that the G-7 countries will cooperate as appropriate if there is excessive short-term volatility in the foreign exchange market. It is extremely important for the recovery of Japan's economy that the yen moves in a stable manner. The Bank will continue to closely monitor the exchange rate and its effect on the economy as well as long-term interest rates and stock prices. II. Conduct of Monetary Policy The Bank has been striving, and will continue to strive, to maintain financial market stability and ensure economic recovery by flexibly providing ample liquidity under the quantitative easing framework. It is also important to strengthen the transmission mechanism of monetary policy so that the effect of monetary easing permeates through the economy. In this regard, the Bank has recently started the outright purchase of asset-backed securities (ABSs) and has been preparing the acceptance of syndicated loans as collateral in its monetary operations. Although it is unprecedented for the central bank to purchase ABSs in that it directly accepts the credit risk pertaining to private-sector debt, the Bank decided on this measure so that the effects of monetary easing would permeate through the economy. It will continue to support, in cooperation with market participants, the development of the ABS market, which has large potential to become a new channel of financial intermediation. The syndicated loan market has been expanding steadily in Japan. We hope that, prompted in part by the acceptance of such loans by the Bank as collateral, the market will expand further, and will contribute to facilitating corporate finance. III. Revitalization of the Corporate Sector and Regional Economies For the sustainable recovery of Japan's economy, a self-sustained growth mechanism-whereby revitalization of the corporate sector increases the income and consumption of the household sector, which in turn leads to further revitalization of the corporate sector-must operate in the economy. In this regard, companies must enhance their competitiveness by creating high-value-added goods and services under the global competition. This viewpoint is equally important in the development of regional economies. We should recognize that there is a limit to the conventional approach such as public works spending in developing regional economies. Companies in regional economies must also enhance their ability to create high-valueadded goods and services from a global viewpoint. In this regard, let me offer two observations. First, we should view the expansion of other Asian economies, including China, favorably as a new market opening, not as a threat. Second, there exists large potential demand for medical care and welfare services as well as environment-related business, given the aging population and the growing importance of environmental issues. IV. Financial System Although the Japanese financial system still faces many difficult problems, we are beginning to see the result of the efforts to date toward overcoming the nonperforming-loan (NPL) problem and restoring the soundness of the financial system. Let me mention four points in this regard. First, adequate provisioning and write-offs based on appropriate assessment of the economic value of NPLs are extremely important in maintaining the financial soundness of banks. In the financial results of all banks for fiscal 2002, substantial losses were posted for the second consecutive year. While this underlines the severe predicament of the financial system, it also illustrates the result of the efforts, by major banks in particular, to reduce their NPLs and strengthen their provisioning. Second, it has become commonly recognized that corporate revitalization is an integral part of dealing with the NPL problem. For example, the Industrial Revitalization Corporation of Japan (IRCJ), which began operations in May this year, has decided to work on six companies to date through the purchase of their debt from non-main banks. Since the debt purchase by the IRCJ will be terminated at the end of March 2005, we hope that the IRCJ will be used actively for the remaining rather short operating period. It is vital for the management of both companies and banks to become aware of the urgency of corporate revitalization through the effective dialogue, and act with speed and decisiveness. Third, it is desirable to reduce the risk associated with stock price fluctuations in banks' shareholdings for financial system stability. At the same time, unwinding cross-shareholdings is also desirable from the viewpoint of strengthening corporate governance. Considerable progress has been made in reducing banks' exposure to stock price fluctuation risk. So far, the Bank has purchased a total of some 1.8 trillion yen worth of shares from banks. It recently decided to extend the purchase period for an additional year since some banks' shareholdings still exceed their core capital, and there is demand for this stock purchase operation. Lastly, banks should strengthen their profitability. The ultimate purpose of restoring the soundness of the financial system is to enable banks to fully perform their financial intermediation function, thereby providing support for sustainable growth. To this end, banks need adequate profitability and sufficient capital bases. The management of banks must select and concentrate various resources in key strategic areas. In this process, it should be kept in mind that banking is a service industry and banks should pay close attention to the needs of customers. We are beginning to see some movements toward this direction, and we hope that they will prevail. Before closing, let me briefly touch on the outlook for the financial system. The removal of the full protection of deposits in settlement accounts, scheduled in April 2005, should not be perceived simply as a change in the type of coverage of deposit insurance. It should be regarded as the termination of special protection that has been provided as a temporary buffer to avoid potential confusion. It should be recognized as a turning point for the reform of banks' management, which is free from the protection of the government. In this regard, banks must have clear business strategies for strengthening their profitability. At the same time, banks must have capital bases that are sufficient relative to the risks associated with their new business model. If banks find their capital bases insufficient, they need to take measures to boost their capital. Given the limited time remaining until the removal of blanket deposit insurance, I think it is desirable to establish a new framework for injecting public funds into banks as the "last instance of public support" in the event that they cannot raise sufficient capital in the market. The establishment of such a framework will facilitate the process of restoring the soundness and effective functioning of the financial system.
|
bank of japan
| 2,003 | 10 |
Speech by Mr Toshiro Muto, Deputy Governor of the Bank of Japan, at Japan Society, New York, 26 September 2003.
|
Toshiro Muto: Battle against deflation Speech by Mr Toshiro Muto, Deputy Governor of the Bank of Japan, at Japan Society, New York, 26 September 2003. * * * Thank you, Mr. Wheeler. Good afternoon, ladies and gentlemen. It is a great honor to be here and address Japan Society. Today I focus on the Bank of Japan's on-going battle against deflation. Japan's core Consumer Price Index, which is the Consumer Price Index excluding volatile food, has been going down for the past five years, and the Bank of Japan has been fighting against this deflation. The Bank of Japan adopted the so-called "zero interest rate policy" in February 1999. After reducing the short-term policy interest rate from 6 percent in 1990 to 0.5 percent in 1995, the Bank decided to push it down to virtually zero by providing ample liquidity in the market. This policy was unprecedented in the history of central banking. In the 20th century, the lowest official discount rate was 0.5 percent in the United States between 1942 and 1946, and also in Switzerland in 1999. In March 2001, the Bank adopted the "quantitative easing" framework. In spite of extremely low interest rates, "Japan's economy had failed to return to a sustainable growth path, and was faced again with the threat of deterioration." In its monetary operations, the Bank shifted the operating target from the short-term policy interest rate to the outstanding balance of current accounts at the Bank. So far, from our experience over the last two and a half years, quantitative easing has been effective in stabilizing the financial markets. It has worked to avert a credit crunch, and facilitate corporate funding. Through these channels, it has been supporting economic activity. The quantitative easing framework has three key pillars. The first pillar is that the Bank of Japan is providing the current account balances of financial institutions with ample liquidity. In fact, the amount of these current account balances is more than five times the required reserves. The base money, which is the sum of these current account balances and banknotes in circulation, has increased more than 60 percent in the past two and a half years. Reflecting such an increase, the balance sheet of the Bank of Japan has expanded significantly. The size of the Bank's balance sheet relative to GDP had been stable around 10 percent for the past 50 years, but now it is close to 30 percent. Naturally, with the provision of such ample liquidity in the market, short-term interest rates are held down virtually at zero. Despite ample liquidity we provide in the market, nominal interest rates cannot decline below zero. This is called the constraint of zero interest rates, which I will touch on later. The second pillar is that the Bank is committed to continuing with the current policy framework until the core Consumer Price Index shows zero percent or above on a year-on-year basis in a stable manner. This commitment tends to reduce medium-term interest rates along the yield curve. It creates the expectations among market participants that the current extra easy monetary policy will continue for a considerable period. It reduces the level of expected future short-term interest rates and the uncertainty about the future path of these rates. This effect of precommitment policy is sometimes called the "policy duration effect." The third pillar is that the Bank is conducting the outright purchase of long-term government bonds as a means of providing ample liquidity in the market. The monthly purchase now is about 10 billion dollars. Deflation is not necessarily new. Indeed, we observe a couple of deflation periods in the past. In Japan, prices declined by about one third during five years in the 1880s. In the United States, prices fell by a quarter in three years in the 1930s during the Great Depression. For a little more than fifty years after World War Two, however, we had hardly experienced deflation. And, central banks had been mainly concerned with prices "going up" rather than prices "going down," and worked hard to put inflation under control. I still remember that the Federal Reserve was very concerned about inflation while I was working at the Japanese Embassy in Washington, D.C. for three years from 1975 through 1978. Around that time, the world economy was suffering from stagflation after the oil crises, and the United States, Germany and Japan were pressured to play the role as the "locomotive" of world growth. Thanks to the prudent conduct of monetary policy and such dramatic changes as the entry of emerging countries into the market economy, inflation has been gradually slowing down since the 1990s. And now, we have entered the period of global disinflation. Japan is currently in mild deflation after passing a disinflationary stage. The core Consumer Price Index is now around minus 0.1 percent on a year-on-year basis following the decline of a little less than 1 percent in the past two years. The extent of deflation in Japan is much smaller than that during the Great Depression, which was well over minus 10 percent. In addition, Japan is suffering from the burst of asset price bubbles in the late 1980s. Asset prices fell dramatically. Now, stock prices are one-third of the peak, and real estate prices are about a quarter of the peak during the bubble period. Although stock prices are rising recently, real estate prices are still falling. Asset price deflation, the decline in real estate prices in particular, is making a greater negative impact on the banking sector than the falling prices in goods and services. As Japan is the only one among industrialized countries that suffers from the decline in both the general price level and asset prices, the Bank of Japan is the front runner in the fight against deflation among central banks around the world. Under such circumstances, the Bank has been, and will be innovative in the conduct of monetary policy. One unconventional policy measure is the purchase of risk assets, such as asset-backed securities and corporate stocks. The Bank now purchases asset-backed securities, or ABS for short, with corporate obligation as the underlying asset. We hope the ABS market will grow with our purchase as a catalyst, and that it will help strengthen the weakened transmission mechanism of monetary policy. As businesses rely heavily on banks for their funding in Japan, it is an important policy agenda to expand the channels of financial intermediation, such as the ABS market, which are not vulnerable to banks' risk-taking capability. With a view to strengthening banks' intermediation function, the Bank of Japan purchases corporate stocks held by commercial banks. This is also an unconventional measure for a central bank. In Japan, due to cross-shareholdings between banks and businesses, some large banks hold a substantial amount of corporate stocks. Because of these holdings, banks are exposed to the impact of stock market volatility on their balance sheets, which may constrain their risk-taking capability. The sale of stocks to the Bank of Japan by commercial banks alleviates the potential negative impact on their financial position and enhances their risk-taking capability. In the course of taking these unconventional measures, we have learned a number of new things. Among these, let me share with you two of them. First is the side effect of quantitative easing. Within the quantitative easing framework, the market function is weakening in the money market. Under zero interest rates, market participants with their cautious investment attitude feel little incentive to lend in the money market, and as a result the market is shrinking. We firmly believe that the well functioning market is quite important in the efficient allocation of financial resources, and we do not in any way take such market shrinking lightly. This side effect, however, is unavoidable in my view. In implementing any policy measure, we need to weigh their effects and side effects against the economic situation. And, we judge that the positive impact of quantitative easing outweighs the side effect of shrinking money market, given the current Japanese economic situation. Second is how to maximize the precommitment policy effect under quantitative easing. During the period of zero interest rate policy from 1999 through 2000, the Bank announced in its policy statement that it was committed to continuing with the policy until deflationary concerns were dispelled. Compared with this rather descriptive announcement, the current commitment under quantitative easing is far more concrete and objective. The Bank maintains that it continues with the existing policy until the published data of the core Consumer Price Index show zero percent or above in a stable manner. The commitment reduces the freedom about the future course of monetary policy. Because of such constraint, the policy impact tends to become more powerful. Compared with the zero interest rate policy, medium-term interest rates under quantitative easing are lower and their volatility is smaller on average. In fighting against deflation under zero interest rates, we have found that the constraint of zero interest rates on monetary policy is an important issue for central bankers around the world. From our experience so far, it seems that the extent of policy constraint depends very much on the factors shaping the economic and financial situation. One factor, which influences the effectiveness of policy response under zero interest rates, relates to the banking system and the financial markets. Both the banking system and the financial markets are the transmission mechanism of monetary policy. They need to be sound and efficient for the transmission mechanism to function effectively. In Japan, at the moment the transmission mechanism is not functioning as is described in the standard textbook. The purchase of risk assets such as ABS and corporate stocks is a policy measure to improve this mechanism. The banking system has not yet fully restored its soundness and stability, and the financial markets have not developed to the degree that they can smoothly provide "multiple avenues of financial intermediation." The situation is quite different in the United States, where the banking system is sound and the capital markets are well developed. Another factor, which eases the constraint of policy response under zero interest rates, is room for the use of fiscal policy. Even when the effect of monetary policy is constrained, to beat deflation will be easier if the government can conduct fiscal policy effectively. In Japan, the question boils down to whether voters can reach a consensus on effective further stimulus. The present stance of the Koizumi Cabinet is that, until fiscal 2006, the size of government expenditure relative to GDP should not exceed the level in fiscal 2002. In the United States, it is quite a contrast that people have high expectations for the stimulative effect of large federal tax cuts. And, these tax cuts are actually making a visible impact on economic activity. Although it is perhaps too early to tell that Japan's economy has returned to a solid recovery path, domestic demand, capital spending in particular, is showing signs of improvement. Toward the end of this year, we expect Japan's economy will gradually recover as the very pessimistic outlook for the world economy subsides. The Bank of Japan will continue with the current extra easy monetary policy to give maximum support to the recovery, which appears to be in progress. Let me briefly mention our thinking on the exchange rate. As was stated in the G7 Statement in Dubai, it is desirable that the exchange rate should reflect economic fundamentals. In the case of Japan, the exchange rate stability is important as it strives to escape from deflation. The current cyclical recovery in demand may not be enough to conquer deflation. Neither will it alone ensure sustainable growth. In this regard, the importance of structural reforms can never be overemphasized. We are making steady progress in structural reforms. For example, a national consensus is being formed on the fiscal reform, and serious discussion is under way about the reform on the social security system. The government takes initiatives to accelerate the resolution of non-performing loans with the target to halve the non-performing loan ratio of major banks by the end of March 2005. The Industrial Revitalization Corporation of Japan, which was established in April this year, is vigorously dealing with corporate restructuring, which helps banks to resolve the non-performing loan problem. On September 22, Prime Minister Koizumi reshuffled his cabinet after he won the party election. Under the new Cabinet, he reiterated the commitment that he would continue promoting structural reforms aggressively, based on his credo of "no growth without reforms." The Bank of Japan, for its part, will continue striving to beat deflation and put the economy back on a sustainable growth path by employing all the possible policy measures. Thank you for listening.
|
bank of japan
| 2,003 | 10 |
Bank of Japan, 14 October 2003.
|
Bank of Japan's October report of recent economic and financial developments1 Bank of Japan, 14 October 2003. * * * The Bank’s View2 The foundation for a gradual recovery in Japan’s economy is being laid, as the environment for exports and business sentiment have improved. With regard to final demand, housing investment remains sluggish and public investment is declining. Private consumption also continues to be weak. Meanwhile, business fixed investment is recovering gradually and net exports have recently started to increase somewhat. In response to these developments in final demand, corporate profits are following a moderate uptrend and business sentiment is improving, although industrial production is still basically flat. Meanwhile, the number of employees has stopped falling and the pace of decline in wages is gradually slowing. However, the employment and income situation of households overall still remains severe, as the unemployment rate continues to be high, albeit with some fluctuations. Turning to the economic outlook, overseas economies are expected to maintain a relatively steady recovery mainly in the United States and in East Asia. Under these circumstances, it is likely that exports will continue to increase and industrial production will turn up gradually. With respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time since the employment and income situation is unlikely to improve markedly. Meanwhile, the recovery trend in business fixed investment is expected to become clearer, mainly in large manufacturing firms, whose investment has been thus far significantly restrained despite the recovery in their profits. Overall, with the recovery in overseas economies, exports and production will increase, which in turn will gradually initiate momentum for an economic recovery in Japan. However, it is expected to take some more time before a self-sustaining recovery in domestic demand gains momentum, given persisting downward pressures from structural adjustments, such as firms’ reduction of excess debt and restraint on labor costs. In addition, uncertainty still exists with respect to the outlook for the environment for exports, as the employment situation in the United States continues to be sluggish and the yen exchange rate has been unstable, tending toward appreciation against the U.S. dollar. On the price front, import prices have stopped declining due to the uptrend in international commodity prices, especially crude oil prices, until this summer. Under these circumstances, domestic corporate goods prices are more or less flat, which is also partly due to the rise in tobacco tax. Meanwhile, corporate services prices continue a year-on-year decrease of slightly over 1 percent. As for consumer prices, the year-on-year rate of decline diminished to 0.1 percent in August due mainly to the special factors, such as the increase in medical treatment costs in April and the rise in tobacco tax in July. As for the outlook for prices, import prices are projected to head for a decline again due to the recent appreciation of the yen. Meanwhile, domestic corporate goods prices are likely to remain more or less flat for the time being, since there is some time lag for these import price developments to have effects on the domestic prices and also the rate of decline in machinery prices is diminishing. As for consumer prices, although it is possible that the year-on-year decline may stop temporarily in the period ahead due to special factors such as a rise in rice prices, they are basically projected to continue falling gradually, since the supply-demand condition in the macroeconomy still remains considerably loose despite its recent gradual improvement. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on October 9 and 10, 2003. The Bank’s view of recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on October 9 and 10, 2003 as the basis for monetary policy decisions. As for the financial environment, the outstanding balance of current accounts at the Bank of Japan moved almost at the 29-30 trillion yen level in September, as the Bank provided ample liquidity, but rose to 34.6 trillion yen on September 30 as a result of even more ample liquidity provision by the Bank. Under these circumstances, the overnight call rate moved at around zero percent, except for the temporary rise on September 30. Interest rates on term instruments remained steady on the whole, although TB and FB rates rose from mid to late September. Meanwhile, interest rates on Euroyen futures are declining gradually, although they were at somewhat high levels in September mainly in distant contracts. Yields on long-term government bonds fluctuated due partly to portfolio adjustments toward the fiscal half year end under the improved outlook for Japan’s economy. Recently, they declined slightly partly because investors bought government bonds on dips. The yields are moving at around 1.3 percent. Meanwhile, yield spreads between private bonds (bank bonds and corporate bonds) and government bonds are virtually unchanged on the whole. Stock prices rose substantially toward mid-September as foreign investors continued to invest in Japanese stocks, but declined toward the end of September due to the rapid appreciation of the yen and growing concern over price adjustments. However, they recovered after the rebound in U.S. stock prices. The Nikkei 225 Stock Average is moving at around 10,500 yen. In the foreign exchange market, the yen rose sharply as market participants became less sensitive to a possible market intervention around the time of the G-7 meeting and as foreign investors continued to invest in Japanese stocks. The yen is currently traded in the range of 109-111 yen to the U.S. dollar. With regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks, while they continue to be more active in extending loans to blue-chip companies. Their lending attitudes seem to be becoming slightly more accommodative in areas such as terms and conditions for loans. Meanwhile, the lending attitudes of financial institutions as perceived by firms in general are improving somewhat, although those perceived by small firms remain severe. In the corporate bond and CP markets, the issuance spreads remain steady and the favorable issuing environment is virtually unchanged on the whole, especially for firms with high credit ratings, although some firms still seem to be taking a wait-and-see attitude in the corporate bond issuance market in view of the rise in long-term interest rates. Credit demand in the private sector continues to follow a downtrend, mainly because firms’ cash flow remains above business fixed investment and firms are continuously reducing their debts. Amid these developments, private banks’ lending continues to decline at around 2 percent on a yearon-year basis. The amount outstanding of CP issued is above the previous year’s level. The amount outstanding of corporate bonds issued is around the previous year’s level. Meanwhile, according to business surveys, the financial positions of firms in general are improving slightly, although those of small firms remain severe. The year-on-year growth rate of the monetary base continues to be around 20 percent. The year-onyear growth rate of the money stock is around 2 percent. Funding costs for firms continue to be at extremely low levels on the whole, although corporate bond issuance rates are increasing slightly reflecting the rise in long-term interest rates. Against the above background, the financial developments are summarized as follows. Money market conditions continue to be extremely easy. Meanwhile, long-term interest rates are at a slightly lower level than last month. Stock prices are basically around the same level as last month. Growth rates of the money stock and the monetary base relative to economic activity remain high. In corporate finance, the favorable issuing environment of corporate bonds and CP is virtually unchanged on the whole, especially for firms with low credit risks. However, there has been no significant change in the severity of the funding environment for firms, particularly for firms with high credit risks. Developments in the financial and capital markets, the behavior of financial institutions, and the situation of corporate finance continue to require close monitoring.
|
bank of japan
| 2,003 | 10 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, to the Naigai Josei Chousa Kai (Research Institute of Japan)...
|
Toshihiko Fukui: Restructuring Japan's economy Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, to the Naigai Josei Chousa Kai (Research Institute of Japan), Tokyo, 28 October 2003. * * * The foundation for a gradual recovery in Japan's economy is being laid as the environment for exports and business sentiment have improved. This development occurs against the background of a cyclical rebound in global demand for IT-related goods as well as the progress of structural adjustment, including the improvement of corporate profitability. Structural adjustment of Japan's economy is but halfway complete, and many issues remain to be resolved. Persistent adjustment pressures have weighed heavily on the self-sustaining recovery of domestic demand, which needs to be duly taken into account in the conduct of monetary policy. Under such circumstances, the Bank of Japan will continue to firmly maintain its quantitative easing policy until the consumer price index registers stably zero percent or an increase year on year. We think it important to ensure that the current nascent economic recovery is put on a sustainable path. In this regard, on October 10, the Bank decided to take such measures as raising the upper limit of the target balance of current accounts in the interest of more flexible and timely monetary operations. We need to put the issues facing Japan's economy, including structural adjustment, into a historical perspective that encompasses such issues as globalization and the maturity of Japan's society and economy. Hence, today I would like to look back upon the process of structural adjustment in the Japanese economy, and address current problems with a focus on three key concepts, "value added," "risk" and "sustainability." I. The Path to Date of the Japanese Economy A. High Economic Growth Let me start by reviewing the high economic growth period between 1955 and 1970. During this 15year period, real GDP almost quadrupled with an annual growth rate of nearly 10 percent. Such high growth was only possible because of the potential endowed to Japan's economy as well as favorable historical and geographical conditions at that time. Japan's endowment included a relatively high technological capacity and a diligent work force. Moreover, it was willing to absorb technology and culture from abroad. Japan's potential in this regard was evidenced by the rapid industrialization after the Meiji Restoration and the subsequent economic development. In terms of historical and geographical conditions, it should be noted that because the Cold War put a number of countries under the influence of communism, Japan could continue to play the role of "the world's factory" in the market economies during the period from the late 1950s to the end of the 1960s. Furthermore, Japan increased its business fixed investment at a rapid pace because World War II had erased a large amount of domestic capital stock. The period of high economic growth in Japan coincided with the baby boomers' entrance into the labor force. In fact, the labor force increased from about 40 million in 1955 to about 50 million in 1970. Furthermore, population growth around that time followed a bell-shaped curve, which led to a relatively light burden being imposed by the pension and other social security systems compared to other industrialized countries. B. Shift to a Floating Exchange Rate System and the Two Oil Shocks From the 1970s through the early 1980s, the Japanese economy experienced several major disturbances, including the revaluation of the yen triggered by the "Nixon Shock" and the subsequent shift to a floating exchange rate system, and the two oil shocks. In particular, the First Oil Shock combined with the excess liquidity of the time to produce rapid inflation. In contrast, Japan managed to overcome the Second Oil Shock smoothly, perhaps we can say the most smoothly among the industrialized countries. Behind this was not only a timely macroeconomic policy response, but also the fact that Japanese industry, having learned the lesson of the First Oil Shock, actively improved energy efficiency. As a result of these efforts, Japan's economy became the least dependent on oil among the industrialized countries, and at the same time succeeded in making energy-efficient technology a new source of value added. This can be cited as a classic example of Japan turning a problem to be overcome into a source of strength by using its technological capability. The success of Japan's economy in overcoming the Second Oil Shock contributed relatively smoothly to raising its international reputation. C. Stronger Yen and the Emergence of the Bubble Economy In the latter half of the 1980s, the Plaza Agreement triggered the large-scale correction of the strong U.S. dollar at the time, and Japan experienced a period of economic stagnation caused by the yen's appreciation. This stagnation, however, ended rather quickly, and, as is well known, what followed was economic expansion accompanied by asset price bubbles. The coexistence of high economic growth and low inflation throughout this period suggested gains in productivity, and we observed widespread optimism that Japan had overcome the adverse effect of not only the oil shocks but also the yen's appreciation. In reality, however, many structural adjustments were simply postponed, in contrast to the period of the oil shocks during which a strong sense of imminent crisis had speeded the adjustment process. During this period, the environment surrounding the Japanese economy had already begun to change significantly. The Cold War structure had begun to be dismantled, as captured most vividly in the pulling down of the Berlin Wall, and the industrialization of emerging economies continued to move forward. As shown by these facts, the conditions surrounding Japan's economy began to undergo such sea changes as globalization and intensified competition. These changes should have brought about the strengthening of corporate earnings power and the efficient reallocation of resources through active entry into and exit from markets and industries. Rising asset prices and overheated domestic demand, however, distorted various signals for economic adjustment and weakened investment discipline. Rather, a large amount of business fixed investment was made based on an excessively optimistic outlook for demand. In this, we can detect the source of the future problems, such as excess capacity, excess debt, and excess labor. On the financial front, intensified global competition should have led to development of the market for financial intermediation, which would have supported the entry of companies into markets and industries and promoted more careful evaluation of the risk and return profiles of various projects. The latter half of the 1980s should have been a period during which financial intermediation progressed from a bilateral transaction basis to a market transaction basis. The rise in asset prices, however, expanded bank lending using real estate as collateral, the classical bilateral transaction type of financial intermediation. When asset prices finally began to fall, expanded bank lending created the nonperforming-loan (NPL) problem, which has adversely affected the economy since the early 1990s. And households became quite hesitant to provide risk capital when they observed scandals involving securities companies and the large volatility of stock prices. The birth rate declined sharply from 1.81 in 1984 to 1.54 in 1990, leading to the rapid graying of society. Of course, there are a variety of factors behind this. One of them seems to have been the rise in the number of women playing an active role in the workplace. With a great many companies still adhering to such employment practices as the seniority system, taking time off from work to raise a child often became a decision with serious consequences. Thus, the institutional set-up did not lend itself to checking the declining birth rate. In spite of these demographic changes, the pension and other social security systems remained largely based on the bell-shaped population curve. As far as the structure of public finance is concerned, both the United States and the United Kingdom made progress toward "a smaller and more efficient government" under severe economic conditions during the latter half of the 1980s. In direct contrast, Japan enjoyed an increase in tax revenues due to the overheated economy and higher asset prices, which led to a delay in reviewing the structure of public expenditure. II. Restructuring Japan's Economy A. Economic Stagnation since the 1990s Since the 1990s began, the end of the Cold War and the progress of IT have brought about an acceleration in the globalization of market economies. Under such circumstances, the Japanese economy has been put under very severe adjustment pressures on a number of fronts, including the deflationary impact caused by the bursting of the asset bubbles and intensified competition with emerging economies. These adjustment pressures may be divided into three broad categories. The first is the adjustment pressure that has emerged as the result of various excesses during the bubble period and their subsequent bursting. The problems of excess capacity, excess debt, and excess labor of the corporate sector as well as the NPL problem of financial institutions fall into this category. These problems have exerted downward pressure on domestic demand and adversely affected financial system stability. The second is the adjustment pressure stemming from broad changes in economic conditions such as market globalization and domestic demographic changes. While preserving the high-cost structure created during the high economic growth and the bubble periods, Japan has begun to face intensified competition from neighboring East Asian economies, which have been growing at a fast tempo recently. The rapidly changing structure of the Japanese population has also suppressed expected future growth. The third category is the adjustment pressure resulting from the need to overhaul the institutional infrastructure, including the legal system, the structure of public finance, and the pension and other social security systems, with a view to making the infrastructure more responsive to the needs of a mature society and economy. B. Progress in Corporate-Sector Adjustment Although many problems remain to be resolved, it should be noted that Japanese companies have been making steady, albeit gradual, progress in some areas. In fact, many companies have made efforts to reduce their debt overhang by restraining business fixed investment as well as cutting labor costs, in order to improve their earnings power. The larger the original adjustment pressure, the greater energy and longer time these efforts will require. A reduction in investment and labor costs is indispensable for companies to recover their earnings power. If aggregated, however, such reduction will work to exert downward pressure on domestic demand and thus hinder the recovery of overall business conditions. I think the efforts of companies to restructure their businesses have finally begun to bear fruit recently. Corporate profits have been increasing since last fiscal year. At present, the ratio of current profits to sales has approached almost its highest level since the bursting of the bubble. This implies that Japanese companies have been succeeding in lowering the break-even point by restructuring and adapting their business structure so that they can secure profits even when sales are sluggish. C. Search for New Business Models Japan's proximity to rapidly growing East Asia has an interesting implication from the viewpoint of the corporate response to changes in the global environment. On one hand, such proximity exerts a strong impact on competition and prices through the inflow of less expensive imports. On the other hand, it strengthens the competitiveness of domestic industries rather quickly. Although Japanese companies are significantly handicapped by higher labor costs compared with companies in East Asia and other emerging economies, many export items, such as electrical machinery and transportation equipment, still maintain strong international competitiveness, and the trade surplus remains. Behind this, Japanese companies have been producing high value added by creating new business models through a combination of their own technology, quality control expertise, the production capability of East Asian economies, and the ability in terms of design to respond to consumer needs in various countries. In the domestic market, including the nonmanufacturing sector, new business models have emerged in which overseas production and distribution channels are consolidated. Some of the products created under such new business models are beginning to attract consumers and gain market share. D. Institutional and Legal Measures It should be noted that institutional and legal measures have been taken, which allow active entry and exit as well as intensified consolidation of the corporate sector. For example, in dealing with the bankruptcy and reconstruction of companies, it is important to make use of market discipline and create a framework that maximizes the interests of all concerned, while retaining the value of companies on a going-concern basis to the greatest possible extent. In line with this view, enactment of the Civil Rehabilitation Law and other adjustments to the legal framework have been effected, and legal procedures expedited. In the area of corporate law, revision has been undertaken to help firms reorganize more easily. For financial system stability, various safety nets, such as the establishment of a framework for injecting public funds into financial institutions, have been improved in light of the difficulties that we have faced since the 1990s. E. Current Economic Situation Progress in restructuring seems to be having a positive effect on the current economic situation. As I stated at the outset, the foundation for a recovery is now being laid. Corporate profits have been increasing, and business fixed investment has shown signs of improvement. Exports are once again on the rise, particularly in the IT-related goods area. Uneasiness surrounding the financial system has also subsided compared to some time ago. Some argue that if prices started falling, corporate profits would be squeezed due to the downward rigidity of nominal wages, and there would be a high probability of a deflationary spiral emerging. Actual experience, however, reveals that Japanese companies have adjusted nominal wages rather flexibly and increased profits. Private consumption remains flat, with the decrease in household income being offset by an increase in the propensity to consume. I believe that an autonomous adjustment mechanism in Japan's economy has been functioning. This fact has significant implications for the conduct of macroeconomic policy. III. Key Issues and Outlook for Japan's Economy A. Structural Issues The Japanese economy still faces a number of structural issues, which it is striving to overcome. These may be summarized as follows. The first issue is the reallocation of economic resources to improve the efficiency of the economy and foster the development of leading industries for the next generation. This may be a necessary process of dealing with the legacy of the bubble economy and strengthening the underlying business structure. But, at the same time, it may create a problem in that the domestic capital equipment of Japanese companies will become obsolete relative to that of other major countries. Thus, once Japanese companies recover their earnings power to a certain extent, their next challenge will be to make their capital equipment more productive through new investments. Many Japanese companies have also reduced labor costs by restraining the hiring of new regular employees. Such labor restructuring tends to put an undue burden on the younger generation, and entails the risk that the vitality of the economy might be impaired if the situation persists and the younger generation's willingness to participate in the labor force diminishes. Thus, it is imperative to enhance labor market flexibility not only at the level of individual companies but also through the entire economy, and expand job opportunities for the younger generation. The second key issue is the reactivation of the financial intermediary function. This includes overcoming the NPL problem and improving the infrastructure of market-based credit intermediation. Although steady progress has been made, there still remains a fairly long way to go before we feel confident that the NPL problem is fully resolved. The complete removal of blanket deposit insurance is still being postponed. Market-based credit intermediation, which can function as a substitute or complement for bank lending, has not yet fully developed. The third issue is to redesign various systems so that they adapt to the needs of a new age. In particular, it is an urgent task for Japan to reform various systems, including the social security systems, the national tax system, and the relationship between the central government and local governments. Redesigning these systems tends to raise the conflict of interest problem among generations. During a high-growth period such as that experienced in the past, a compromise solution to this problem can be found relatively easily as the economy is expanding. Recently, however, it is increasingly difficult to resolve the conflict based on the premise of economic expansion. B. Importance of Creating Value Added Although these issues are not easy to overcome, let me offer a few comments regarding the key to the solution. The first is the need for Japan to strengthen its ability to create value added in various areas. Of course, creating value added is not limited to the economic problem, but also includes more comprehensive concepts such as cultural and political activities. Here, I would like to focus my remarks mostly on value added related to the economic problem. As a country becomes richer and the people's standard of living improves, labor costs tend to rise. For continued economic prosperity, it is thus vital whether or not Japan can create high value added comparable to the increase in labor costs. In addition, the nation's total population is expected to start declining from around 2006 and hence we cannot expect much contribution from the population front to future economic growth. This is an added reason why raising the capacity to create value added is such a pressing item on the agenda. This agenda must be achieved in the context of globalization. Globalization means that the division of labor proliferates globally. In this regard, we must ask ourselves seriously in what area Japan should play a role in creating value added. With the advancement of the IT revolution, the costs of obtaining and duplicating information across borders have been significantly reduced. Thus, producing similar items will not yield high value, which naturally leads to limited profit opportunities. At the same time, precisely because of the advance of IT, if unique items are somehow produced, they can easily be spread globally. Under such circumstances, it becomes very important to produce things unique to Japan or things that only Japan can produce. I believe that Japan has sufficient capability to continue creating unique items, at least in the economic area, and is equipped with several advantages. Since World War II, Japanese manufacturers have applied their advanced technologies exclusively to nonmilitary rather than military use. This has been one of the major features distinguishing Japan's application of advanced technology compared with the United States and European countries. There is no country other than Japan that is more enthusiastic about applying advanced technology to every corner of daily life. Examples include not only automobiles, home appliances, ticket vending machines and passenger gates, but also mobile phones with Internet and photographic functions and digital cameras. In the context of emerging economies with large populations, people's lives are increasingly affected by new technologies such as IT as their economies develop. In this regard, the technologies developed and applied to daily life in Japan may make large contributions to emerging economies. This may be particularly applicable to the case of East Asian countries, which are geographically close to Japan. Japanese consumers are said to be among the most demanding in the world. If we can effectively combine Japan's technology and expertise, which are approved in the demanding domestic market, with the production capability and local consumer demand in East Asian countries, geographical proximity as well as historical and cultural linkage with Asian countries will likely work to Japan's advantage. We have already seen some signs of such a combination materializing. Let me digress a little and touch briefly on a serious question of whether the world economy from the 21st century onward is sustainable in view of the energy and environmental problem. Recently, strong interest has been expressed with respect to the development of recyclable energy and the restraint of carbon dioxide emissions. Considering the size of the economy and the tempo of growth in Asia, it is highly likely that Asia will be the first region to face squarely the question of whether or not the global economy is sustainable. Measures to deal with the energy and environmental problem should not be considered simply in terms of costs. From the viewpoint of maintaining the sustainability of the global economy in the future, these measures are in themselves a source of value added. As I mentioned earlier, the experience of overcoming the Second Oil Shock allowed Japan to find a new source of value added in energy efficiency and environmental protection technology. I am confident that we can make use of such value added in a variety of areas. As long as there remain issues to be resolved and needs to be addressed, we have infinite opportunities to create value added. C. Risk-Resilient Financial Intermediation System My second comment concerns the need to provide a framework sufficient to support private economic agents in their efforts to find and develop these opportunities. In this regard, dealing with risks involved in economic activity is an extremely important issue. Since it is impossible to fully forecast the future, economic activity to produce value added will inevitably entail uncertainty. When adequate measures for dealing with the uncertainty are in place, economic agents can launch forward-looking plans with confidence. Creating value added and managing risks are in fact two sides of the same coin. The framework for the diversification of risks among economic agents has been developed as fundamental infrastructure for economic development. For instance, modern corporate law, based on the idea of limited liability of shareholders, can be regarded as the framework that enables risks pertaining to economic activity to be absorbed by a wide range of economic agents. Undoubtedly, these systems have played an important role in supporting economic development in many countries in the modern era. In the coming age in which risks pertaining to economic activity will grow as globalization advances, financial intermediation systems will play a very important role in constructing a framework for the efficient diversification of risks and their absorption by the overall economy. Companies and other economic agents diversify risks stemming from economic activity by combining various means of financing. Financial institutions make judgments about how to provide the best financial services by examining the profitability and risk of economic activity. If such judgments together with those of investors are eventually revealed in market prices such as lending rates and bond yields, economic activity will be disciplined and the efficient allocation of resources achieved. For the efficient reallocation of resources in an economy as a whole, the financial intermediation system must be capable of appropriately evaluating profitability and risks, and such evaluation must be duly reflected in lending rates and credit spreads. When an economy is experiencing high growth, financial institutions need not pay much attention to the ability to evaluate profitability and risks, because risks can be absorbed rather easily through larger revenues if these institutions maintain a certain volume of assets. Market financing may tend to remain as the secondary source of funding. When an economy moves to a new stage with an intensified competition and metabolism, we commonly observe the active entry and exit of companies as well as the transformation of business models. Under such circumstances, the financial intermediation system must be equipped with a strong capability to deal with risks, and needs to contribute to improving the power to create value added through the efficient allocation of resources. Toward this end, financial institutions will be severely tested in their ability to evaluate credit risks, develop new financial services, and manage risks. In addition, it is vital to develop market-based financial transactions, which enable a variety of investments to be evaluated by multiple investors. D. Fairness My third comment concerns the need for fairness. This is the key concept for resolving conflicts of interest in the reform process of various systems by balancing benefits and burdens. In the process of reforming such systems to adapt to economic maturity, we cannot avoid a conflict of interest to a certain extent. When economic growth is decelerating, it becomes increasingly difficult to avoid such a conflict. For example, pension system reform is a kind of agenda that inevitably creates a conflict of interest among generations. Individual economic agents tend to focus on their own benefits and burdens rather than the adverse effect on the economy due to the delay in reforming the system. This makes it difficult to forge a consensus for the necessary reform. Under such circumstances, we need to be aware of the question of whether or not the fairness between benefits and burdens is maintained when we try to reach nationwide agreement on the revision of the social security system, tax system and other economic systems. In addition, a blueprint needs to be developed showing what kind of society and economy Japan aims at, and a consensus must be obtained. Then, we must strive to effect policies consistent with the blueprint. IV. Concluding Remarks Before concluding, allow me to mention three points that need to be borne in mind when conducting monetary policy in light of the issues faced by the Japanese economy. First, maintaining price stability, which is the fundamental mission of the Bank. Economic agents will pay increasing attention to the problem of uncertainty stemming from global economic activity. In this regard, it is important to make price stability an anchor for the economy and remove the largest impediment to people's activity to create value added. Bearing this in mind, the Bank continues to work to overcome deflation, which is the most pressing item on the agenda. Second, maintaining financial system stability. The meaning of financial system stability has evolved over time. During the high growth period, the convoy system was the norm, in which the primary objective was to prevent exit from the industry by restricting competition among financial institutions. Now, financial institutions are required to perform efficient funds intermediation, while strengthening their ability to evaluate profitability and risks as well as improving their risk management capability through competition. Systemic risk must be contained. Thus, both active risk-taking and financial system stability are necessary. The financial system in Japan is still on the path to revitalization, and the risk-taking capability of financial institutions is not yet sufficient. Financial institutions need to accelerate their efforts by April 2005 when the blanket guarantee of deposit insurance will be completely lifted. In light of the various demands of the new era, the Bank aims to enhance prudential policy as well as the conduct of on-site examinations and off-site monitoring. The third issue is how to improve the financial market. In the new economy in which companies compete in creating value added, it is necessary to understand the needs of the time and the evaluation of one's own business model from the "signals" transmitted by various markets. The market mechanism serves as an "antenna" and enforces discipline, which is indispensable for the Japanese economy's future prosperity. Looking at this from a financial standpoint, financial institutions need to strengthen their risk-taking ability. At the same time, we require a framework in which the optimum allocation of resources is realized through the markets. The Bank aims to contribute actively to this end. Since lending by financial institutions is an overwhelming part of the financial intermediation channel, it is both pragmatic and effective to start developing new credit markets, including a market for asset securitization. Accordingly, the Bank has already begun to implement concrete measures along this line.
|
bank of japan
| 2,003 | 11 |
Speech given by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting of the Council for Financial Innovation, To...
|
Toshihiko Fukui: Toward the further enhancement of financial services in Japan Speech given by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting of the Council for Financial Innovation, Tokyo, 4 November 2003. * * * Today, I would like to talk about Japan’s financial system and share with you my thoughts on the future of financial services. I. Current State of Japan’s Financial System and the Challenges It Faces The Bank of Japan has sought to maintain financial system stability and promote economic recovery, by providing ample liquidity under the quantitative easing policy, to overcome deflation. The Bank has also supported efforts by the financial services industry, using various means, to strengthen the soundness and functioning of the financial system. Our strategy is two-pronged, aiming both to overcome deflation and to solve the financial system problem at the same time. As I have just noted, we face two problems simultaneously. While deflation hampers the resolution of the nonperforming-loan (NPL) problem and delays the revitalization of the financial system, the malfunctioning of the financial system exacerbated by the NPL problem weakens momentum for economic recovery. Both at home and abroad, there are some who argue that we should focus exclusively on one of these two problems. I believe, however, that most people with a deep understanding of the issue would agree with us that these two problems are inseparable. In short, we consider it important to work steadily and continuously toward both economic recovery and the revitalization of the financial system. Japan’s financial system has faced several critical moments over the past ten years or so. The failure of a number of large banks and securities companies is still fresh in our memories. Many complicated issues remain to be resolved. For example, in addition to the NPLs that may be more directly attributed to the bursting of the asset price bubbles, there has been a constant stream of new NPLs stemming from structural problems in the Japanese economy, which has made the NPL problem more difficult to resolve. Furthermore, efforts on the part of the financial services industry seem to have been largely negated by the continued decline of real estate and other asset prices, as the persistent economic stagnation has lowered the expected economic growth rate. It is true, however, that progress has been made in reform related to financial services and markets. Frameworks have been established for the resolution of failed banks and for injections of public funds into troubled banks. Necessary revisions have been made to tax and accounting systems, and bankruptcy laws. In addition, inefficient and outdated trade practices that existed in the relationship between banks and their corporate clients are being reviewed, as evidenced by the accelerated unwinding of cross-shareholdings. Consequently, it seems that gradual but concrete and visible progress, particularly among major banks, has been made in resolving the NPL problem that has shackled banks’ business performance. A. NPL Problem The following three points are fundamental to overcoming the NPL problem: first, appropriate measurement of the economic value of loans and the subsequent provisioning of sufficient reserves; second, removal of NPLs from banks’ balance sheets; and third, accurate determination of the viability of troubled firms, followed by appropriate and prompt measures to reconstruct or reorganize these firms with close cooperation between the firms themselves and banks. The Bank proposed these measures in its report titled “Japan’s Nonperforming Loan Problem,” released in October 2002. Adoption of the discounted cash flow (DCF) method, a measure recommended by the Bank, led to a general increase in banks’ loan-loss provision ratios in their financial statements for fiscal 2002. Furthermore, in fiscal 2002, major banks’ NPLs to borrowers classified as “bankrupt,” “effectively bankrupt,” or “in danger of bankruptcy” declined by more than 11 trillion yen on a gross basis. Their NPLs as disclosed under the Financial Reconstruction Law amounted to 21 trillion yen as of the end of March 2003, down by more than 30 percent from a year ago. Some banks recorded the ratio of NPLs to total loans below 4 percent. Various initiatives are also being made in the area of corporate turnarounds. Private-sector corporate restructuring funds, both Japanese and foreign, have become more active. The government-backed Industrial Revitalization Corporation of Japan has announced restructuring plans for eight firms as of the end of October. Japan’s financial system is expected to enter a virtuous circle in which the monitoring function of the market and more intensified competition will effectively encourage banks to take further actions to reduce their outstanding NPLs. Resona Group substantially increased its loan-loss provisioning in an attempt to drastically shorten the time required to regain financial soundness, and this attracted considerable attention in the market. The new management seems to have decided to take actions that put the highest priority on the prompt recovery of its credibility in the market after receiving public funds. We commend its actions as representing a bold step toward dealing with its problems. B. Reduction of Exposure to Stock Price Volatility Progress is also being made in banks’ efforts to unwind their shareholdings, which, together with the NPL problem, pose a major threat to their financial condition. This is of course not to say that banks should not hold stocks for any purpose whatsoever. Considering the potentially high price volatility of stocks as well as the fact that cross-shareholdings are not held for portfolio investment purposes and cannot be sold in a timely manner, these shareholdings may have a serious and unpredictable impact on banks’ business given their limited capital base. Banks can protect their business from stock price fluctuations by reducing crossshareholdings. Moreover, by reducing the allocation of capital to stock price volatility, banks can free up some of their capital to support firms. It is worth noting that banks have made steady progress in reducing their exposure to stock price fluctuations. In fact, the total shareholdings of banks fell by 48 percent to 21 trillion yen over the past two years. To support the efforts of banks, the Bank started purchasing stocks held by them in November 2002. The total value of stocks purchased by the Bank amounts to 1.8 trillion yen to date, and in September, the Bank decided to extend the stock purchasing period by one year. Needless to say, the market should be the place in which stocks are traded. Fortunately, trading volumes on the stock market have been high since May, and the market seems to be recovering its function. In September, the Banks’ Shareholdings Purchase Corporation was reformed so that it could function more effectively. Banks are expected to make further steady progress in reducing their shareholdings now that there are three outlets in place to absorb their stock sales-the stock market, the Bank, and the government-backed organization. C. Implications and Conditions regarding the Removal of Blanket Deposit Insurance Let me now turn to the removal of blanket deposit insurance in April 2005. What conditions should be satisfied before the removal? In identifying these conditions, we need to envision what the financial system will be like after the removal of blanket deposit insurance. I would like to call attention to two points. First, Japanese firms will have to survive severe competition and drastic changes in the global economy. Participants in the market will be subject to constant replacement, as burgeoning firms and new firms enter while some existing firms are restructured and nonviable ones exit. The corollary is that it is impossible to avoid the emergence of new NPLs and losses arising from defaults at banks. This leads to the second point. Banks will also be subject to frequent new entry, exit, and mergers and acquisitions, under the strict governance of shareholders and depositors. We cannot return to the period of high economic growth where, de facto, there were no bank failures. In this sense, the removal of blanket deposit insurance may represent the last hurdle for banks to overcome before they enter the next stage of competition. In doing so, it is desirable that banks be perceived as having passed over the hurdle on their own, not under the government’s initiative as in the past. I believe, therefore, that the following conditions are necessary when removing blanket deposit insurance. Japanese banks, particularly large banks and core regional banks, must regain credibility among financial market participants both at home and abroad by proving that they have stable earnings power. To that end, they must establish schemes for prompt disposal of NPLs and improve risk management techniques, including those for dealing with stock price volatility. Banks’ stock prices have recently been recovering rapidly, although these rises reflect the revision of overly pessimistic views about banks’ business performance. Banks must work to reinforce this positive assessment in the market, and this will require a wide range of effective measures to improve their profitability. In resolving the NPL problem, for example, it is important to avoid increases in credit costs arising from further deterioration in the quality of existing NPLs, by strengthening the measures for revitalizing troubled firms and removing NPLs unlikely to be collected. If banks can contain credit costs to roughly the level necessary to cover newly emerging NPLs, we can assume that they should at least be able to post stable net income. If banks find themselves short of capital for dealing with NPLs, they should first raise additional capital in the market. We cannot, however, rule out cases where, within a limited time frame until the blanket deposit insurance is removed, banks prove unable to strengthen their capital base by themselves. The current scheme for public funds injection pursuant to Article 102 of the Deposit Insurance Law is designed to be permanent and functions as the last resort to prevent systemic risk from materializing. I believe that, as a comprehensive measure in the face of the removal of blanket deposit insurance, a new scheme should be established whereby injections of public funds are available to banks in difficulties, even in cases where the materialization of systemic risk is not imminent. What, then, should the bank supervisory authorities, including the Bank, do to prepare for the removal of blanket deposit insurance? They need to prove that they have developed a sufficient crisis management system to prevent the materialization of systemic risk and ensure financial system stability. To prepare for cases where banks’ financial conditions deteriorate significantly, the safety net comprises several measures for maintaining financial system stability. Two primary examples are the Deposit Insurance System and the Bank’s function as the lender of last resort, including its readiness to extend emergency loans when necessary. The crucial issue from now on is to further devise ways to apply these safety-net measures in practice. The government and the Bank have accumulated a great deal of knowledge and experience by working together closely in the resolution of failed banks, both large and small. As I mentioned earlier, we cannot rule out the possibility of bank failures after the removal of blanket deposit insurance. It has become all the more important that the bank supervisory authorities obtain from the market and the public the strong trust in their ability to ensure financial system stability, while further improving the environment for free and open competition. This can be achieved if they avoid any large, negative impact on the economy, without causing significant moral-hazard effect, by taking appropriate and swift action whenever the resolution of troubled banks becomes necessary. The injection of public funds into Resona Bank was the first case pursuant to Article 102 of the Deposit Insurance Law, and it confirmed the effective functioning of the system. The bank supervisory authorities need to further enhance their practical skills for dealing appropriately with other potential cases. II. Future Agenda for Japan’s Financial System Next, I would like to share with you my thoughts on several issues that are significant for the future enhancement of Japan’s financial services. What are the key issues ahead? Answers may vary depending on whether one is a depositor, an investor, a firm, or the manager of an entity that provides financial services. Many of the questions that come up in such a discussion should be left to the ingenuity of the private sector to solve. Therefore, today I would like to focus on one issue. Even if we assume that the NPL problem is successfully overcome, will Japan’s system for credit intermediation prove adequate to the task of offering firm and effective support to the economy? A. Problems in Credit Provision The Bank has been providing ample liquidity to financial markets under the quantitative easing policy, and this has definitely helped to relieve various concerns as well as maintain financial market stability and underpin the economy. However, this liquidity provision by the Bank has not necessarily led to increased efficiency in the provision of credit by private banks. It is true that the NPL problem has been one of the obstacles for the system of credit provision, but there are other factors. For example, in spite of the fact that banks are not reluctant to make loans to eligible firms, firms still perceive that it is difficult to receive sufficient credit from banks. Such miscommunication makes the problem more complex. This implies that the problem lies not only in a lack of efforts among the agents involved, but also in structural flaws of the financial system that need to be corrected. I would like to give some examples that illustrate this point. I will start by looking at the segmentation of the loan market. For instance, the ratio of bank loans without collateral or guarantees to the outstanding amount of loans is around 40 to 50 percent for major banks, due partly to the contribution of loans to large firms. On the contrary, for regional banks and shinkin banks, the ratio is only about 10 to 20 percent. This suggests that small to medium-sized firms’ demand for loans, especially firms without sufficient collateral but with a high potential to increase cash flow, is not being fully met. In addition, given the fact that the secondary market for loan assets is still in its infancy and the relatively low liquidity in the corporate bond and CP markets, it appears that investors willing to take on credit risk are not being given adequate investment opportunities. Meanwhile, we observe cases of insufficient segmentation of the functions related to credit provision. When bank loans to firms are provided based on short-term contracts, they are in fact refinanced many times, and so they function partly as quasi-capital. Banks are exposed to complex combinations of risks from sources that differ in nature, such as debt and equity, and this hinders the process of reallocating these risks appropriately among suitable investors. Thus, I believe that the overwhelming priority is to review the current system of credit provision within which deposit-taking and lending business of banks play a dominant role. The system has long been in place and can be called an entrenched custom. The current system tends to concentrate various risks on banks’ balance sheets. Therefore, to achieve more efficient credit provision, we need to not only identify the factors causing this concentration of credit risks at banks but also seek persistently to reduce them. B. Toward Seamless Provision of Credit The current system of credit provision needs to be changed so that credit risk is no longer concentrated too heavily at banks but is allocated to a wide range of investors. It is not simply a matter of choosing the best type of financing, whether it is traditional bank lending, securitization, or financing through capital markets. Rather, it is a matter of designing a system for credit provision that covers all types of financing and achieves the seamless provision of credit. I believe that there is a significant role to be played here by financial innovation, by which I refer to the progress in IT, enhanced financial engineering technology, and the financial theory that supports it. Seamless provision of credit enables the efficient use of capital necessary for taking on credit risks. It also aids the process of matching interest rates to borrowers’ credit risks. The result is that funds are allocated more efficiently, and this contributes to economic growth. In relation to this point, I would like to briefly touch upon government financial institutions. The principal function of government financial institutions is to complement the role of private banks, extend credit to borrowers that are selected in accordance with policy objectives at the time, and provide credit enhancement. However, due to the increase in postal savings and the resulting rise in funds under the government’s fiscal investment and loan program (FILP), Japan Post and other government financial institutions seem to have expanded their business activity beyond complementing the role of private banks. People point out that the expansion most likely distorts the efficient allocation of credit in the economy. For this reason, the government has been reforming FILP and has started discussions on the privatization of Japan Post, which was established as a public corporation earlier this year. Discussion on the privatization should proceed based on the recognition that it is important to build a nationwide financial system better suited to the efficient allocation of credit. C. Shift to a Financial System Capable of Seamless Provision of Credit When banks and investors provide credit to borrowers, they measure the value and risk of credit based on borrowers’ expected future cash flow. On this basis, they decide whether to take on the risk themselves or reallocate it. Therefore, the key to successfully achieving the seamless provision of credit is to ensure that a wide range of agents, including investors, banks, and other financial services providers, fully perform their respective functions, such as evaluating and taking on credit risks. Hereafter, I use the term “credit risk” to represent the value and risk of credit. In what follows, I will elaborate on the three credit risk-related functions: the appropriate assessment of risks; the unbundling and repackaging of risks; and the effective reallocation of risks. D. Appropriate Assessment of Credit Risks First, credit risks should be assessed appropriately. To facilitate the smooth provision of credit, information regarding borrowers’ profitability and their financial condition should be analyzed thoroughly and the results of the analysis should be reported to potential lenders accurately. Financial data on borrowers are useful for this purpose, but the information publicly available on small or newly established firms is limited compared to that on large firms that have access to the capital market and disclose data on their financial condition. Banks, with their broad in-house networks of branches and sales staff, have an advantage over other financial services providers in originating credits through their ability to obtain and analyze information on borrowers. Having said this, however, banks’ available capital is limited, as mentioned earlier, and this can be a constraint on their ability to not only originate credit but also bear credit risks on their own balance sheets. Banks must therefore use their capital efficiently by extending credit only when it matches their strategies and reallocating the remaining credit risk to other investors. Such a reallocation of risks should be beneficial to both banks and investors. To this end, banks are expected to enhance their ability to assess borrowers’ creditworthiness appropriately and to reflect these assessments in their pricing of credit. Thanks to recent progress in financial engineering, various new methods to measure and control risks have been made available. These include quantitative evaluation of credit risks based on such data as credit ratings and bankruptcy ratios, as well as the portfolio approach that makes use of the law of large numbers. New financial products utilizing these methods have also been developed. Examples include loans with a non-recourse arrangement, standardized loans to small firms requiring no collateral and making use of scoring models, as well as consumer loans that require only simple loan screening procedures. Banks should be able to further expand the practical use of such methods throughout their in-house networks to expand their business activities. For smoother reallocation of credit risks, the crucial factor is that the credit originator assesses the initial risk appropriately and sets the interest rate accordingly. E. Unbundling and Repackaging of Credit Risk Second, we need to enhance techniques for unbundling and repackaging credit risks. Instead of simply selling loan assets, originators can unbundle and repackage the credit risk inherent in loan assets using financial engineering techniques, thus satisfying the demand of a wider range of fund providers and investors. For example, when creating asset-backed securities (ABSs), cash flows from pooled assets are often classified into tranches, such as senior, mezzanine, and equity, reflecting different degrees of risks, and these tranches are sold to investors. This is because the value of pools of the original assets is likely to fluctuate considerably. Through the unbundling of risks, the differing risk preferences of various institutional investors, at home or abroad, can be satisfied. As I mentioned earlier, bank loans to firms in Japan are provided in the form of short-term contracts, although they are in fact rolled over many times, so they function in effect as quasi-capital. By separating credit risks inherent in these loans into equity and debt portions, risks for each portion can be efficiently reallocated to investors willing to bear them. An example of repackaging risks is a bank loan to a small but promising firm in which banks retain a right to purchase new stock when issued. In this way, banks may benefit from a rise in the firm’s value if its business succeeds, and banks and other shareholders can participate in the governance of the firm if necessary, while at the same time keeping interest rates on loans lower than otherwise. Financial services providers ranging from banks, securities companies, and nonbanks to credit-rating agencies and auditing companies can contribute to the process of enhancing techniques for unbundling and repackaging credit risks. F. Reallocation of Credit Risk Third, the market function of reallocating credit risks needs to be strengthened. In this regard, we need to improve the infrastructure of credit markets, by which we refer to the markets for liquidating loan assets, syndicating loans, and trading ABSs. This would enable credit risks initially borne by credit originators, typically banks, to be reallocated among a wider range of investors, allowing additional capital resources both inside and outside Japan to be utilized more efficiently. It would also be useful to utilize the price discovery and verification functions of credit markets. For risk-based pricing mechanisms to work properly, the accuracy of prices must be constantly subject to review. Credit markets will provide information useful to confirm the accuracy of prices. Concrete measures to improve the functioning of credit markets need to be taken by both the private and public sectors: for example, the establishment of uniform loan contracts, and a wider use of covenants covering cases of deterioration in credit quality. Improving the functioning of the Japanese government securities (JGS) market would also help secure the sound development of credit markets. The JGS market provides rates that are free from credit risks and which become a benchmark for interest rates in other markets, including credit markets. The JGS market should be constantly improved to ensure that it becomes highly liquid and robust enough to consistently offer reliable risk-free rates under various circumstances. The Bank, in cooperation with both market participants and the fiscal authority, will continue to work to enhance the functioning of this market. In Japan, however, a major issue is how to control the risk inherent in an expansion of the amount outstanding of JGSs issued. There is an immediate need to show to the public the blueprint of a new fiscal structure for the country. III. Role of the Bank of Japan By ensuring permeation of monetary easing effects throughout the economy, the Bank will continue to secure financial market stability and economic recovery, as well as improve the overall functioning of the financial system in the long run with regard to the efficient allocation of credit. We believe that these are prerequisites for achieving a vigorous economy suitable for the new era. To achieve this goal, the Bank decided to provide ample liquidity more flexibly, and confirmed its commitment to maintaining the quantitative easing policy at the Monetary Policy Meeting on October 10, 2003. In addition, the Bank will continue its wholehearted support of efforts being made in the financial services industry to improve the overall functioning of the financial system with regard to the efficient allocation of credit. Since last year, the Bank has announced a number of measures in this regard. These include the release of a proposal for an early resolution of the NPL problem, including suggestions for introducing the DCF method for evaluating loans; the purchase of stocks held by banks; and the inclusion of asset-backed commercial paper (ABCP) on the Bank’s list of eligible collateral, and the launch of asset-backed securities (ABS) purchases, aimed at nurturing these markets. In addition, the Bank decided to hold a forum, starting this month, to discuss with a wide range of market participants how together we can improve the ABS market and other financial markets. Furthermore, through our on-site examinations and off-site monitoring, we wish to deepen discussions with banks and other financial services providers on ways to better manage their business in line with the enhancement of the market functions. The Bank will enhance the effect of monetary policy by continuing to review market operations, as well as contribute to strengthening the functioning of the financial and capital markets. Let me conclude by saying that, as our efforts to enhance financial services in Japan bear fruit, I am confident that there will gradually emerge a completely new financial system, one which is innovative and provides the strong support to the country’s economy that it deserves. Thank you for your kind attention.
|
bank of japan
| 2,003 | 11 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a luncheon for the EU Ambassadors, Tokyo, 28 November 2003.
|
Toshihiko Fukui: Achieving sustainable growth Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a luncheon for the EU Ambassadors, Tokyo, 28 November 2003. * * * Today, I will talk about Japan's economic outlook and the conduct of monetary policy in pursuit of sustainable growth. Japan's economy is starting to recover gradually. Exports and production are increasing. Corporate profits are rising, and business fixed investment is staging a modest recovery. The majority of the Bank of Japan's Policy Board members forecast real GDP growth of around two and a half percent in both fiscal 2003 and 2004. Behind Japan's nascent economic recovery is the synchronized recovery of the world economy. The US economy is clearly on the rebound, European economies are showing signs of a moderate recovery, and closer to home, East Asian economies have regained their high growth paths after quickly overcoming the adverse impact of SARS. Increasing interdependence between the United States, East Asian countries and Japan is one of the keys to achieving sustainable growth in Japan. For example, Japanese firms strategically incorporate China not only as a low-cost production center but also as a potentially huge consumer market for goods and services. This is underscored by the increasing amount of both exports to and imports from China. We also observe an increasingly important mechanism whereby, for example, a recovery in the US economy stimulates East Asian economies, and this in turn has a positive impact on Japan. Looking at the domestic front, steady progress has been made in solving structural problems. The debt to sales ratio for all industries has declined from its peak in 1993. The employment and income situation has somewhat improved recently. Corporate profits have increased largely as a result of firms' restructuring efforts. This has led to a recovery in business fixed investment. While economic activity is improving, mild deflation is expected to continue. Indeed, the most recent figure for the Bank of Japan's Policy Board members' forecast of the Consumer Price Index excluding volatile food prices, which we generally refer to as the “core CPI,” is slightly negative, between minus 0.2 and minus 0.5 percent for fiscal 2004. The combination of economic recovery and continuing deflation suggests a number of underlying problems, which may have some policy implications. First, the output gap remains large. Since real GDP growth in both fiscal 2003 and 2004 will be slightly above potential growth, the output gap will be reduced only marginally. Second, inflation has been declining globally. This is due mainly to the successful conduct of monetary policy worldwide and the increasing penetration of emerging countries into market economies. Firms have not regained pricing power in the market. Therefore, there is a strong possibility that inflation will stay at a relatively low level, while the growth rate will increase. Third, Japan's economy is still suffering from structural problems such as excess debt, excess labor, and financial system fragility. Because of these structural problems, cyclical recoveries at large manufacturers are not able to generate strong positive spillover effects for non-manufacturers, small to medium-sized companies, or households. To return to a sustainable growth path and overcome deflation, Japan must thus solve its structural problems and enhance the growth prospects of both firms and households. In Japan, as in Europe, structural reform to ensure the more efficient use of capital and labor is urgently called for. Despite the recent progress, we should not be complacent about the need for structural reform. The process of solving structural problems is still half-finished. For example, the debt to sales ratio for nonmanufacturing industries is still higher than it was before the bubble period. In addition, the sense that they are still holding excess labor remains among firms, whether in manufacturing or nonmanufacturing, and whether large or small. Banks have also made progress in their restructuring. Large banks have reduced outstanding amounts of nonperforming loans and have increased provisioning. They have also reduced the risk pertaining to stock prices by selling their shareholdings to the market as well as to the Bank of Japan under our stock purchasing scheme. Almost all banks have reduced their shareholdings to levels below their Tier 1 capital. Banks' financial results turned out to be better than expected for the first half of the current business year ended in September. Because losses resulting from the disposal of nonperforming loans were smaller than operating profits, most banks posted profits. The average capital adequacy ratio for large banks was around 11 percent. Given the scheduled removal of blanket deposit insurance in the spring of 2005, time is running short for us to engage in the further restructuring of the financial system to restore the soundness of the banking system. Moreover, the decline in bank lending illustrates not only that demand for loans is weak but also that the risk-taking ability of banks has not recovered sufficiently. Under such circumstances, the Bank of Japan has adopted quantitative easing as its fundamental policy framework. And we have made our commitment to maintain the current quantitative easing, that is to maintain zero interest rates, until the core CPI shows a year-on-year rate of increase of zero percent or above on a sustainable basis. Quantitative easing has helped to maintain financial market stability and to make the environment surrounding corporate finance more accommodative, thereby underpinning economic activity. Concerns about a liquidity shortage in the money market have been almost dispelled, and short- to medium-term interest rates have been low, reflecting the Bank's commitment in terms of policy duration. In the area of corporate finance, borrowing rates have been stable at low levels. Although the outstanding amount of loans has been declining, the lending attitudes of banks as perceived by firms and the funding situations of firms themselves have been improving. During 1997 and 1998 amid the currency crises in Asia and Russia, the failures of several large Japanese financial institutions triggered a credit crunch. Since then, however, firms have not experienced such hardships, thanks to the provision of ample liquidity by the Bank and the strengthening of the safety nets. Under quantitative easing, the Bank has raised the target for the outstanding balance of current accounts three times this year, resulting in a total increase of 10 trillion yen. In April and May, the Bank raised the target in response to downside risks, including the negative effect of SARS and the decline in stock prices. In October, the Bank raised the upper limit of the target. This was intended to give the Bank more flexibility in providing liquidity through its money market operations. Unlike earlier increases in the target, the objective of the increase in October was not to deal with downside risks, but rather to reinforce the recent momentum for recovery. In my view, two things are important to strengthen the framework of quantitative easing. One is to clarify our commitment to maintain the quantitative easing policy, thereby enhancing the transparency and increasing the effectiveness of monetary policy. The other is to strengthen the transmission mechanism of monetary policy in the area of corporate finance. In October, with a view to enhancing the transparency of monetary policy, we decided to clarify our commitment to maintain the quantitative easing policy. We also decided to improve the way we communicate to the market our thinking on the economic outlook. In terms of our commitment, we specified two conditions for terminating quantitative easing. First, the most recently published year-on-year rate of increase in the core CPI must register zero percent or above, and such a tendency must be confirmed over a period of a few months. Second, we need to be convinced that the future year-on-year rate of increase in the core CPI will not fall below zero percent. To be more specific, the majority of Policy Board members must forecast that the rate of increase in the core CPI will be above zero percent during the forecasting period. While these two conditions are necessary conditions, there might be cases in which even though the above conditions have been met, the Bank might still deem it appropriate to continue quantitative easing. As a way to improve our communication with the market, we have introduced the following measures with particular emphasis on the timing and frequency of communication in conjunction with the clarification of our commitment. We decided to release an interim assessment of the state of the economy and prices in January and July. Previously, the Bank released its view of the “standard scenario” for the economy after reviewing the outlook and risk assessment of the economy and prices twice a year, in April and October. Now, in addition to these, the Bank will discuss possible deviations from this standard scenario at Monetary Policy meetings and report the outcome of its discussion in the January and July monthly reports. The Bank also decided to change the schedule for publishing its monthly report as well as to hold the Governor's press conference on the same day as the Monetary Policy meetings. We hope that the clear and concrete commitment to continue quantitative easing will help the effects of monetary easing to permeate the economy more efficiently. We believe this will contribute to strengthening the foundation for a more sustainable economic recovery. Some argue that such clarification of the Bank's commitment may impair the flexibility with which it is able to conduct future monetary policy. For example, if market participants consider the Bank's commitment to be too inflationary, this will cause the yield curve to steepen. It reflects not only the eventual increase in future short-term interest rates, but also the greater risk premium attached to concerns that a “too-easy” policy may be continued for “too long.” In this sense, the idea of policy commitment involves a delicate balancing act between securing the short-term economic recovery and achieving long-term sustainable growth. Considering that deflation, though mild, is expected to continue under zero interest rates, I believe an unusual policy commitment, which is linked with a specific and observed economic indicator, is necessary in striking the best possible balance under the circumstances. To strengthen the policy commitment, I am well aware that there are those both at home and abroad who argue for adopting an inflation target or a numerical definition of price stability. In this regard, let me reiterate that when nominal interest rates are constrained by the zero bound and financial institutions are not performing their intermediary function sufficiently, we cannot expect the transmission mechanism of monetary policy to function properly. Under such circumstances, it is hard to believe that the adoption of inflation targeting would increase the effectiveness and enhance transparency regarding the future conduct of monetary policy. I believe that the current policy commitment is most effective in enhancing the transparency of monetary policy and stabilizing the expectations in the market. It clarifies under what conditions and for how long the Bank intends to maintain the framework of its current quantitative easing policy. In addition to enhancing transparency, we need to strengthen the transmission mechanism of monetary policy in the area of corporate finance. In this regard, the Bank has begun purchasing assetbacked securities backed by private sector corporate debt. The credit markets in Japan have traditionally been dominated by bank lending. However, given a situation in which banks' ability to take risks is constrained, we need to expand the markets for asset-backed securities and other such credit instruments, which are not susceptible to fluctuations in banks' capital levels. To date, the Bank has purchased about 200 billion yen of asset-backed securities and asset-backed commercial paper. We hope that our efforts will contribute to the further expansion of the asset-backed securities market by raising awareness of its advantages among financial institutions and investors as well as encouraging the origination of asset-backed securities in the market. Earlier this month, the Bank initiated a series of workshops with a wide range of market participants on how best to coordinate efforts to improve the markets for asset-backed securities and other similar credit instruments. Our current framework for quantitative easing coupled with measures to strengthen the transmission mechanism of monetary policy will improve the financial environment within which firms and banks engage with the structural problems. It will thus facilitate the Japanese economy's return to a sustainable growth path and also bolster the efforts to overcome deflation. Since the strategy of the Bank of Japan relies on the efforts of the private sector, this policy may take time to pay off, but it is the most effective way of tackling the roots of the structural problems. In closing, I express my sincere hope that the current momentum for recovery in both Europe and Japan will be successfully translated into sustainable economic growth.
|
bank of japan
| 2,003 | 12 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting in Fukuoka, 8 December 2003.
|
Toshihiko Fukui: Recent economic and financial developments in Japan Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting in Fukuoka, 8 December 2003. * I. * * The current economic situation and the route to sustainable growth Largely in line with the standard scenario in the Outlook and Risk Assessment of the Economy and Prices published at the end of October, Japan’s economy is starting to recover gradually, after a period of generally flat economic activity that lasted up until around summer. With corporate earnings improving, business fixed investment continues its gradual recovery. Against the backdrop of an improvement in overseas economies, exports, which had been flat until summer, have started to turn upward. Production, whose recovery had been somewhat delayed due to the unusually cool summer, is starting to increase recently. The fact that the rise in exports and business fixed investment has led to a recovery in production suggests that cyclical momentum for a recovery is kicking in, and that the Japanese economy is at last settling onto a recovery path. From the second half of fiscal 2003 through fiscal 2004, a moderate recovery is expected to continue. Exports and production are likely to continue increasing against the background of high growth in the United States and Asia, particularly in China, with a recovery in global demand for IT-related goods. In Europe, it is becoming more apparent that the economy has bottomed out. There is a greater probability that these increases in exports and production will promote further business fixed investment along with the improvement in corporate earnings. The pace of the recovery will most likely be contained to a moderate clip, considering ongoing structural adjustment pressures as well as not so favorable prospects for employment and income. The corporate sector, especially non-manufacturing, is still suffering from excess debt. With no clear signs of improvement in employment and income, personal consumption is expected to continue following a generally flat trend. It will be quite some time before we can eliminate the word “moderate” from the description of the current recovery. After decreasing constantly for five and a half years, the consumer price index excluding fresh food, which we refer to as the core CPI, increased by 0.1 percent year-on-year in October. This was partly due to a hike in rice prices caused by the unusually cool summer, in addition to factors such as the rise in medical treatment costs and the tobacco tax. Although the core CPI may fluctuate due to temporary factors, its underlying trend is expected to be for a slight decline during the rest of fiscal 2003 and throughout fiscal 2004 since aggregate demand is projected to remain short of potential supply capacity. Naturally, this standard scenario entails various uncertainties, or what we term risk factors. Among them, we pay particular attention to the global demand for IT-related goods, the U.S. economy, the domestic financial system, and financial market developments. These risk factors may cause the Japanese economy to deviate from the standard scenario laid out in the Outlook and Risk Assessment, either upward or downward. To overcome deflation and return to a sustainable growth path, a cyclical recovery alone is not sufficient. Structural problems must be dealt with, and expectations of higher growth must be formed. We need to address excess debt in the corporate sector and weakness in the financial system. We need to raise expectations of growth among firms and households, who seek for new value added, so that these may be translated into brisker spending. In the corporate sector, steady efforts have been made, stretching over more than 10 years, to solve problems such as excess debt and labor. In fact, large manufacturers have largely succeeded in eradicating these excesses. As break-even points have been lowered, the ratio of current profits to sales for such firms has improved to its highest level since the bursting of the bubble. Some manufacturers are aggressively pursuing improvements in productivity by investing in newly growing businesses and constructing a more efficient international division of labor. Spread of such movements throughout the corporate sector, including to non-manufacturers and to small and medium-sized firms, is one of the key factors to enhancing expectations of growth generally and reinvigorating Japan’s economy. II. Conduct of monetary policy The Bank of Japan is continuing to provide ample liquidity, targeting an outstanding balance of current account deposits at the Bank under its quantitative easing policy. Since the beginning of the year, the target has been significantly raised twice, in April and May, in light of risk factors such as the war in Iraq and severe acute respiratory syndrome. Furthermore, in October, the Bank raised the upper limit of the range for the target balance of current account deposits. This was intended to reinforce the nascent recovery by enhancing the flexibility of money market operations when providing liquidity to the market. With the economy in an incipient recovery phase with its concomitant uncertainties, there is the potential for subtle fluctuations in the expectations of market participants and changes in funding needs. The Bank has sought to respond flexibly in its market operations to any possible changes of these sorts, so that it can reinforce the current stirrings of recovery. The outstanding balance of current account deposits now stands around 30 trillion yen, having risen from around 20 trillion yen at the beginning of the year. The Bank conducts market operations centering on this balance by carefully monitoring daily market conditions. In order to help the effects of monetary easing through the provision of ample liquidity to permeate the whole economy, the Bank is taking measures to strengthen the transmission mechanism of monetary policy in corporate finance. In August, the Bank began the purchase of asset-backed securities collateralized by assets mainly related to small and medium-sized firms. The Bank recently decided to accept syndicated loans as eligible collateral. In addition to their immediate monetary policy implications, these measures will also contribute, over the long run, to establishing a new shape for corporate finance, better compatible with Japan’s future economy. We hope that our initiatives will act as a trigger, spurring the private sector to explore various new market-based funding channels to supplement the traditional bank lending channel. III. Enhancing transparency in the conduct of monetary policy There are two points that are of pivotal importance when conducting monetary policy. One is to implement effective policy in a timely manner. The other is to provide the public with a lucid explanation and promote their understanding of the Bank’s evaluation of economic and price developments as well as the thinking upon which it bases its policy decisions. The new Bank of Japan Law stipulates that the Bank, which has been given independence to conduct monetary policy at it own discretion, must make efforts to be more accountable for its decision. We think that the greater the public understanding of the thinking behind monetary policy, the more effective that monetary policy will be. Bearing these points in mind, the Bank made two major decisions to enhance the transparency of monetary policy at the Monetary Policy Meeting in October. First, measures were taken to provide the public with a lucid explanation of the Bank’s evaluation of economic and price developments in a timely manner. In addition to the semiannual report on the Outlook and Risk Assessment of the Economy and Prices in April and October, the Bank decided to carry out interim assessments of economic and price developments in January and July, and to release the result of its discussions accordingly. These interim assessments are designed to investigate possible deviations of economic and price developments from the standard scenario presented in the Outlook and Risk Assessment three months before. Second, the Bank published a more detailed description of its commitment to maintaining the quantitative easing policy. The Bank had already committed to maintaining the current policy until the core CPI registers a stable year-on-year rate of increase of zero percent or above. In October, it decided to clarify the meaning of the phrase “registers stably a zero percent or an increase year-on-year” in a more concrete manner. Specifically, quantitative easing will be continued until the following two conditions are met. First, not only must the most recently published core CPI register a year-on-year rate of increase of zero percent or above, but this tendency must be confirmed over a few months. Second, the year-on-year rate of increase in the prospective core CPI must not be expected to register zero percent or below. In other words, the majority of Policy Board members need to make the forecast that the core CPI will register a year-on-year rate of increase greater than zero percent during the forecasting period. This forecasting period is roughly a year starting from April in the April Outlook and Risk Assessment, and roughly a year and a half, which is the second half of the current financial year starting from October and the whole of the next financial year ending in March, in the October Outlook and Risk Assessment. The above two conditions are necessary conditions. However, we have also announced that there may be cases when the Bank will judge it appropriate to continue with quantitative easing even if these conditions are fulfilled. Since its announcement, we have received a few questions about this detailed description of the commitment. Let me answer two major questions. The first question is why the Bank does not carry out interim assessments of economic and price developments every month. Since the economy is changing constantly, perhaps, theoretically speaking, we should carry out the interim assessments every month, or even every week. Against this theoretical possibility, we judge it appropriate that the Outlook and Risk Assessment and interim assessments should be released roughly every three months in light of their objective to present a basic view of how the economy will develop over a reasonable period of time. We cannot revise the basic view about the economy and prices in an appropriate manner without sufficient accumulation of critical data. Also we may confuse the market if we release assessments based on insufficient data or if we change our assessments too frequently. Actually, many central banks abroad release their monetary policy reports or inflation reports every three months. This does not, of course, imply that the Bank will make policy changes only every three months. Although conducting the basic evaluation roughly every three months, we need to closely examine the ever-changing state of the economy and prices and to carefully deliberate on the need for policy changes at every Monetary Policy Meeting. As has always been the case, if the need arises, the Bank will adjust its policy in a timely and appropriate manner, regardless of the frequency and timing of the release of the Outlook and Risk Assessment and interim assessments. The second question concerns the risk that more detailed description of the commitment to maintaining the quantitative easing policy may affect the Bank’s ability to conduct monetary policy in a flexible and timely manner in future. It may be natural to ask this question, because it is extremely unusual for a central bank to link its future policy conduct to a particular economic indicator, such as the core CPI in the case of Japan. While paying due attention to this kind of risk, we have come to the conclusion that, with a number of obstacles still confronting Japan’s economy as it seeks to overcome deflation and settle onto a more solid recovery path, such a detailed description of the commitment is necessary at the current time. This detailed description is a manifestation of our strong determination regarding the future conduct of monetary policy. IV. Current state of the financial system On the whole, the current state of the financial system in Japan remains severe. It should be noted, however, that at some financial institutions, especially major banks, efforts to improve financial conditions have gradually begun to bear fruit. For the financial year ending in September, profitability improved significantly at all major banks, except for Resona Group, which received an injection of public funds. This was mostly thanks to successful reductions by all major banks of losses from nonperforming loan disposals, on a year-on-year basis at the end of September 2003. These reductions were partly due to large capital increases and higher provisioning in the previous financial year ending in March 2003. After registering a record high at the end of March 2002, the amount outstanding of nonperforming loans continued to decrease as progress was made in the removal of nonperforming loans from balance sheets. Major banks improved stability of their profitability by reducing their shareholdings, which had been blamed for large fluctuations in profits. In fact, banks’ shareholdings had decreased to levels well below Tier 1 capital at the end of September. To strengthen profitability, major banks made efforts in cutting costs and increasing fee incomes. These efforts have gradually begun to be reflected in their financial results. Moving on to conditions surrounding regional financial institutions, let me first touch on the recent case of Ashikaga Bank. Last month, Ashikaga Bank informed the government that it had negative net worth at the end of September, and that there was a risk of suspending repayment of deposits. Considering the significant financial role played by Ashikaga Bank in the region, including Tochigi Prefecture, the government judged that a serious disruption of the financial system in the region might occur if no measures were taken. The Prime Minister summoned the Financial System Management Council, of which I am a member, and decided upon the temporary nationalization of Ashikaga Bank, pursuant to Article 102 of the Deposit Insurance Law at the end of last month. As a temporarily nationalized bank, Ashikaga Bank will continue normal operations, and all of the bank’s obligations, including deposits and interbank borrowings, will be met smoothly. A new management team will carry out appropriate business operations, while seeking to transfer its business to an assuming financial institution as soon as possible. As part of this process, the Bank of Japan will provide liquidity, including the extension of special loans pursuant to Article 38 of the Bank of Japan Law if necessary. Fortunately, at present, no other regional financial institution faces conditions of comparable severity. In fact, financial statement at the end of September 2003 showed improvements at more than a few regional financial institutions as losses from the disposal of nonperforming loans were reduced. Regional financial institutions, however, seem to lag behind major banks in addressing tasks, such as appropriately evaluating the economic value of nonperforming loans, making provisions accordingly, and working toward corporate revitalization. While land prices continue to decline, small and medium-sized nonmanufacturing firms, which dominate regional economies, find their business recovering only too gradually. In these difficult circumstances, it is increasingly hoped that regional financial institutions will play an active role. We at the Bank will do as much as we can to support their efforts in this regard, through supervision and other means, whenever the occasion presents itself. V. Issues for 2004 2004 is the final year of preparation for the removal of blanket protection of demand deposits in April 2005. This removal, in my view, should not be perceived simply as an adjustment of the extent to which deposit insurance protection is applicable. Rather, it should be recognized as the last hurdle before the management of financial institutions becomes truly independent from regulatory authorities. At the end of March 2005, major banks are expected to reduce their nonperforming loan ratios to about half autumn 2002 levels. At the same time, the Industrial Revitalization Corporation of Japan will cease its purchase of loan assets. From April 2005, fixed asset impairment accounting rules will be introduced. Firms continue to strengthen their business structures and competitiveness. Initiatives based on the private sector’s creativity and vitality will be the driving force for Japan to achieve steady economic growth under global competition. Together with firms, financial institutions also play an important role in supporting the Japanese economy. Dynamic expansion of the economy will not be possible if financial institutions remain dependent on regulatory authorities and generous safety nets. Not only firms but also financial institutions will be confronted with frequent new entries to and withdrawals from the market, as well as consolidation and reorganization in their respective industries. This makes it all the more critical for financial institutions to demonstrate their firm intention to stand on their own feet, and enhance their credibility in the market. In this regard, let me point out some of the major tasks to be addressed in 2004. In order to achieve reform of the economic structure and a sound financial system more rapidly, financial institutions, especially major banks, must work harder with firms to revitalize the corporate sector, while expediting the disposal of nonperforming loans. It is true that some financial institutions have already established subsidiaries specializing in corporate revitalization. Further efforts, however, are still required in areas such as the more effective use of the Industrial Revitalization Corporation of Japan and the Resolution and Collection Corporation. In corporate revitalization, regional financial institutions basically face the same problems as major banks. There are more than a few borrower firms with competitive technology and expertise, which find it difficult to improve profitability because of the financial legacy of past borrowing. For this reason, the strategically important issues that many regional financial institutions address include the provision of detailed consultation services to borrower firms, the extension of greater assistance to borrower firms, and the prompt realization of business revival. We hope that their efforts will bear fruit. Financial institutions also have an important role to play in helping the corporate sector to develop the new businesses that will underpin Japan’s future economy, while at the same time supporting ailing business firms. Regional financial institutions in particular are expected to play an active role in generating new businesses in their region. We observe the first shoots of new regional businesses in a variety of areas: biotechnology and other advanced technologies, new industrial clusters linked to recycling and other environment-related technologies, as well as regional city revival, sightseeing, medical care, and nursing services. To strengthen such trends, regional financial institutions are expected to play a new role in their regions. In this regard, the thinking behind their business decision-making in the past needs to be radically overhauled. For example, decisions about whether or not to assume particular risks should be based on a close examination of the nature of projects at hand rather than depending unduly on traditional collateral or guarantee-based methods. They should also raise their levels of expertise at providing advisory services relating to the smooth management of projects. This in turn will lead to the revitalization of regional financial institutions themselves. Once the blanket protection of demand deposits is removed, financial institutions will no longer be able to count on support from the authorities. In principle, they will have to rely entirely on their own intellectual resources and creativity in dealing with the tasks facing them, including the nonperforming loan problem. It is conceivable, however, that there may be financial institutions, which are keen to rebuild their financial base, but which may not be able to strengthen their capital positions within the limited time frame without outside assistance. To deal with this possibility, injections of public funds which may be executed without reference to systemic risk should be considered apart from the measure stipulated in Article 102 of the Deposit Insurance Law. I am aware of a variety of learned opinions calling for caution in establishing another system of capital injections. Bearing these opinions in mind, I hope that we will somehow manage to find a way to design an appropriate new framework - one that will function as the last public support to the efforts of the private sector. In closing, let me reiterate our determination to support the efforts of the private sector and to exert ourselves to the full to achieve sustainable growth.
|
bank of japan
| 2,003 | 12 |
Keynote speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the JSLA Symposium on ¿New Corporate Finance to Revitalize Japan¿, Tokyo, 17 November 2003.
|
Toshihiko Fukui: Toward the reform of corporate finance in Japan Keynote speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the JSLA Symposium on “New Corporate Finance to Revitalize Japan”, Tokyo, 17 November 2003. * * * Introduction I am honored to have the opportunity to address this symposium sponsored by the Nihon Keizai Shimbun and the Japan Syndication and Loan-trading Association (JSLA). In the brief three years since its founding in January 2001, the JSLA has contributed greatly to establishing the infrastructure for the syndicated loan market: not only devising a standard form of sales contracts for loan assets and promoting its wider adoption, but also working toward better disclosure of information relating to loan assets trading. On behalf of the Bank, I would like to express, at the outset, our sincere admiration for the JSLA's energetic efforts in this regard. In constructing a revitalized and dynamic economic system in Japan, I believe that it is increasingly important to direct our efforts towards reform of the framework for corporate financing, just as the JSLA has done to date. Today, I would like to share with you my thoughts on reforming the system governing corporate financing in Japan. I. Role of corporate financing Let me start by discussing the fundamental role of corporate financing within the economy from a purely theoretical standpoint. We can classify a vast number of decisions taken daily at companies into two broad categories: those that relate to operations, including production, sales, and investment; and others relating to the company's financing decisions such as procurement of debt and equity. Let us take a completely hypothetical example, where no friction exists in economic activities, no asymmetry of information is found between sellers and buyers or between borrowers and lenders, and no one even has to worry about the threat of bankruptcy. In such a world, companies should devote themselves purely to the production and sale of attractive products and services, and there would be no active decisions to be made regarding financing. In other words, the company's financing activities would simply and passively follow the development of its business. In reality, however, we face various uncertainties. In particular, there are always significant informational asymmetries between borrowers and lenders, and these force borrowers to make appropriate decisions on financing as well as operational decisions. In deciding their optimal capital and liability structures, firms need to consider the idiosyncratic risk profiles associated with their particular businesses. A firm operating a high-risk business should have a sufficient capital base. If liabilities were high relative to capital, it would be difficult for the firm to maintain an appropriate degree of liquidity in the face of market concerns about the materialization of risk, and the firm's ability to continue operations would come into question. Furthermore, the awareness of the risks involved in a firm's business operations varies depending on the stage of development at which the firm finds itself. A start-up firm that lacks sufficient creditworthiness is required to maintain a proportionately higher capital base. Similarly, the optimal composition of capital and liabilities also varies with the macro business cycle. When recession brings the possibility of bankruptcy to the forefront of firms' minds, they should respond by strengthening their capital bases. While narrowing the information gap, we must also ensure the smooth flow of funds between borrowers and lenders, that is, between firms and banks/investors. To this end, corporate financing should not simply involve the unilateral determination of the levels of debt and equity by one party, but should be a process which allows players on both supply and demand sides adequate input into the determination of optimal financing and fund management arrangements. The key to this process is the ability to assess the risk and return involved in a given transaction accurately and efficiently. A fund provider which is highly competent in this area can earn more profits. On the other hand, if a fund-raising firm lacks the ability to judge how to combine different means of financing, including new financing facilities, so as to minimize both the costs of financing and the possibility of bankruptcy, it becomes difficult for the firm to maintain efficiency and stability when managing its business. This is an ability that requires expertise, and as a result, banks, securities companies, institutional investors, credit-rating agencies, and firms' finance divisions all have crucial roles to play. Accurate assessment of risk and return is vital not only at the microeconomic but also at the macroeconomic level. If many companies raise funds to finance investments whose returns are low relative to the degree of risk involved, macroeconomic productivity and the economic growth rate will decline in line with the reduced rate of return on the savings. The same can be said if sufficient funds are not provided for investments that are expected to yield high returns but which carry only modest risks. Both of these phenomena have been evident in Japan's economy and financial markets since the emergence of the asset price bubble and its subsequent collapse. II. New corporate governance I would now like to look briefly at the past history of corporate financing in Japan, in order to identify what reforms are necessary to revitalize the Japanese economy. As is often pointed out, until relatively recently corporate financing in Japan was dominated by fund provision under the main bank system. Banks extended loans not based on their evaluations of individual operations or projects, but based on their evaluations of individual borrower firms. In determining the eligibility of corporate borrowers, banks were less interested in diligently assessing the state of cash flow than in gauging the extent of the real estate holdings that could be offered as collateral. They focused on the long-term and comprehensive profitability of overall transactions with each borrower, rather than the profitability of each loan transaction. Within this framework, main banks accumulated extensive information about borrower firms, and decisions about the granting or rolling-over of loans were based on this information. The main bank's decision then acted as a signal which other banks typically followed. From the viewpoint of corporate governance, the main bank was not only, clearly, a major creditor of the borrowing firm, it was often also one of its shareholders. In a sense, therefore, banks, and in particular the main bank as the most important stakeholder, acted to discipline corporate activities. During the years of high economic growth and rising real estate prices the main bank system had its own underlying rationality. Indeed, Japan could not have achieved high economic growth under the system if it had not been rational. However, the system has gradually become incompatible with the changing economic environment. This change was already evident even before the emergence of the asset price bubble, and it has been further confirmed since the bubble's collapse. Yet, there does not yet appear to be a consensus explanation of the reasons behind the malfunctioning of the system. In contrast to the period of high economic growth and its ensuing afterglow, economic globalization has forced firms to take up the challenge of high risk businesses and projects. I believe that a new framework for corporate financing is required in order to control such risks. Banks' assessments of borrowers' profitability become less well-defined if they cling to the conventional criteria of “long-term and comprehensive profitability.” They can no longer compete with other financial services providers that offer highly specialized, cutting-edge financial services. I should remind you, however, that I am not insisting on a simple shift from bank-dependent financing to capital-market-dependent financing. We will not be able to identify an optimal system for corporate financing by perfunctorily repeating such questions as: “Which is more desirable, financing mainly from banks or from capital markets?” For business projects to contribute to economic growth, there has to be someone collecting and analyzing data about these projects, and assessing the risks involved and the likely rates of return. No matter how we change the overall structure of the financial system, we will always require somebody to perform this fundamental role. What is called for at present is a complete revamping of the ways in which information on risk and return is gathered and dealt with, as an integral part of building a new system of corporate governance to replace the main bank system. Japan is not the only country that is searching for alternative forms of corporate governance. In the past, U.S. firms were seen as providing the role model for corporate governance. However, in the wake of a series of incidents such as the failure of Enron, they too appear to be entering a new phase of corporate governance. As a result there is no particular textbook model that we can apply to for guidance regarding corporate governance, and we must work hard to produce an original one. III. Recent developments in corporate finance Over the past few years there have been a number of new developments in the area of corporate finance in Japan that seem to signal further changes in the future. First, firms have been reducing their levels of debt. This has been a major trend since the 1990s. The corporate sector has registered a net surplus since fiscal 1998, with savings exceeding investment, and the outstanding amount of loans extended to firms by banks has decreased on a net basis since 1994. The straightforward reasons for these debt reductions have been firms' need to get rid of the excess debts built up during the asset price bubble in the late 1980s, and also the increasing difficulty of finding new investment opportunities in the years of economic downturn. More fundamentally, both firms and banks have become increasingly aware of the need to optimize their capital and liability structures to adapt to changes in the economic environment. For firms this involves carefully assessing the risks and returns associated with projects, as well as recognizing the need to achieve an optimal structure in terms of their relative holdings of capital and interest-bearing liabilities. Meanwhile, banks are striving to enhance their risk management by taking better note of their capital situations, and to set interest rates that reflect the credit risks associated with individual borrowers so as to improve the profitability of lending. Second, banks are rushing to unwind their cross-shareholdings. The amount outstanding of stocks held by banks fell by 48 percent, that is, by 21 trillion yen, over the past two years. This is not of course to say that there are no circumstances under which banks should hold stocks. However, cross-shareholdings may have a serious and unpredictable impact on banks' business given their limited capital bases. In this sense, banks' reductions of cross-shareholdings represent an attempt to restore themselves to financial soundness. At the same time, I believe that, having freed their capital from stock price volatility, they will be able to increase their extension of loans to firms. Third, many banks have been starting to measure the economic value of loans, particularly nonperforming loans (NPLs). For example, banks made use of the discounted cash flow (DCF) method in their fiscal 2002 financial statements and made subsequent increases in provisioning. Improvements of this nature in the evaluation of NPLs enable them to be traded on markets more easily, thus helping expedite banks' disposals of their NPLs. They also encourage corporate restructuring funds and other institutions to increase their purchases of NPLs, speeding up the process of corporate revitalization. Fourth, new credit markets, led by the markets for syndicated loans, asset-backed securities (ABSs), and credit derivatives, are growing rapidly. The arrangement of syndicated loans totaled about 11 trillion yen in 2002, marking a sharp increase from around 3 trillion yen in 1999, while over the same period ABSs also rose significantly, to slightly less than 5 trillion yen from roughly 2 trillion yen. Such instruments aid the smooth transfer of funds and risks through markets. For example, a new risk management method is being adopted for ABSs which involves diversification of risk by pooling individual loan assets. Banks are also actively working on new lending products, such as small-value business loans and non-recourse loans. IV. Future direction of corporate finance These recent developments I have mentioned basically indicate that we are heading in a desirable direction. At the same time, however, it is true that there are still many challenges ahead. For instance, banks often say that business relationships with customers tend to make risk-based pricing of lending rates easier said than done. Japanese firms often rely heavily on relatively low and fixed-rate loans from banks for much of their external funding, and these loans are often regarded as “quasi-equity.” From the point of view of firms, pricing interest rates to reflect risk is rather like suddenly turning equity into debt, and it is scarcely surprising that they show resistance to the idea. Those working at the frontlines of corporate finance have different perspectives on these issues. Loan officers at banks that have a long history with their customers find it difficult to reach agreement on the specifics of adopting risk-based rates. This is because, although customers may be able to understand the need for such risk-based rates in an abstract sense, alternative capital markets, such as markets for corporate bonds, have not yet been fully developed, and this makes it harder to discuss specific rates. On the other hand, institutional investors find it difficult to invest in corporate bonds because the amount issued is still small and insufficient. This is often attributed to the extremely low interest rates charged on bank lending. Meanwhile, firms, especially small and medium-sized firms with low creditworthiness, point to difficulties experienced even in borrowing from banks, let alone in issuing corporate bonds. Each party, therefore, has a different perspective, and, from their various standpoints, all seem to me to make sense. Solving these kinds of interrelated problems is somewhat like trying to determine which came first, the chicken or the egg. Nevertheless, this does not absolve us from doing everything we can in order to deal with the problem. In this regard, corporate financing based upon an accurate evaluation of risk and return is all important. Although the term may still be somewhat new, what we are talking about here is the establishment of a “credit culture.” It is this that I believe to be the crucial issue facing Japanese corporate finance today. Although not perhaps comprehensive solutions, from a strategic viewpoint I would like to emphasize the significance of the following two points. First, it is vital to establish an infrastructure to facilitate the use of information. Corporate financial information, such as details about products and transactions, need to be disclosed appropriately and efficiently so that providers of funds can understand accurately the risk and return of particular projects. The establishment of the JSLA's criteria for the disclosure of loan asset information is one example of such efforts. Databases of firms' financial information enable processing of such data and make investors' risk management more efficient. Data on trade volume and the size of financial markets are also useful. Information vendors are planning to provide information relevant to the secondary markets for NPLs. Bank loans have been the dominant means of corporate financing in Japan. Under the main bank system, borrower information has been shared only between the borrower and its main bank, and neither party has been especially averse to this arrangement. It is always difficult to change such established practices. For this reason, persistent efforts will be required not only to establish an infrastructure to facilitate the use of information, but also to convince market participants to change their thinking on this matter. Second, the revitalization of credit markets using cutting-edge financial engineering techniques is indispensable. We see technological innovation in many industries but it is particularly rapid in the financial sector. A variety of statistical methods have been introduced which use information such as accounting data and bankruptcy ratios to obtain quantitative estimates of credit risk and also to evaluate the overall risk inherent in particular portfolios. These techniques have facilitated the rapid development of markets for syndicated loans, ABSs, and small-value business loans based on scoring models, as well as markets for non-recourse loans and credit derivatives. When arranging ABSs, these techniques enable the classification of cash flows from pooled assets into tranches, such as senior, mezzanine, and equity, reflecting different degrees of risks, enabling investors to select the tranche best suited to their individual risk preferences. V. Expectations for syndicated loan market Next, I would like to focus on syndicated loans in the context of reforming corporate finance in Japan. Syndicated loans are considered sophisticated because they incorporate devices for both producing and managing information efficiently. I believe that the development of this market will play a leading role in the reform of corporate finance in Japan, and is likely to accelerate the establishment of a “credit culture.” There are two features of this market that are worth specific mention. First, contracts make clear stipulations regarding the relationships between borrowers and banks, and between agent banks and participating banks. They also stipulate precisely the obligations of contracting parties and the compensation to which they will be entitled. For example, the contract between a borrower and its bank includes covenants that establish certain conditions on profitability and asset quality to which the borrower agrees to be subject. Such covenants allow borrowers more operational freedom, since they can prevent unnecessary intervention of banks. On the other hand, they also allow lenders to take necessary measures quickly when the borrower becomes unable to fulfill its obligations under the covenant. In the United States, where the syndicated loan market is firmly established, covenants are seen performing a triggering role: when borrowers experience difficulties in honoring the terms of their covenants, this prompts discussions with their banks and the implementation of recovery measures. A separate set of contracts for syndicated loans is also signed between agent banks and participating banks. Under these contracts, agent banks are responsible for disclosing information on the borrower and monitoring its observance of the covenant, a service for which they receive a compensatory commission. This gives agent banks incentives to monitor borrowers' financial situations accurately. Second, syndicated loan assets are designed specifically with the secondary market in mind. If borrowers allow lenders to transfer loans to a third party, this will dramatically change the landscape of Japan's financial markets. In the past, there were close and exclusive relationships between borrowers and lender banks, especially the main bank, and borrowers were extremely resistant to the idea of having their loans transferred to a third party. Indeed, they were reluctant even to see changes in the share of their total borrowing that came from banks. This explains the existence of contracts for syndicated loans in Japan that explicitly limit the scope for transferring loans to third parties. For transactions in the secondary market to take off, syndicated loan assets should be priced in such a way that banks other than the existing lenders, or institutional investors, may purchase them in the market. If this happens, it will allow borrowers and agent banks to consider current market prices for loan assets when fixing the terms governing lending in the primary market. A positive growth cycle in secondary markets can be envisioned with more institutional investors entering the credit market. Of course, expansion of syndicated loan market alone does not complete the reform of corporate financing in Japan. However, if the transfer of loan assets becomes more widely accepted through the development of a secondary market for syndicated loans, the market liquidity of new vehicles such as ABSs will improve. Moreover, if covenants allow borrowers and agent banks to respond more promptly when firms become financially distressed, the amount of lending and investment that goes to finance low-return projects will gradually decrease, and this should accelerate the shift of economic resources to highly-profitable businesses and industries. I look forward to seeing the JSLA continue to contribute actively in this area. VI. The Bank of Japan's initiatives A. Three pillars of the monetary easing policy The Bank of Japan is making every possible effort to ensure that the effects of monetary easing permeate the economy more fully, so as to overcome deflation and put the economy back on a sustainable growth path. Let me elaborate on our efforts in this regard. First, the Bank is providing extremely ample liquidity to financial markets. This so-called quantitative monetary easing acts to ensure the stability of financial markets, thereby firmly supporting economic activity. Second, the Bank has committed itself to continue this quantitative easing policy. Often termed the “policy duration effect,” the effect of this commitment is to stabilize public expectations about the direction of future policy, and to keep relatively long-term interest rates at lower levels. Specifically, the Bank's commitment is to keep the current framework until the annualized growth rate of the consumer price index (CPI) stabilizes above zero percent. At the Monetary Policy Meeting in October, the Bank further clarified its commitment in simple and clear terms. Third, the Bank is striving to enhance the transmission mechanism of monetary easing. For the effects of quantitative monetary easing to reach every corner of the corporate and household sectors, credit should be extended either by banks and other financial services providers, or through financial markets, not only widely but also effectively. In this regard, the reform of corporate finance is intimately related to the Bank's current conduct of monetary policy. Such reform is also extremely important for the future of Japanese economy because, in the creative and dynamic economy that we envision for the future, I believe that it will be essential that the firms intending to identify new sources of value-added, which are actively undertaking risks, should be able to obtain sufficient support to meet their specific financial needs. B. Efforts to revitalize credit markets Based on this thinking, the Bank has stepped up its efforts to revitalize credit markets in Japan. First, the Bank has provided substantial support for private efforts to improve the functioning of such markets. In addition to the traditional credit markets such as for loans, commercial paper (CP), and corporate bonds, we consider it crucial to promote the development of new credit markets for syndicated loans, ABSs, and credit derivatives. The Bank, in cooperation with the JSLA and a large number of market participants, has continued to support steadily efforts to improve new credit markets, in such areas as devising standard forms for contracts, streamlining transaction practices, as well as collecting market data and publishing statistics. A recent example is the Bank's decision to start publishing statistics on syndicated loans from December 2003, in response to earnest requests from market participants. The Bank has also conducted quantitative and theoretical research using a variety of data to capture movements in financial markets and at financial services providers, and has sought to share professional views with market participants by publishing the results of its analyses. Second, the Bank has been enhancing the settlement infrastructure for financial markets. The Bank started online operation of its funds transfer system in 1988, and of the transfer system for Japanese government securities (JGS) in 1990. As for CP, corporate bonds, and stocks, the Bank has cooperated with private-sector settlement systems to introduce online settlements as well as simultaneous settlements of securities and funds, the delivery versus payment (DVP) system. The Bank will continue its proactive support for ongoing projects, including the complete online settlement of corporate bonds and stocks. Third, the Bank has continuously reviewed the effects of its various policy measures and operations, adjusting these in light of prospective changes in financial markets and at financial services providers. In 1999, the Bank began to accept ABSs as collateral for its market operations to provide liquidity, and since then it has expanded the scope of ABSs as eligible collateral. Currently, the Bank is also working on detailed ways of using syndicated loans as collateral, a project for which it has sought the opinions of market participants. In the summer of 2003, the Bank launched operations to purchase ABSs. This represents an unconventional policy measure for a central bank. However, since the market for ABSs is still in an embryonic stage, with relatively few market participants willing to assume the associated risks and with difficulties in arranging the securities, the Bank decided to shoulder the credit risk of holding ABSs itself. Although it is conceivable that this intervention by the Bank may distort the price discovery function of the market and thereby jeopardize its sound development, the Bank's design and management of the purchase scheme makes careful allowances for this risk. The Bank wishes to make every effort to cooperate with market participants in the revitalization of credit markets. To this end, the Bank has inaugurated a “Workshop on Securitization.” I hope that various market participants, including both originators and investors, will take part in the workshop and suggest further ways to nurture and improve these credit markets. I expect this workshop to provide valuable insights in these areas. Concluding remarks To achieve a dynamic economy in Japan, efficient allocation of economic resources through market mechanisms is indispensable. In this regard, it is of the utmost importance to reform the framework for corporate financing so that participants can accurately evaluate the risk and return associated with transactions and products. This, I would like to emphasize, is the core message of my speech today. The traditional framework for corporate financing in Japan worked well in the economic environment and structures of the past, which explains why it will take a substantial amount of effort and energy to change its direction. All the parties concerned, including companies, financial services providers, and the relevant authorities, should tackle the issues boldly by sharing new ideas and promoting innovations. Let me conclude by stating that the Bank commits itself to playing a leading role in such efforts and cooperation. Thank you for your kind attention.
|
bank of japan
| 2,004 | 1 |
Keynote speech by Mr Kazumasa Iwata, Deputy Governor of the Bank of Japan, at the Center for Financial Industry Information Systems (FISC), Tokyo, 9 December 2003.
|
Kazumasa Iwata: Recent economic and financial developments Keynote speech by Mr Kazumasa Iwata, Deputy Governor of the Bank of Japan, at the Center for Financial Industry Information Systems (FISC), Tokyo, 9 December 2003. The references can be found on the Bank of Japan’s website. Click on ko0312d.pdf (35KB) to download figures. * * * It is an honor to be invited to speak at this seminar sponsored by the Center for Financial Industry Information Systems. Today, I will talk about recent economic and financial developments in Japan with special focus on deflation and monetary policy. At the outset, I should say that the views expressed here are those of my own and do not reflect those of my colleagues on the Policy Board or the Bank of Japan. I. Third economic recovery since the bursting of the bubble During the current recovery, which started in January 2002, real GDP has grown at an annualized rate in the mid-2 percent range, and increased for six consecutive quarters. This is the third recovery since the bursting of the bubble. The first was from October 1993 through May 1997, and the second from January 1999 through October 2000. Let me describe the current recovery by comparing with the two previous ones. First, exports and business fixed investment are the driving forces as was the same in the two previous recoveries. Although in terms of contribution to GDP growth business fixed investment is playing a greater role than net exports, the recovery in industrial production and business fixed investment is in fact triggered by the increase in exports. In the meantime, domestic demand is generally sluggish because of adjustment pressures on balance sheets as well as equipment and labor. In the current recovery, China, in addition to the United States, is greatly contributing to the increase in exports. This is in contrast to the second recovery from 1999 through 2000 during which period imports from China played an important role. Other Asian countries are also contributing to the increase in exports from Japan in the current recovery. Second, in terms of inventory cycle, the current recovery resembles the first. In the first recovery from 1993 through 1997, the economy was about to enter an inventory adjustment phase against the backdrop of the rapid appreciation of the yen against the U.S. dollar in 1995. However, once the yen started to depreciate, the economy began to see increasing inventory investment from a very low level. In the current recovery, inventory is at a historically low level, and the inventory to shipment ratio is following a similar pattern as in 1995 (Chart 1). Thus, inventory investment is expected to increase as production and shipments rise. In the United States, inventory is also at a low level, and inventory investment is expected to increase, thus offsetting the slowdown in the growth of final demand until mid-2004. Third, the business fixed investment cycle in the current recovery is following a similar pattern as in the second recovery from January 1999 through October 2000. According to the September Tankan, business fixed investment plans of large manufacturers for fiscal 2003 are expected to increase 11 percent in nominal terms. This rate of increase is almost the same as that of large manufacturers for fiscal 2000. The 11 percent increase in business fixed investment is quite high in real terms when we consider the decline in prices of fixed investment goods. In fact, the deflator for business fixed investment fell 5.8 percent year on year in the July-September quarter. This deflator may overstate the decline in prices of fixed investment goods, as I will discuss later. If we assume that the true extent of price decline is half of the observed data, the 11 percent increase in business fixed investment in nominal terms will be translated into an approximate 15 percent increase in real terms. The current expansion of business fixed investment centers on IT-related investment as was the case in the second recovery, though the range of products is much wider. Such investment is related to not only semiconductors but also new household electronic products, including digital cameras, plasma display panel television sets, and DVD recorders. An increase in renewal investment is also being planned in the steel and chemical as well as transportation industries. This is against the background that exports to China are increasing not only in the IT-related goods area but also in heavy industries such as steel and chemicals, and that equipment in the manufacturing sector has become obsolete. Current business fixed investment has declined to roughly the same as that of fixed capital consumption. If we apply the business cycle theory of Hicks, Japan's business fixed investment has bottomed out and is starting to expand. Furthermore, it is an encouraging sign that a number of small firms, among both manufacturers and non-manufacturers, plan to increase fixed investment reflecting the recent improvement in business sentiment. The current recovery is similar to the previous two recoveries in that it greatly depends on the recovery of the world economy, particularly the economies of the United States and China. However, it seems more robust than the previous two recoveries because this time cyclical factors in the domestic economy, such as inventory and fixed investment, are gaining momentum. II. Sustainability of recovery and risk factors Private forecasts of real GDP growth for fiscal 2003 and 2004 are generally lower than the Bank's forecast in the mid-2 percent range for both years as presented in Outlook and Risk Assessment of the Economy and Prices (hereafter the Outlook Report) in October 2003. However, private forecasts for fiscal 2003 are currently being revised upward. This is because the annualized growth rate of real GDP increased by 1.4 percent in the July-September quarter, higher than private forecasts of zero percent or a slight increase based on the slowdown in private consumption due to the cool summer. After revision, real GDP growth for fiscal 2003 may reach close to 2.7 percent, which is the highest among the nine Board members' forecasts in the Outlook Report published in October. One of the reasons why private forecasts for fiscal 2004 are more pessimistic than the Bank's forecast is that they anticipate inventory adjustment or a slowdown in business fixed investment. As I mentioned, the current recovery is fairly robust thanks to the favorable impact of the cyclical upturn in inventory and fixed investment. In fact, the more than 10 percent annualized rate of increase in exports during the July-September quarter is supporting the growth of industrial production. Another reason for pessimistic private forecasts is that the U.S. economy may rapidly slow down in mid-2004 after the effects of recent tax cuts have run their course. However, labor productivity growth has been quite remarkable, recording 7.0 percent and 9.4 percent on an annualized basis in the second and third quarters of fiscal 2003, respectively. Of course, such rapid growth will not be ever-lasting, but it is expected to remain relatively high for all industries, including services industries, in the fourth quarter and thereafter. Productivity growth would improve corporate profits, which would not only finance business fixed investment but also contribute to an increase in wages. An increase in total household assets aided by a rise in employment and wages as well as in stock prices could offset the waning effect of tax cuts in the middle of next year. Thus, the U.S. economy is highly likely to continue growing at around 4 percent from the fourth quarter of this year through the end of next year. China and other Asian economies are rapidly recovering. The euro area has hit bottom and is expected to be on a growth track of around 1.5 percent in 2004 as business sentiment improves. As a result, 2004 could be a year of synchronized recovery in the world economy. The main obstacles to this scenario are the rapid depreciation of the U.S. dollar and geopolitical risks. Many argue that the stronger U.S. dollar causes a widening of the U.S. external imbalance. However, it is the income effect from the growth of trading partners, not the price effect of the exchange rate that is far more effective in correcting the external imbalance. The situation where the U.S. economy continues to be the sole engine for growth is not desirable for a sustainable recovery of the world economy. Hence, it is a top priority policy agenda for Japan, other Asian countries, and also European countries to achieve a full-fledged economic recovery. A rapid depreciation of the U.S. dollar would reduce capital inflows to the United States, and lead to the fall of both bond and stock prices, which would, in turn, weaken momentum for economic recovery. Since 1985, Japan's current account to nominal GDP ratio has hardly changed from around 3 percent in spite of large fluctuations in the yen exchange rate from 260 yen to 80 yen against the U.S. dollar. This shows that the size of a country's external imbalance over the medium to long term is determined by the difference from the rest of the world in terms of such fundamental determinants for economic growth as technological progress, population growth, and national savings rates.1 III. Economic growth rate and bias in the price index From the viewpoint of overcoming deflation, we need to understand the bias in the price index as well as how it relates to changes in the relationship between real growth and potential growth. If there is no bias in the price index and real GDP growth exceeds potential growth by about 1 percent for two years, we will have the possibility of escaping from deflation in view of the relationship between the pace of narrowing output gap and current size of the output gap.2 To the contrary, if the price index bias is large and real GDP growth is overvalued compared with potential growth, the output gap will not narrow and it will be difficult to escape from deflation. Economists have long been debating the “index problem,” namely what the true cost of living index is and which price index is the closest to it. Regrettably, no ideal price index exists. Among various price indices, the Fisher chain-weighted price index has been considered to be relatively close to the ideal price index. It is the geometric average of a Laspeyres price index with base-year weighting and a Paasche price index with current-year weighting. The CPI and the corporate goods price index (CGPI) in Japan are Laspeyres indices based on weightings in 2000. On the other hand, the GDP deflator is a Paasche index based on 1995 weightings in National Income Statistics, which is obtained by dividing nominal GDP by real GDP. The fact that real GDP has a base year preceding that for the CPI does affect the price index bias. While a Laspeyres price index tends to overstate the increase in the cost of living, a Paasche price index tends to overstate the decline in the cost of living.3 A Laspeyres price index has an upward bias because it does not necessarily incorporate the shift of consumer behavior from more expensive goods to less expensive ones as prices of various goods change to a different extent over the years (intertemporal substitution effect). Other factors contributing to this bias are (1) the increase in new products, (2) the increase in discounted products and sales campaigns, and (3) qualitative changes due to diversification and technological innovation. To the contrary, a Paasche price index has a downward bias because it takes account of the substitution effect by putting a relatively smaller weighting on goods whose prices have been increasing, thereby overstating the decline in the cost of living. Real GDP growth may be overstated since the GDP deflator, which is a Paasche price index, overstates the decline in the cost of living. How great is the bias in the Paasche price index? During the July-September quarter of 2003, the private consumption deflator fell 1.4 percent, and the underlying trend of core CPI fell around 0.5 percent4 (Chart 2). The difference between the deflator and the core CPI was about 1 percent. All Hamada and Iwata (1989) analyzed the external imbalance of Japan and the United States using a neo-classical growth model in an open economy, and found that the observed imbalance was smaller than that suggested by the model. The difference was likely attributable to the preference of residents to hold domestic assets rather than foreign assets (“home bias”) and also the existence of non-tradable goods. The acceleration or deceleration of inflation depends on not only the current size of the output gap but also the difference between the actual real GDP growth rate and potential growth rate. This can be derived from the Phillips curve and the formation of expectations for expected inflation. The year-on-year rate of increase in the core CPI was minus 0.8 percent in fiscal 2002, turning to plus 0.1 percent in October 2003. Special factors such as a tobacco tax hike, an increase in medical treatment costs, and a rise in rice prices pushed up the CPI in October 2003 by 0.4 percent to 0.5 percent. The remaining improvement compared with the CPI in fiscal 2002 was due to the following. The price increasing effect of a reduction in the output gap, that is, real GDP growth being higher than potential growth, outweighed the price-reducing effect stemming from the output gap itself. I express my appreciation to Mr. Laurence Meyer for his insight that the change in inflation depends on not only the level of the unemployment rate but also change in the unemployment rate. In retrospect, the history of the “index problem” reveals that a Laspeyres price index indicates the maximum value of a true cost-of-living index, and a Paasche price index its minimum. In terms of production, a Laspeyres price index indicates the minimum value of a production possibility index for a given level of production, and a Paasche price index its maximum. For discussion of the “superlative index,” see Diewert (1976) and Sakuramoto (1999). In Japan, the year-on-year rate of increase in the core CPI was higher than that in the private consumption deflator and the GDP deflator in the 1990s, though there had been little difference between these three indices in the preceding period. There seems to have been a large difference between the three indices since the mid-1990s when deflation measured by of this cannot be regarded as the bias in the Paasche price index because CPI, which is a Laspeyres price index, has an upward bias. The Fisher price index is less biased than other price indices. Considering that it is the geometric average of the Paasche and Laspeyres price indices, we may say that the size of a downward bias in the private consumption deflator, which is a Paasche price index, is roughly a half of one percent. If the difference of decline between the business fixed investment deflator and the price index for business fixed investment goods in the CGPI was 3 to 4 percent, a downward bias in the business fixed investment deflator would be about half of this difference.5 Accordingly, both the downward bias in the GDP deflator in National Income Statistics and upward bias in real GDP growth lie between 0.5 percent and 1 percent. Personally, I think both of these biases are closer to 0.5 percent. The potential GDP growth rate is estimated from observed real GDP data in National Income Statistics. Roughly speaking, the trend of real GDP growth rates in the past is used as the potential growth rate. In the White Paper on Economic and Fiscal Policy Management for fiscal 2003, the potential growth rate is estimated at around 1 percent, which has an upward bias. It should be noted that the qualitative improvement in products due to technological innovation has been captured more appropriately and reflected in GDP data since 2000 when the wholesale price index (WPI) was changed to the CGPI. However, from 1995 to 2000, the WPI was still used in National Income Statistics, and the improvement in quality and productivity due to technological innovation was not captured as well as it has been since 2000. If the increase in productivity were substantial during this period, the potential growth rate would be understated. Considering an upward bias due to the Paasche price index and understatement due to the WPI, we should use the current estimate of the potential growth rate as it is until structural adjustment is complete. When structural adjustment has ended, the effect of productivity improvement due to the IT revolution may materialize, raising the potential growth rate to 1.5 percent to 2 percent as recently asserted by Jorgenson (2003). To summarize, we will have better prospects of overcoming deflation as the output gap narrows if the following two conditions are fulfilled: (i) the real growth rate exceeds the potential growth rate by 1 percent after taking account of the Paasche price index bias for the two years of structural adjustment period, designated by the government; and (ii) the output gap remains around 1 percent.6 In addition, the higher-value-added new products in the manufacturing industry, the recovery of pricing power through consolidation and integration in raw material industries, and the stronger preference of the household sector for higher-value-added products suggest that a business model with new value-added-products are in the process of being created after a period of price destruction. This also contributes to overcoming deflation. IV. Four prescriptions for overcoming deflation So far, I have discussed the possibilities of overcoming deflation based on the data. Turning to the theoretical aspect, let me introduce the following four prescriptions for overcoming deflation: (i) The central bank purchases a large amount of foreign bonds, targeting a given exchange rate to achieve a desirable inflation rate. (ii) The central bank purchases a large amount of government bonds, targeting a desirable inflation rate. (iii) The central bank increases the monetary base in an appropriate manner with the support of fiscal policy, targeting a desirable price level. the GDP deflator began. It will probably be worthwhile examining the extent of difference between the three indices once the economy returns to a normal situation. Morgan (2003) focuses on the difference between the fall in the business fixed investment deflator and the decline in business fixed investment goods prices in the Corporate Price Index, and asserts that 50 percent of the annualized growth rate of 3.9 percent during the April to June period was due to the distortion of price indices. The output gap that may trigger inflation is shown in Chart 3. (iv) The central bank increases the monetary base, aiming at desirable rates of inflation and potential growth in the medium to long term, under fiscal policy targeting a zero primary balance. Svensson (2001) proposed the first prescription. He argues that the central bank should continue purchasing foreign bonds by creating money to achieve a target exchange rate consistent with a target inflation rate. Or, the country should adopt a crawling peg exchange rate system, in which the exchange rate depreciates by the same amount as the difference between inflation at home and abroad. This prescription aims at overcoming deflation by raising import prices with lower exchange rates. Auerbach and Obstfeld (2003) proposed the second prescription. They argue that a target inflation rate is announced beforehand, and the central bank continues purchasing government bonds through money market operations until the target inflation rate is achieved. They focus on a combination of the future increase in monetary base and the current positive long-term interest rates. The latter indicates that market participants expect short-term interest rates to become positive in future. Eggertsson and Woodford (2003) as well as Bernanke (2003) proposed the third prescription. They argue that the central bank should increase monetary base in an appropriate manner with the support of fiscal policy to achieve a target price level. For example, the target price level can be set at a level immediately before the CPI begins to fall. For example, a money-financed tax cut is one promising policy measure. This is a path dependent policy in which a larger increase in inflation becomes necessary if the target price level is not achieved. I personally recommend the fourth prescription, which can be applied to the Japanese economy. Let us assume the following. Japan's potential growth rate is between 1 percent and 1.5 percent over the medium to long term, and that a desirable inflation rate is between 1 percent and 2 percent in terms of the core CPI. The central bank increases the monetary base, while paying due attention to the change in the trend of the income velocity of money, to realize both the potential growth rate and desirable inflation. Fiscal policy is implemented to achieve a zero primary balance in the early 2010s. Under such circumstances, both the nominal balance of government bonds and the monetary base continue rising. The private sector can raise its utility by substituting the expected increase in the real balance of financial assets for consumption. Thus, private spending would increase. A money-financed tax cut does not require the new issue of government bonds. Similarly, fiscal policy aiming at a zero primary balance does not require the redemption of existing government bonds by a future tax increase. The balance of government bonds remains in the future. This is a typical case of non-Ricardian fiscal policy. When non-Ricardian fiscal policy is implemented and the monetary base is increased, households would increase spending so that the future real balance of financial assets would not become too large.7 In fact, the household savings rate in Japan became negative in the most recent flow of funds survey. This may be partly due to temporary factors, but there is a possibility that the spending expansion mechanism that I just described may be at work for senior citizens and pensioners. The year-on-year rate of increase in the monetary base is currently around 17 percent to 20 percent. This is large enough to realize Japan's potential growth rate and a desirable inflation rate over the medium to long term.8 If the central bank announces that it is prepared to increase the monetary base The effect of increasing spending can be called the “intertemporal Pigou effect,” which is independent from the portfolio rebalancing effect. Or, it can be called the “intertemporal Walras Law” because it focuses on the effect on budget constraint of the fact that the discounted present value of the real balance of debt of the government sector, which is equal to the discounted present value of the real balance of financial assets of the private sector, will not become zero even in the distant future. This effect is created because the private sector anticipates an increase in its wealth in the future. Another prescription similar to the one proposed in the speech is a combination of non-Ricardian fiscal policy and the policy of increasing the monetary base by k percent as suggested by Benhabib et al. (2002). My prescription differs from the prescriptions of Eggertsson and Woodford (2003) as well as Benhabib et al. because it focuses on the trend change in the income velocity of the monetary base, which is influenced by interest rate fluctuations, the rate of change in inflation, and the progress of nonperforming loan disposals. The decrease in the trend change in the income velocity of the monetary base is currently around minus 11 percent. Adding a desirable nominal growth rate as well as the difference between the desirable nominal growth rate and the actual nominal growth rate to the 11 percent would produce a desirable rate of increase in the monetary base, which would achieve the desirable nominal growth rate. to the extent necessary to achieve medium- to long-term policy targets, the private sector will feel less uneasy about increasing spending, which, in turn, will make monetary policy more effective. The Bank of Japan clarified its commitment to continue its quantitative easing policy, which began in March 2001, specifying the following from the viewpoint of enhancing transparency. The Bank will continue its current quantitative easing policy until, (i) the underlying trend of the year-on-year rate of increase in the core CPI marks zero percent or higher for a few months, and (ii) the majority of Policy Board members forecast that the prospective year-on-year rate of increase in the core CPI will register above zero percent during the forecasting period. These two conditions are necessary conditions. In some cases, the Bank may judge it appropriate to continue quantitative easing even if these conditions are fulfilled. To overcome deflation, the Bank aims to stabilize not only short-term interest rates but also longerterm rates through its commitment to continue its zero interest rate policy in the future. This commitment is consistent with that regarding monetary base that I just described. We can strengthen the commitment by modifying the condition regarding the prospective rate of inflation in such a way that the Bank continues quantitative easing until the year-on-year rate of increase in inflation reaches 1 percent. This 1 percent is the lower bound of the numerical target for price stability, which I think desirable from the viewpoint of adjusting an upward bias in the CPI and maintaining a sufficient buffer so that the economy will not easily fall into deflation again. The announcement of a numerical target for price stability would stabilize people's expectations for the future, thereby stabilizing long-term interest rates and reducing the adjustment period to reach a new equilibrium with positive price increases. Many aspects of my proposal have already been implemented. And, I believe we can raise the probability of overcoming deflation by combining the policy commitment effect and the monetary expansion effect.
|
bank of japan
| 2,004 | 1 |
Bank of Japan's February report of recent economic and financial developments, This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on February 4 and 5, 2004.
|
Bank of Japan’s February report of recent economic and financial developments1 Bank of Japan, 5 February 2004. * * * The Bank’s view2 Japan’s economy is recovering gradually. Exports are recently increasing substantially and business fixed investment continues a gradual recovery. Reflecting these developments, industrial production is also increasing. The decline in household income is gradually coming to a halt and private consumption is virtually flat. Meanwhile, housing investment remains sluggish and public investment is declining. As for the outlook, Japan’s economy is anticipated to continue recovering, albeit at a moderate pace. Overseas economies are projected to continue growing relatively fast. Based on this projection, it is expected that exports and production will continue increasing and that the recovery trend in business fixed investment will also become more visible. However, given persisting structural factors such as excessive debt, the increase in business fixed investment is expected to remain moderate. Private consumption is likely to remain virtually flat for some time, since the employment and income situations are unlikely to improve markedly. Meanwhile, public investment is projected to follow a declining trend. On the price front, domestic corporate goods prices have been firm, due to the rise in rice prices and the strengthening of overseas and domestic commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has been close to zero percent, while temporary factors such as the rise in rice prices have exerted upward pressure on prices. Turning to the outlook, domestic corporate goods prices are expected to remain firm for the immediate future. As for consumer prices, the year-on-year rate of change is likely to be around zero percent for the time being due partly to the rise in rice prices. However, they are basically projected to continue falling slightly, since the imbalance between supply and demand in the economy still remains considerable despite its gradual improvement. As for the financial environment, the environment for corporate finance is becoming somewhat more accommodative on the whole, although it is still severe for firms with high credit risks. The issuing environment for CP and corporate bonds is favorable on the whole, especially for firms with high credit ratings. Also, the lending attitudes of private banks have been slightly more accommodative. The pace of decline in credit demand in the private sector is becoming somewhat moderate. Under these circumstances, the amount outstanding of CP and corporate bonds issued continues to be above the previous year’s level, and the rate of decline in lending by private banks is diminishing slightly. As growth of banknotes in circulation is on a downtrend due mainly to decreasing anxieties about the financial system, the year-on-year growth rate of the monetary base is moving around 15 percent. The year-on-year growth rate of the money stock is at the 1.0-2.0 percent level. As for developments in financial markets, money market conditions continue to be extremely easy, as the Bank of Japan provides ample liquidity. In the foreign exchange and capital markets, while the yen’s exchange rate against the U.S. dollar is rising somewhat from the previous month, stock prices are declining slightly. Long-term interest rates are around the same level as last month. This report is based on data and information available at the time of the Bank of Japan Monetary Policy Meeting held on February 4 and 5, 2004. The Bank's view was determined by the Policy Board at the Monetary Policy Meeting held on February 4 and 5, 2004.
|
bank of japan
| 2,004 | 2 |
Statement by Mr Toshihiko Fukui, 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, Tokyo, 23 March 2004.
|
Toshihiko Fukui: A review of the Bank of Japan’s conduct of monetary policy Statement by Mr Toshihiko Fukui, 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, Tokyo, 23 March 2004. * * * Introduction The Bank of Japan submitted its Semiannual Report on Currency and Monetary Control for the first half of fiscal 2003 to the Diet in December 2003. I am pleased to have this opportunity to present an overall review of the Bank’s conduct of monetary policy. I. Developments in Japan’s economy Japan’s economy is recovering gradually. Exports have recently increased substantially, and business fixed investment continues its path of recovery. Reflecting these developments, industrial production has also been increasing. The decline in household income is gradually coming to a halt, and private consumption is currently showing some positive movements. As for the outlook, Japan’s economy is anticipated to continue recovering moderately, reflecting the projection that overseas economies will continue growing relatively fast and final demand, particularly exports and business fixed investment, will continue recovering. The features of Japan’s current gradual recovery are as follows. First, reflecting the steady recovery of the world economy led by IT-related demand worldwide and the high growth of the Chinese economy, Japan’s exports are increasing substantially. A virtuous cycle is starting to operate in the economy initiated by the increase in exports, leading to an increase in production and corporate profits, and then to a recovery of business fixed investment. Second, firms’ efforts to tackle their structural problems such as excess debt and labor are finally starting to show results. Large manufacturers’ profitability has improved considerably as a result of streamlining of business operations and restructuring of industries, although adjustment pressure remains at nonmanufacturers and small firms. As for the Japanese financial system, there are some encouraging signs that, especially at major banks, various efforts to restore banks’ financial soundness are paying off, although the system is still in a difficult situation as a whole. Given this economic situation, domestic corporate goods prices are recently rising due mainly to the strengthening of overseas and domestic commodity prices, and are expected to continue increasing for some time. The year-on-year rate of change in consumer prices (excluding fresh food) has been close to zero percent, while temporary factors such as the rise in rice prices have exerted upward pressure, and is likely to be around zero percent for the time being. However, consumer prices are basically projected to continue falling slightly, since the imbalance between supply and demand in the economy remains considerable despite a gradual improvement. Financial markets have been stable on the whole, even during the approach of the fiscal year-end at the end of March 2004 as the Bank has been providing ample liquidity. The environment for corporate finance is becoming somewhat more accommodative on the whole, although it remains severe for firms with high credit risks. The lending attitude of private banks has been slightly more accommodative, and the issuing environment in the corporate bond and CP markets continues to be favorable. II. Conduct of monetary policy The main features of current monetary easing policy are as follows. First, the Bank has been providing ample liquidity to the money market, with the outstanding balance of current accounts at the Bank as the operating target for money market operations. Second, the Bank is committed to maintaining the quantitative easing policy until the consumer price index (excluding fresh food, on a nationwide basis, hereafter the core CPI) registers stably zero percent or an increase year on year. And third, the Bank is working to strengthen the transmission mechanism to ensure that the effects of monetary easing permeate through the economy. The Bank has been implementing additional measures since the autumn of 2003, as in the past, in line with these three main features. With regard to the Bank’s provision of funds to the money market, it raised the upper limit of the target balance of current accounts at the Bank by 2 trillion yen in October 2003, to provide scope for conducting money market operations in a more flexible manner. In addition, in January 2004, the Bank raised the target range for the outstanding balance of current accounts at the Bank by 3 trillion yen to around 30 to 35 trillion yen in order to reaffirm its policy stance of overcoming deflation and to ensure a continued recovery. Regarding its commitment to maintain the quantitative easing policy, the Bank released a more detailed description in October 2003. That is, the commitment to maintain the quantitative easing policy until the core CPI registers stably zero percent or an increase year on year is underpinned by the following two conditions. First, it requires not only that the most recently published core CPI should register zero percent or above, but also that such tendency should be confirmed over a few months. Second, the Bank needs to be convinced that the prospective core CPI will not be expected to register below zero percent. There may be cases, however, that the Bank will judge it appropriate to continue with quantitative easing even if these two conditions are fulfilled. The Bank considers that this clear commitment is contributing greatly to the appropriate formation of interest rates in financial markets. With regard to strengthening the transmission mechanism of monetary easing effects, the Bank has devised various measures including methods related to money market operations, partly with a view to contributing to the development of financial markets from a long-term perspective. As part of this effort, in July 2003, the Bank started outright purchases of asset-backed securities (ABSs). In January 2004, the Bank amended the terms and conditions for the outright purchases of ABSs, so that its aim would be achieved more effectively, taking into account the opinions of market participants. The total amount of ABSs purchased to date has reached around 500 billion yen. The Bank has also been hosting a workshop on securitization with market participants to encourage a constructive exchange of opinions to support the development of the ABS market. III. Purchases of stocks held by commercial banks The Bank started to purchase stocks held by commercial banks from November 2002 to reduce the risk that stock price fluctuations might impact negatively upon the business management of individual financial institutions, potentially resulting in instability of the financial system as a whole. The Bank increased the maximum total amount of stock holdings it can purchase from banks to 3 trillion yen from 2 trillion yen in March 2003, and in September 2003 extended the period for purchasing stocks from banks by one year to the end of September 2004. The total amount of stocks purchased by the Bank as of March 10, 2004 was 1,928.8 billion yen. Conclusion In contrast to a year ago, positive signs are steadily increasing in Japan’s economy. At the same time, however, there remain many tasks in achieving sustainable growth of the economy and overcoming deflation. The Bank is also fully aware that there is a disparity in the level of business confidence between large firms and small firms, manufacturers and nonmanufacturers, and metropolitan and other areas. The Bank considers it essential that a wide range of economic entities, such as firms, financial institutions, and policymakers, continue to make efforts to revitalize the economy now when a virtuous cycle is starting to work, so that the momentum for recovery spreads throughout Japan’s economy. The Bank will continue to do its utmost to put the economy back on a sustainable growth path and overcome deflation, by firmly supporting the positive movements in the private sector from the financial side.
|
bank of japan
| 2,004 | 4 |
Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Yomiuri International Economic Society, Tokyo, 13 May 2004.
|
Toshihiko Fukui: Achieving sustainable economic growth and overcoming deflation Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Yomiuri International Economic Society, Tokyo, 13 May 2004. * * * Japan’s economy has now entered its third recovery phase since the bursting of the bubble, and this time it is of utmost importance to make the recovery lead to sustainable economic growth and put an end to deflation. With this in mind, I will talk about the current situation and the outlook for Japan’s economy as well as the conduct of monetary policy. New features of the world economy The interrelationships among various economies worldwide have become ever more pronounced as globalization and the IT revolution have progressed. Recently, the Chinese economy has been playing a larger role, contributing to higher world economic growth. Against this background, new features have been emerging in the world economy. One feature is that, compared with the past, recovery in employment and household income tends to lag significantly behind the recovery in economic growth. Intensified global competition has been forcing firms to continue reducing the size of their labor forces even when the economy is recovering. Higher productivity due to the widespread IT revolution has been dampening firms’ demand for labor. The abundant supply of less expensive workers in China and India has been encouraging outsourcing by firms in industrialized countries. Another feature is related to the mechanism of price formation. There has been an increasing tendency for retail and consumer prices to remain basically unaffected by the surge in crude oil prices, international commodity prices, and shipping charges that has taken place in line with the steady recovery of the world economy. This is because the increases in raw material prices and shipping charges have been able to be absorbed mainly by reductions in wages, which seem at last to have almost run their course, and higher productivity. Hence, these increases have not been passed on into prices of finished goods. These new world economic features have a direct bearing on the Japanese economy, and should thus be borne in mind when seeking to achieve the sustainable recovery and overcome deflation in Japan. World economic recovery and Japan’s economy Let me briefly comment on the recent recovery in the world economy before turning to the current situation and the outlook for Japan’s economy. The world economy has been recovering at a steadier pace than expected. The growth rate increased to around 3.9 percent in 2003, and is most likely to increase further to around 4.5 percent in 2004. In particular, the rapid growth of the Chinese economy has been conspicuous. It was over 9 percent in 2003, despite the adverse effect of severe acute respiratory syndrome (SARS). In fact, the Chinese economy has been growing at an annual rate of 8 to 9 percent as if it were hardly susceptible to economic fluctuations. Recently, whether the economy will smoothly adjust to a more moderate and sustainable growth path is becoming a focus of attention. The current recovery, driven by expansion in the world economy, particularly the Chinese economy, seems to differ from the past in that Japan’s economy is not just exporting its way out. As I remarked at the beginning, the interrelationships among various economies have become pronounced. It is worth noting that substantial progress has been made in the international division of production processes, particularly for IT-related goods in which the division of labor and concentration of production tend to work most effectively. IT-related investment has been pursued actively all over the world, led by the United States. Against this background, the process of manufacturing finished goods has been increasingly carried out across a number of countries to take advantage of differences in the degree of technological progress, the make-up of the labor force, the condition of infrastructure, and the efficiency of public services. Interrelationships among economies have also been strengthened through integrating production processes across borders. For example, the production of semiconductor fabrication machines and equipment as well as high-value-added parts for digital home appliances has been rising in Japan. These parts as well as machines and equipment have been shipped to the East Asian countries for processing and assembly, which have also been on the rise recently. Finally, finished goods have been exported, for example, back to Japan. Thus, in the trade between Japan and other East Asian economies, both exports and imports have been increasing substantially. The recovery in the Japanese economy should be understood as taking place in tandem with the strengthening of its interdependence with the world economy, and particularly with other East Asian economies. Current situation and outlook for the economy Japan’s economy has entered a recovery phase since around the summer of 2003. During 2004, the recovery has gradually been spreading from manufacturing to nonmanufacturing firms, from large to small firms, and from urban to regional economies. The decline in employment and household income is finally coming to an end, and Japan’s economy is expected to continue recovering. At the end of April, the Bank released the economic outlook for fiscal 2004 in its Outlook for Economic Activity and Prices. In the Outlook, the majority of Policy Board members forecast real GDP growth for fiscal 2004 in the range of 3 to 3.2 percent. If this forecast is achieved, the economy will have maintained year-on-year growth of about 3 percent in both fiscal 2003 and 2004. Although this does not measure up to the growth rate of the United States, it is well above that of the European Union (EU). Japan’s economy is likely to continue recovering, gradually gaining momentum. Exports and production are expected to increase as overseas economies continue to record high growth. Corporate profits are likely to continue increasing reflecting firms’ success in reducing costs and strengthening their financial conditions. Higher profits are likely to continue raising business fixed investment, particularly among manufacturers. A recovery in household consumption will become probable, as the positive effects of the rise in production and profitability are expected to spread gradually to the household sector via improvements in the employment and income situation as well as in asset prices. Regarding the year-on-year change in the consumer price index (CPI), the forecasts of the majority of Policy Board members are projected to remain negative, in the range of minus 0.1 to minus 0.2 percent in fiscal 2004. The output gap in the economy as a whole, which affects the underlying price trend, is expected to narrow, reflecting the economic recovery. The extent of the narrowing, however, is hard to estimate because firms tend to start new investment related to technological innovation before capacity utilization becomes too high. Although the rise in commodity prices at home and abroad has started to influence the prices of raw materials and intermediate goods, its impact on the prices of finished goods is likely to be rather limited. Upward pressures on the prices of finished goods are expected to be offset mostly by the increased productivity in the corporate sector, which is one of the new features of the world economy. Furthermore, temporary factors that have been pushing up prices, such as the increases in both medical costs and rice prices, and have contributed to a slowdown in the rate of decline in consumer prices, will start to fade. Structural problems in the private sector As described earlier, the current Japanese economy reflects the new features of the world economy. In addition, structural problems, such as firms’ excessive capital stock, debt, and labor, as well as financial system problems have hindered Japan’s economic recovery over the past decade or so. These problems still continue to weigh on the economy to some extent. A feature common to all of the recovery phases since the bursting of the bubble is that the recovery was seen mostly among large manufacturers, and did not spread much to other firms or to households. This was because, when compared with large manufacturers, nonmanufacturing firms and small firms suffered more severely from excessive capital stock, debt, and labor, and they could not adopt aggressive strategies. Furthermore, adjustment in employment and wages undoubtedly delayed the recovery in household consumption. The excessive debt problem of firms is none other than the nonperforming loan (NPL) problem of banks. The NPL problem triggered a vicious cycle, causing a decline in the risk-taking ability of banks, and in turn hampering the recovery of firms whose funding is highly dependent on bank loans. It seems that the intertwined structural problems that have been such a burden on the Japanese economy are at last gradually being resolved, as the past efforts of firms and banks bear fruit. This has been evidenced by the recent recovery in corporate profits and the abatement of concerns over financial system stability. Many point to sustainable growth of the world economy as the prerequisite for Japan’s continued recovery. However, in my view, the more important prerequisite is that firms and banks accelerate their efforts to resolve structural problems. Let me elaborate on this issue. Efforts by the corporate sector In contrast with the period of rapid economic growth, an increasing number of firms are placing more emphasis on future cash flow than sales in assessing their business performance, and they have started taking on new business opportunities geared toward raising value added. Firms have become extremely conscious of their financial soundness after experiencing the bursting of the bubble and concerns over financial system stability. They have been accelerating their adjustment of excessive capital stock and labor, as well as raising their capital adequacy ratios by reducing interest-bearing debts. These developments are particularly evident among manufacturers who continue to reduce debts even though their interest-bearing debts have already declined to the levels seen before the bursting of the bubble. Such developments seem likely to spread gradually to nonmanufacturing firms and small firms. In the Bank’s most recent March Tankan (Short-Term Economic Survey of Enterprises in Japan), profits improved in a wide range of industries, not only among large manufacturers but also among nonmanufacturing firms and small firms. In fact, corporate profits have been increasing significantly in spite of relatively small increases in sales. This indicates not only the cyclical strengthening of the economy but also the strengthening of the corporate structure accompanying progress in dealing with structural problems. Problems in the financial system Although there are still more than a few problems left for banks to deal with, they have made substantial progress in dealing with NPL problems over the past year or so. Major banks have made considerable progress in disposing of NPLs, although the pace of disposal has varied across individual institutions. Combined with the rise in stock prices, their capital adequacy ratios recovered, on average, to around 11 percent at the end of September 2003. Regional banks have also made progress in reducing NPLs, but the pace of disposal has been slower than at major banks. Under such circumstances, banks’ lending attitude seems to be gradually becoming more accommodative. The lending attitude as perceived by firms in the Tankan has improved moderately. In the most recent March survey, the number of firms that responded that banks’ lending attitude was “accommodative” exceeded those that responded “severe.” The Bank intends to encourage these favorable developments. Japanese banks need to realize that they will no longer be able to satisfy the diverse needs of their customers simply by increasing the supply of conventional bank loans. As a matter of fact, it is encouraging that a considerable number of banks have already launched initiatives toward introducing new methods of credit extension, expanding existing channels for credit extension, managing their credit portfolios proactively, and developing more sophisticated risk management systems. The Bank will back their efforts to establish new business models, as stated in its “On-Site Examination Policy for Fiscal 2004.” The full removal of blanket deposit insurance in April 2005 will be an important challenge for banks, as it will put their true financial strength to the test. The Bank hopes that efforts such as those I have described will enable many banks to regain market confidence and allow them to meet this challenge on their own. The situation in the household sector Finally, let me turn to the household sector. Consumers have been rather restrained in their spending as they have experienced prolonged economic stagnation and the frequent emergence of concerns over financial system stability. Recently, however, there have been signs that consumers’ attitude has become somewhat less restrained. For example, the growth rate of the amount outstanding of banknotes in circulation has been slowing recently. In the past, the growth in banknotes surged when major financial institutions failed in 1997 and 1998 or when blanket deposit insurance was partially removed in April 2002. This was mainly because people who felt concern over the soundness of banks increased their cash on hand. The recent decline in the growth rate of banknotes suggests that these concerns have been abating. Household consumption has been rather firm recently despite the sluggishness in household income. This may indicate that the economic recovery has improved consumer sentiment. There seem to have been changes in consumers’ attitude and in household consumption. In this regard, we need to watch carefully whether the emerging pattern of household consumption differs somewhat from that previously observed in Japan. Thus far, the basic view of the Bank is that household consumption recovers on a sustainable basis when backed by rising household income, and it is this virtuous cycle of income and spending that we would like to see firmly established. However, in the United States, household consumption frequently increased ahead of improvement in the economy as a whole. Something similar seems to be occurring in Japan, with the introduction of state-of-the-art technology products, such as flat-panel TVs, DVD recorders, and digital cameras; consumption has been stimulated in spite of the lack of a marked increase in household income. Let me also mention the types of savings by the household sector. Since “safety first” has been the traditional savings habit of Japanese households, an excessive proportion of their savings is held in the form of safe assets, such as bank deposits. For the truly dynamic development of the economy, however, it is crucial that diverse channels of credit provision, particularly financial intermediation through markets, should be fostered. Financial institutions have already been striving to develop new business models geared toward this end, as well as to improve the functioning of financial markets. If households, which are the ultimate source of savings, remain extremely risk-averse, a significant mismatch in the supply of and demand for savings will emerge. In the future, particularly after the full removal of blanket deposit insurance in April 2005, and also in the context of the reform of the Japanese postal savings system, efforts should be made across the board to encourage households to diversify risks in their savings. Conduct of monetary policy Japan’s economy is expected to continue recovering in fiscal 2004, with the momentum for recovery spreading to a wider range of industries. Persistent efforts across the board are necessary to achieve sustainable growth and overcome deflation. The Bank, for its part, will continue the extremely easy monetary policy, thereby backing private-sector initiatives to deal with structural problems and enhance market mechanisms. The current easy monetary policy consists of three elements. The first element is the provision of ample liquidity to the money market. As a result, concerns over liquidity have almost disappeared in the money market, and financial institutions can concentrate on their businesses without worrying about raising funds in the market. The second element is the policy commitment. The Bank has made a commitment to continue the current policy until the year-on-year change in the CPI registers zero percent or higher on a sustainable basis. This commitment has facilitated market participants’ projection of future interest rates, and market interest rates have been stable. Firms have been able to enjoy a stable market environment in which they can raise funds at low interest rates. The current easy monetary policy is expected to have a stronger positive impact on economic activity in the private sector as the economy recovers further. Given that the Bank’s policy commitment allows firms to continue enjoying low funding costs and that the economic recovery raises the expected rate of return on new investment, firms’ profitability on investment will increase. Firms will become more proactive in seeking investment opportunities. Banks will also benefit from increased opportunities for profit from lending and other financial services. With this impact in mind and with a view to overcoming deflation, the Bank is determined to pursue the extremely easy monetary policy even as the economy continues to recover. The third element is the Bank’s efforts to improve the transmission mechanism of monetary easing. It is important to promote new financing channels other than bank lending in order to ensure that the effects of monetary easing permeate throughout the economy. These efforts will also improve Japanese capital markets over the long term. As part of these efforts, the Bank started to purchase asset-backed securities (ABSs) from July 2003, and to date, the total accumulated amount of ABS purchases has amounted to around 580 billion yen. The Bank’s purchases of ABSs have stimulated the capital market, and ABSs, which had been little used in Japan, are now becoming increasingly familiar. Furthermore, the Bank hosted a Workshop on Securitization to back the development of the securitization market, and exchanged views with market participants about practical problems and possible solutions to developing the market further. The Bank released a report on the Workshop in April, and proposed specific measures to evaluate the prices of securitized products more accurately and efficiently and to reduce costs related to the structuring and trading of these products. The Bank has already begun taking concrete measures to nurture the development of the securitization market. It is planning to conduct a “Survey on Securitization Market” and to partly remove the prohibition-of-transfer clause attached to some of the receivables whose debtor is the Bank. “Exit policy” There are views that the Bank is avoiding discussion on the termination of the quantitative easing policy, or the so-called “exit policy,” for fear of overreaction by market participants. It is true that the zero percent year-on-year change in the CPI specified in the current commitment is merely a milestone, and therefore the Bank intends to study how to conduct monetary policy in a transparent way beyond that point. However, under the current circumstances, it is still too soon to specify a concrete policy framework. For the time being, therefore, it is important that the Bank concentrate all its efforts on achieving the goal contained in the existing commitment. When extricating itself from an unusual financial environment as at present, the Bank should be fully aware of the risk that expectations regarding financial market developments, such as the outlook for long-term interest rates, may become unstable. As the economy passes the zero percent milestone, the Bank should be extremely careful to avoid sharp fluctuations in financial markets and to prevent any sudden discontinuities in market conditions. Financial markets sometimes overreact to a shock, but they are also capable of absorbing it. Fundamentally, market conditions reflect the outlook for economic activity and prices. Therefore, the Bank will strive to accurately assess the economic and financial situation, communicate its thinking to market participants, and enhance the functioning of the market. Let me add that, to achieve stability in long-term interest rates, it is particularly important that the government maintains sound fiscal discipline and takes investors’ needs into consideration when issuing government securities. Conclusion In concluding, let me point out a few things that I feel are important for the long-term development of the Japanese economy. First, Japan should be at the forefront of the race to create new technologies and ideas. High-quality human capital is the key to achieving this goal. Second, Japan should take the initiative in promoting the formation of a community of Asian economies whose mutual economic ties are even stronger than the fledgling ties enjoyed at present. This would help rectify global economic imbalances. Third, Japan should play a prominent role in developing sustainable energy sources and creating innovations that contribute to solving environmental problems. Lastly, Japan should prepare itself to deal with the various problems attending its declining population.
|
bank of japan
| 2,004 | 5 |
Speech by Mr Toshiro Muto, Deputy Governor of the Bank of Japan, at the Japan Society, London, 7 June 2004.
|
Toshiro Muto: What lies beyond this cyclical recovery? Speech by Mr Toshiro Muto, Deputy Governor of the Bank of Japan, at the Japan Society, London, 7 June 2004. * * * Good afternoon, ladies and gentlemen. Today, after touching on a short-term outlook for the Japanese economy, I will talk about further challenges Japan faces. I. Short-term outlook for the Japanese economy The outlook for the Japanese economy is reasonably good for the foreseeable future. As you see in Chart 1, economic growth, after showing 3.2% for fiscal 2003, will be 3.1% for fiscal 2004 according to the median forecast by the Bank of Japan’s Policy Board at the end of April. The ongoing economic recovery is the third of its kind since the bursting of the bubble in the early 1990s. During the so-called “lost decade,” we had two economic recoveries: one with 3.6% growth for fiscal 1996, and the other with 3.0% growth for fiscal 2000. The first recovery was immediately followed by a sharp slowdown and the second by negative growth. Compared to these two cases, now the chances are better that the recovery will be sustained. Behind that are three factors. The first factor is an encouraging outlook for the world economy in spite of some risks associated with persistently high oil prices. Many economists believe that the United States will grow at a faster pace than its potential growth rate. While the economic growth of China is expected to decelerate somewhat from the overheated pace, it is still likely to be fairly rapid. The second factor is great demand for digital consumer electronics at home and abroad. This provides favorable business conditions for Japanese manufacturers, whose competitive edge lies in high-end electronic devices including flat-screen panels. This is an important reason for the recovery in business fixed investment. The Bank’s corporate survey Tankan shows that nominal capital spending by large manufacturers will increase by more than 7% for fiscal 2004 after a 9% increase for fiscal 2003. Third and the most important factor behind the good economic outlook is progress in the structural adjustments. Chart 2 illustrates that the ratio of corporate debt to cash flow has been declining steadily. The improvement is observed even in the small and medium-sized nonmanufacturing firms, the sector which was once under a particularly heavy debt burden. As for the adjustment in labor, Chart 3 shows that the share of labor costs in the nominal GDP declined to the lowest level since the early 1990s. In connection with the structural adjustments, as Chart 4 shows, progress has also been made in reducing nonperforming loans. As far as major banks are concerned, they as a whole seem to be hitting the March 2005 target, namely, lowering the share of nonperforming loans in total credits to half of that in March 2002. Of course, Japan’s financial institutions are still facing quite a few problems. In this regard, they should step up their efforts to reduce nonperforming loans and contribute to corporate restructuring. And they should be well prepared for the removal of the blanket deposit insurance, which is scheduled for April 2005. As the structural adjustments have progressed, an opportunity for sustained growth is finally arising. In order to turn this nascent opportunity into full-scale revitalization of the economy, both the private sector and the government should work harder. II. Conduct of monetary policy On the part of the Bank of Japan, we continue to maintain the monetary conditions which should help deflation come to an end. Chart 5 shows that deflation has been easing but the year-on-year change in the consumer price index (CPI) has not yet reached positive territory even with the help of upward one-off factors including a rise in rice prices. Based on the assessment that the underlying trend of the CPI is still moderately negative, the Bank is conducting an extremely accommodative policy with three features. First, the Bank is providing unusually ample liquidity to financial markets. The so-called “quantitative monetary easing” keeps short-term interest rates at almost zero, thereby ensuring the stability of financial markets, which in turn supports economic activity. Second, the Bank is conducting its policy with the commitment to continue quantitative easing until deflation ends. The resultant “policy duration effect,” by working on expectations about future monetary policy, contributes to further stabilizing financial markets. Third, the Bank is making efforts to enhance the transmission mechanism of monetary easing. For instance, the Bank has already been expanding the types of money market operations. Moreover, the Bank is eagerly communicating with market participants and other authorities as to how to expand the securitization market. Of the three features of the current monetary policy, let me elaborate on the second one: the Bank’s policy commitment. In this commitment, the Bank will maintain quantitative easing until the core CPI registers stably zero percent or an increase year-on-year. More specifically, before the Bank considers terminating quantitative easing, certain conditions must be met: the core CPI inflation has been positive over a few months and it is forecast to remain positive in the future. As for the inflation forecast, the semiannual Outlook Report at the end of April shows that the Board members’ median outlook for the core CPI for fiscal 2004 is –0.2%. Although the narrowing output gap and the lagged effects of a rise in commodity prices will contribute to moderating CPI deflation, they will not be strong enough to make year-on-year CPI firmly positive for fiscal 2004. I believe that sustained reforms in both the private and the government sectors, together with the Bank’s commitment to keep monetary easing, will help the economy gather momentum, which in turn will lead to a better possibility that deflation comes to an end. III. Longer-term issues for the Japanese economy Despite the encouraging short-term outlook, the aging and declining population is a source of concern for economic growth in the long run. Any attempt to address this concern would cause a conflict of interests with regard to income transfer and risk sharing. How to deal with this type of conflict is a particularly daunting challenge. Challenges arising from population aging Let me explain how serious the demographic change is in Japan. As is shown in Chart 6, Japan’s population is expected to start declining in 2007. Moreover, the share of elderly people of 65 and older has been increasing since around 1990 and is now approaching 20%. In 2050, the share is expected to reach 36%, the second highest in the world after Spain. Not only is the share among the highest, but the rising pace of the share is unparalleled. There are calculations by the United Nations as to how many years it takes for the elderly people’s share of each country to double from 10% to 20%: 42 years for Spain, 70 years for Germany, 75 years for the United Kingdom, but only 21 years for Japan. The rapid population aging will certainly have significant impacts on the economy. First, the labor force will decrease. According to the Bank’s research staff, assuming that the labor participation rate at any given age stays constant, the decline in the labor force caused by the demographic change will pull down the economic growth rate by 0.5% in the 2010s. The second impact of population aging is on the savings rate. Chart 7 illustrates that the household savings rate in Japan has already been declining in line with population aging. It declined from about 15% in the early 1990s to merely 6.4% in 2002. Assuming that the declining savings rate restrains capital formation, the Bank’s research staff estimated that the economic growth rate in the 2010s would be reduced by 0.5%. Together with another 0.5% decline coming from the labor factor that I mentioned, the economic growth rate overall will decline by as much as 1%. The third problem caused by the population aging is increasing doubt about the sustainability of the pension system. Chart 8 shows that the Japanese birthrate has been steadily declining, with the most recent figure being as low as 1.32. If it continues for the next hundred years, a rough estimate suggests that Japan’s population will become only one-third of the current population. While a much higher birthrate is required to maintain the current pension system, raising the birthrate in a short period of time is not realistic. Therefore, there is an imminent need for massive pension reform, notwithstanding the difficulty in allocating the huge losses carried over from the past system. Inevitable rise in the cost of the social safety net As the population ages, not only pension benefits but also demand for medical services and elderly care will increase. However, younger generations are unsure as to whether the increasing demand will be met. According to a survey conducted by the Bank’s affiliate, the Central Council for Financial Services Information, among the households headed by those under 60, 19% were “very worried” about retirement in 1995, and the share more than doubled to 45% in 2003. Changes in the social structure and lifestyle may also be sources of uncertainty about the future. Traditionally, family members cared for their aged parents and neighbors helped each other, while businesses, under the so-called “lifetime employment system,” provided employees with education, welfare, and job security. However, as lifestyles have been changing and companies have been involved in increasingly fierce global competition, those traditional safety nets have become less dependable. This puts the public sector in a position where it has to play a greater role in providing social safety nets. As for the national burden, there appears to be some room for enhanced safety nets. Chart 9 shows that the “national burden,” defined as the sum of taxes and social security contributions, currently stands at 36% of national income. The ratio is much smaller than those for some European countries. If we use the “potential national burden,” which includes the fiscal deficit, the same conclusion still holds. Although this suggests that shouldering a somewhat heavier burden for somewhat better safety nets is a reasonable option for Japan, the question of how much remains. All in all, it is not easy to achieve a national consensus on how much higher benefits and burdens will be appropriate. It may take some time before Japanese people make a choice. IV. To the second stage of structural reforms The worst scenario is that Japan will fall into a “heavy burden but insufficient benefit” society, which might actually take place without a gain in productivity. It is exactly in this context that the structural reforms should be propelled further. Among many reform agenda, I will focus on the importance of facilitating further integration of Japan into the global economy. Further integration into the global economy Although at home resources are constrained by the declining population, there is a great source of usable technology, labor, and management skills abroad. I believe that what determines a nation’s long-term economic growth is not its population but its flexibility in taking advantage of globally available resources. Let me discuss two aspects of globalization: use of the foreign management resources and use of foreign labor force. The first aspect is to introduce more foreign management resources. As Chart 10 shows, although foreign direct investment into Japan has been increasing considerably, the stock of direct inward investment as a ratio to nominal GDP is still much lower than the same ratio for other countries. One good example is the United Kingdom in the 1980s. Tax incentives, infrastructure improvements, and other measures were taken to promote foreign inward investment. Japanese manufacturers, encouraged by the U.K. government, decided to build their factories here; Nissan was an early good example and many others, particularly automobile companies and electrical appliances companies, followed suit. The core of the reform in the United Kingdom was perhaps its willingness to be open to the world. Many years later in the late 1990s, it was again Nissan that became a model, this time, of demonstrating the merits of learning from foreign management. Mr. Carlos Ghosn came to Nissan as a new president, transforming the company at a crisis into one with years of record performance. The revival of Nissan, by creating a more competitive environment, contributed to invigorating the entire automobile industry and triggered a large-scale restructuring of suppliers. The second aspect of global integration is more extensive use of foreign labor. Some people express their concern that if the introduction of foreign workers is too rapid, unbearable friction will arise, particularly for a homogeneous country like Japan. However, in certain areas of the economy, for example the service industry, the growth potential hinges on the availability of the labor force. There must be a balance between expanding foreign employment, directly or through outsourcing, and avoiding excessive socioeconomic changes. After all, many countries are getting more active in the global allocation of resources, and Japan has to compete with them. Under these circumstances, a key to economic prosperity lies in a continuous trial and error process of combining globally available technology, management, and human resources with the merits our economy has on its own. Concluding remarks As I have discussed, Japan’s economy is still facing many challenges, particularly in the long run. On the other hand, prospects of a continued economic recovery are good at least for the time being. The Bank of Japan, for its part, will continue making every effort to bring deflation to an end, thereby creating a better environment for further progress in structural reforms. Thank you for listening.
|
bank of japan
| 2,004 | 6 |
Statement by Mr Toshihiko Fukui, 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, Tokyo, 9 June 2004.
|
Toshihiko Fukui: Bank of Japan’s conduct of monetary policy - an overall review Statement by Mr Toshihiko Fukui, 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, Tokyo, 9 June 2004. * * * Introduction The Bank of Japan submitted its Semiannual Report on Currency and Monetary Control for the second half of fiscal 2003 to the Diet on June 4, 2004. I am pleased to have this opportunity to present an overall review of the Bank’s conduct of monetary policy. I. Developments in Japan’s economy When I spoke to this committee in March 2004, I presented the assessment that Japan’s economy was recovering gradually. Since then, industrial production and corporate profits have continued to increase due to a substantial rise in exports, and against this background business fixed investment has continued to recover. The decline in household income is gradually coming to a halt, and private consumption is showing some positive movements. With a virtuous cycle in operation, the economy continues to recover gradually and domestic demand is becoming firmer. As for the outlook, Japan’s economy is expected to continue its recovery as momentum increases gradually. Overseas economies are likely to continue growing relatively fast, despite some negative factors such as geopolitical risks and the rise in crude oil prices. The U.S. economy continues to show balanced growth. Private consumption and business fixed investment remain firm, and in the employment situation a recovery which had been delayed is becoming clearer. East Asian economies, particularly China, are likely to continue high growth. Reflecting such developments in overseas economies, Japan’s exports and production are expected to continue on an increasing trend. Furthermore, corporate profits are likely to remain on an uptrend as exports and production increase, given the progress in dealing with problems, such as excessive labor and debt, which were part of the background to the delay in Japan’s economic recovery. Business fixed investment is therefore likely to continue on an uptrend, particularly in the manufacturing sector. The increase in production and corporate profits is expected to exert positive effects gradually on the household sector through changes in employment and income as well as in asset prices. Against this background, private consumption is expected to recover at a moderate pace. On the price front, domestic corporate goods prices have been rising recently, due to the strengthening of commodity prices at home and abroad and to the improvement in supply and demand conditions, and they are expected to continue increasing for some time. The year-on-year rate of change in consumer prices (excluding fresh food) has been close to zero percent. As for the outlook, the output gap, which affects the underlying trend of prices, is expected to narrow steadily, but temporary factors, such as the increase in rice prices that has contributed to a slowdown in the year-on-year rate of decline in consumer prices, will dissipate gradually. Furthermore, the increase in productivity in the corporate sector is likely to absorb the effects of the rise in commodity prices. Given this situation, consumer prices are basically projected to continue falling slightly on a year-on-year basis. As for the recent rise in crude oil prices, however, future developments and their effects require close monitoring. The money market continues to be stable overall against the background of the Bank’s provision of ample liquidity. In the capital market, Japanese stock prices declined temporarily from late April given declines in stock prices and rises in interest rates worldwide, but they rose thereafter. Long-term interest rates have been stable on the whole, but are recently rising somewhat. The environment for corporate finance is becoming more accommodative on the whole, although it remains severe for firms with high credit risks. The rate of decline in lending by private banks has been diminishing slightly, and the fund-raising environment for firms in the capital market through corporate bonds and CP continues to be favorable. II. Conduct of monetary policy The Bank has been conducting the quantitative easing policy with the outstanding balance of current accounts held at the Bank as the operating target. In accordance with the current target range for the outstanding balance of “around 30 to 35 trillion yen,” the Bank provides ample liquidity to the money market. The Bank has also made a commitment to maintain the quantitative easing policy until the year-on-year rate of change in the consumer price index (CPI; excluding fresh food, on a nationwide basis) registers zero percent or higher on a sustainable basis. Against the background of this policy, financial institutions have been more confident in raising funds in the money market, and this has been contributing to stability in financial markets. The Bank’s commitment to maintaining the policy has contributed to stabilizing market participants’ projection of future interest rates, and thus market interest rates have been stable. In this situation, firms have been able to raise funds at low interest rates. Reflecting the recovery of the economy, firms’ returns on investment are expected to increase, and the current quantitative easing policy will therefore further promote their positive activity. The effects of the quantitative easing policy will support the economy more strongly as it continues to recover. With these points in mind, the Bank has continued to conduct its quantitative easing policy with the commitment based on the CPI. The Bank has been making efforts to make credit intermediation in the market more diversified and efficient so that monetary easing effects permeate further throughout the economy, and these efforts are expected to improve the Japanese capital market in the long term. As part of such efforts, the Bank started to purchase asset-backed securities (ABSs) from July 2003, and the total amount of ABSs purchased to date has reached around 800 billion yen. In addition, the Bank hosted the Workshop on Securitization, and exchanged views about practical problems and possible solutions with market participants to back the development of the ABS market. In April 2004, the Bank released the results of the discussions held at the Workshop, which contained specific proposals, for example, a proposal that prices of securitized products should be evaluated more accurately and efficiently. In May, the Bank introduced a facility which provides the markets with Japanese government securities (JGSs) held by the Bank as a secondary source with a view to enhancing the liquidity of JGS markets. The Bank has been making a wide range of efforts to improve the infrastructure of financial markets and will continue to do so. III. Purchases of stocks held by commercial banks The Bank started to purchase stocks held by commercial banks from November 2002 to reduce the risk that stock price fluctuations might impact negatively upon the business management of individual financial institutions, potentially resulting in instability of the financial system as a whole. The total amount of stocks purchased by the Bank as of May 31, 2004 was 1,979.9 billion yen. Conclusion Japan’s economy is expected to continue recovering as it gains further momentum gradually. To ensure that this recovery will become sustainable and to overcome deflation, the Bank considers it essential that a wide range of economic entities continue to make efforts to revitalize the economy. The Bank is determined to firmly support Japan’s economy by continuing with monetary easing even as the economy continues to recover, in order to realize sustainable growth and overcome deflation.
|
bank of japan
| 2,004 | 7 |
Opening speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the 11th International Conference sponsored by the Institute for Monetary and Economic Studies, Bank of Japan, Tokyo, 5 July 2004.
|
Toshihiko Fukui: The challenges for sustained economic growth under changing economic, social and international environments Opening speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the 11th International Conference sponsored by the Institute for Monetary and Economic Studies, Bank of Japan, Tokyo, 5 July 2004. * * * Introduction Good morning, ladies and gentlemen. I am very pleased to address the 11th international conference hosted by the Institute for Monetary and Economic Studies. On behalf of my colleagues at the Bank of Japan, I welcome the participants from all over the world. This year’s conference is focused on “The Challenges for Sustained Economic Growth under Changing Economic, Social and International Environments.” Over the two-day conference, we will explore a broad range of issues on economic growth. What are the major engines of economic growth? What are the long-term effects of uneven growth over the economies on global resource allocation? What roles should a government and a central bank play in promoting sustained economic growth? Major engines of sustained economic growth Our understanding of economic growth has advanced significantly since the revival of growth theory in the mid-1980s. For the last two decades economic growth has been one of the most sought-after subjects of economic research. The new “endogenous” growth theory has provided various systematic expositions of technological progress, such as creation, accumulation and diffusion of new ideas. The standard growth theory tells us that economic growth in per capita basis comes from mainly two sources: capital deepening and total factor productivity growth, or TFP growth. Capital deepening increases output along the production function. TFP growth increases output by pushing the production function upward. The former faces the diminishing marginal productivity as capital deepening progresses, and the latter becomes increasingly important in achieving sustained growth in the long-term. As the new endogenous growth theory suggests, TFP growth is closely related to accumulation of the intangible capitals, such as human capital and research and development. We see a lot of evidence that such investments have actually trended upward. In particular, workers with high educational backgrounds and those engaged in research and development have both increased in major industrial countries. Interactions between trend growth paths and business cycles Growth theory tends to focus on the trend growth paths in the long run. Observed growth paths, however, are not smooth. There exists a dynamic interaction between trend growth paths and business cycles. How do macroeconomic fluctuations influence the trend growth paths? How do the trend growth paths in turn influence the short-term fluctuations in the economy? For example, during the past three decades, we have seen a contrast in the cyclical and trend behaviors of real output between Japan and the United States. From the 1970s to the mid-1980s, the Japanese economy moved in a less volatile manner around the higher trend growth path, compared with the US economy. From the mid-1980s such an observation was reversed. The Japanese economy moved in a more volatile manner around the lower trend growth path. Indeed, the 1990s are often referred to as the “lost decade” for Japan’s economy. Average growth declined from the mid-three percent in the 1980s to the mid-one percent in the 1990s. The recoveries in the 1990s were not strong enough to lead to self-sustained growth. The recessions were deep and long enough to weaken the economic fundamentals. Now the Japanese economy is finally reaching the end of the long and painful path of the post-bubble adjustments. Our economy has achieved significant progress in overcoming structural impediments. It is gradually gaining momentum for the restoration of sustained growth, and is showing more signs of recovery, spreading from manufacturing to non-manufacturing industries, from large to small firms, and from metropolitan to regional areas. Yet we should remain vigilant. We cannot say for sure that the current recovery will be durable and strong enough to push the economy back to a sustained growth path. Thus, the questions we should ask here are what makes the current economic upswing different from the past two recoveries, and whether such differences are sufficient for the economy to reach the sustained growth path. The Japanese and U.S. experiences in the past three decades I mentioned before remind us of three things. First, such experiences confirm the importance of technological progress as a major engine of economic growth. Second, at the same time, they suggest the possibility that some additional factors also play a key role in determining sustained economic growth, such as financial systems and globalization. Third, they indicate that a low inflation environment emerges as a new challenge for sustained economic growth. Now I will elaborate on some important but often-ignored or newly-emerged factors in achieving sustained economic growth. This year’s conference takes up such issues in a well-balanced manner. I am convinced we will be able to broaden and deepen our understanding of economic growth here. Implications of globalization Let me begin by focusing on the implications of globalization for economic growth. The increased global linkages promote economic growth in the world through two key mechanisms: the division of labor and the international spillovers of knowledge. In this context, the current recovery in the Japanese economy is taking place in tandem with the growing interdependence with the rest of the world, particularly with the other East Asian economies. The direct investment of Japanese businesses to East Asian economies accelerates the reallocation of their production bases. Consequently, between Japan and the other East Asian countries, both exports and imports are growing substantially. Exchange rate movements have the short run and long run influence on an economy. As for the short run effects, exchange rate movements influence the economy through changing relative prices between goods at home and abroad. Recent empirical studies, however, show such short run effects become small because the exchange rate pass-through to import prices declines. On the contrary, exchange rate movements still play an important role in facilitating more efficient resource allocations in the long run. At the previous conference, Professor Maurice Obstfeld here mentioned in his keynote speech that exchange rates still have significant expenditure-switching effects through influencing firms’ decisions on production bases and production-goods suppliers across borders. In fact, the recent increase in intra-firm trading enables businesses to shift their activities across borders smoothly, thereby strengthening the response of economic activity to exchange rate movements in the long run. Asset price fluctuations and financial systems Asset price fluctuations have important implications for promoting more efficient resource allocations and achieving sustained growth in the long run. The staff at the Institute will present an analysis on how asset price fluctuations and subsequent structural adjustments influence sustained economic growth, based on Japan’s experience since the second half of the 1980s. They emphasize the viewpoint that the protracted economic stagnation in Japan derives from incomplete economic adjustments to significant changes in relative prices. In view of the incomplete economic adjustments during the post bubble distress, we fully realize that the malfunction of financial intermediation impedes the resource allocation mechanism in the financial markets. With weak balance sheets, banks tend to continue lending unprofitable businesses and leave them existing. Such lending policy hampers the factor reallocation to more profitable businesses. Good news is that banks’ lending attitude seems to be gradually becoming far more accommodative than in the previous recoveries. This shows that major banks in Japan have made good progress in solving non-performing loan problems. The resultant improvement in bank balance sheets is expected to enhance their loan capacity. Well-functioning financial systems are important in achieving sustained economic growth. They play a crucial role in channeling household savings into the corporate sector and allocating investment funds among firms. Demographic changes The aging and decreasing population is a serious problem in many developed countries today. In Japan’s case, these demographic changes are taking place at a more rapid pace than any other country has ever experienced. The aging and declining population will have far-reaching impacts. Declining fertility rates will possibly increase immigration. The structure of family and society will inevitably change. A new challenge in a low inflation environment Now let me proceed with a new challenge in a low inflation environment. During the past two decades, inflation has fallen to a low level in major industrial countries. A low rate of inflation itself now poses a new challenge of achieving and promoting sustained economic growth in the global economy. For example, a low inflation economy has a higher risk of deflation, and the interest rates find no other way than declining. However, in spite of the general perception that monetary policy should be conducted so as to avert deflation, a central bank cannot lower interest rates below the zero lower bound. The downward rigidity of nominal wages is often pointed out as a factor that prevents the smooth adjustment of real wages under very low inflation. This impediment to the real wage adjustment is likely to hamper the reallocation of labor forces among sectors and regions. As a sequel to this story, the snag is that the inflation expectations could firmly anchored at low level, even after the demand-supply conditions turned to be tighter, aided by the high anti-inflation credibility of the central bank. By the time prices and wages start rising, a potential risk of inflation mounts. In addition, if worse to come, in the shadow of relatively stable movements of prices in goods and services, mortgage and the other asset price spikes tend to be ignored. As a result, if any, a likely possibility is that the monetary policy stays longer behind the curve. Japan has experienced the asset price bubble in the fairly favorable price environment and resultant long-lasting economic stagnation in the last two decades. Japan’s experience suggests the importance of assessing the sustainability of price stability over a fairly long period, which many central banks have emphasized in recent years. This implies that “price stability” does not always correspond to the achievement of a specific rate of inflation in terms of a specific price index within a specific time horizon. Conclusion I have reviewed the challenges for sustained economic growth under changing economic, social and international environments. I expect that through discussion, those from both academic circles and central banks will learn more, share insights, and make the most of the wisdom for the future conduct of monetary policy. I certainly welcome discussions on how central banks can best contribute to sustained economic growth and sound development of the global economy. Thank you.
|
bank of japan
| 2,004 | 7 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the reception for the centenary of the Bank of Japan Representative Office in London, 29 June 2004.
|
Toshihiko Fukui: The centenary of the Bank of Japan’s London office Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the reception for the centenary of the Bank of Japan Representative Office in London, 29 June 2004. * * * Welcoming guests to the party and expressing appreciation for the 100-year-long friendship Distinguished guests, Governor King, Ladies and gentlemen, On behalf of the entire institution of the Bank of Japan, let me extend our gratitude to all of you and your predecessors for our long-standing friendship and your cooperation with our London office. We have been extremely happy to work with every one of you, regardless of nationality, domicile or profession. Some guests have worked with us in the financial, academic and public sectors, and some other guests have worked for the UK-Japan relationship. We also owe very much to the guests from the active and hard-working Japanese community here. The year of 2004 marks the centenary of the Bank of Japan’s London Office. I will take this opportunity to share with you some reflections over the past century by highlighting major events that have involved our London office. Looking back on the 100-year history and thinking about the central bank What prompted the Bank of Japan to open an office in London 100 years ago? The imminent objective then was to supervise the issuance and repayment operations of Japanese government bonds in London. In 1904, Japan, despite being a small emerging country, was forced into the so-called Russo-Japanese War. In order to engage in the warfare, the Japanese government issued sterling-pound bonds four times in the London market. Funds raised through the four issues altogether amounted to double the size of the Japanese government budget in an ordinary year. Under the circumstances, the Bank of Japan decided to open its London office to superintend the operations of the national debt. Some of you may recall how such large issuance was arranged. It was Baron Korekiyo Takahashi, then Deputy Governor of the Bank of Japan, who stayed in London to negotiate for the issuance. His efforts were supported by Baring Brothers, Hongkong Shanghai Bank, and Mr. Alexander Shand of the then Parr’s Bank amongst others. It is well known that Baron Takahashi later became Governor of the Bank of Japan, and subsequently Minister of Finance and Prime Minister. You can find a hard copy of the bond in the showcase at the back of this room. It is interesting to note that the coupon rate was reduced from 6% for the first two issues to 4.5% for the rest. The rate of the third and fourth issues was lowered because this small and underdeveloped country in the Far East had won some battles against all the odds. What was the significance of opening the London office? It represented our commitment to never betray trust given us by the market. I am pleased to emphasize that history shows the impeccable record of honoring the national debt and fulfilling our commitment. The role of managing the national debt is nowadays no longer deemed a major function of our Bank or central banks in industrial countries. Our principal objective today is to maintain price stability and financial stability. Yet, we find there is a timeless and shared element in the evolving objectives of the central bank between now and then. Honoring debt repayment and maintaining price stability both point to one thing in common. It is “trust in the currency.” It has never changed as one of the ultimate objectives of the central bank. When we review the past century, we are again impressed by the depth of the London market and the dynamism of market initiatives here. The successful flotation of Japanese government bonds in 1904 epitomizes such characteristics of the London market. We also find, over the century, numerous cases in which Japanese banks and businesses benefited from their participation in the London market. In the area of intellectual thinking and its applications, we have been quite often inspired by the monetary authorities in the UK in general and the Bank of England in particular. We highly appreciate the close cooperation and the constant exchanges of views between us. The Bank of Japan has not been a mere beneficiary. It has also contributed somewhat to nurturing the London market and maintaining its stability. Several months ago, senior officials at the Bank of England kindly reminded us of two major examples amongst others. The first one is, curiously enough, that the Bank of Japan was instrumental in the development of London’s money market at the beginning of the twentieth century. Upon the request of the Bank of England, the Bank of Japan utilized a large pool of funds from the Japanese government bond issuance for the purpose of the better functioning of the money market in London. Let me give you a rough idea of how large the proceeds of Japanese government bond issuance. The total amount was more than double the amount of the gold reserves of the Bank of England. The second example is the scheme for credit facility that was made available to the UK during the period from 1964 to 1977. The scheme was undertaken under the auspice of broader international initiatives, and the two central banks, in particular, were in very close cooperation. For details, please refer to the handout of a historical summary of major events that involved the UK-Japan relationship. In this regard, I would also like to refer to some of the Bank of England’s collections that are displayed in the showcase. The collections are commemorative of relations between the Bank of England and Japan as a whole. They are made available here today kindly by Mr. Keyworth, the archivist of the Bank of England. Concluding remarks Finally, let me move from the past to the future. The future is always uncertain, but some current trends and changes can be certain in the future as well. Among them are globalization and the advancement of communications technology. It is true that these things will reduce notional distance between countries, but nobody would deny the importance of direct face-to-face interactions between people in the market. As far as we understand it, the very strength of the London market comes from such direct face-to-face interactions between market participants, who work here in financial, accounting, legal and other related businesses. The London market attracts the best and brightest professionals and management from all over the world. In fact, their close interactions generate the dynamism of market development. That is why the Bank of Japan highly values information and insights that our London office gains from direct contacts here. Moreover, that is why the Bank of Japan sees our London office as one of the important channels of communication to market participants. In concluding, I thank again, all the guests, predecessors and your institutions for the 100-year-long friendship and cooperation. And I am convinced that this established good relationship will continue for another century. There is no “exit policy” from London. I wish all the best for each of you. Thank you.
|
bank of japan
| 2,004 | 7 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, to the Japan Center for Economic Research, Tokyo, 22 July 2004.
|
Toshihiko Fukui: Significance of efficient financial services for the future of Japan’s economy Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, to the Japan Center for Economic Research, Tokyo, 22 July 2004. * * * Introduction I am pleased to be here today to address such a distinguished audience drawn from Japan’s economic and financial circles, who naturally have a strong interest in the future of Japan’s economy. Against the background of new business strategies including mergers and acquisitions underway in the financial sector toward the planned full removal of blanket deposit insurance in April 2005, today I will discuss the roles that efficient financial services should play in the future in Japan’s economy. I. Need for efficient financial services A. Current state of the Japanese economy and financial system The Japanese economy has been recovering since the latter half of last year, driven by a virtuous cycle in which an increase in exports leads to a pickup in production and corporate profits, which in turn raises capital spending. Recently, the household sector has also been recovering in line with the improvement in employment. To support the ongoing recovery, the Bank of Japan is continuing with its current quantitative easing policy until the year-on-year rate of change in the core consumer price index (CPI) registers zero percent or higher in a stable manner. In this regard, let me emphasize our firm commitment to maintain the accommodative monetary policy. To achieve sustainable economic growth and strengthen the dynamism of the Japanese economy over the long run, a smoothly functioning financial system is an obvious necessity. Let me begin with the current state of Japan’s financial system. A reduction in nonperforming loans (NPLs), one of the most significant problems requiring resolution, has been proceeding steadily. The ratio of NPLs to total outstanding loans at major banks decreased to almost 5 percent at the end of March 2004. Even regional banks that seemed to be slowing in their reduction of NPLs were able to lower their ratio to below 7 percent. In addition, approximately 90 percent of both major banks and regional banks posted positive net income for the fiscal year ended March 2004. For the current fiscal year starting from April 2004, I am confident that we will come closer to resolving the NPL problem, as corporate profits are expected to increase further and banks are accelerating their efforts to revitalize firms with large debts. So, as we move toward the full removal of blanket deposit insurance planned for next April, I think it is fair to say that Japan’s financial system is on track to restore its soundness and stability. In addition to tackling of the NPL problem, reforms have been implemented in various areas such as accounting, taxation, and bankruptcy laws, and a framework has been established for improving corporate governance. The rules and practices that have been supporting economic growth in Japan up to recent years have emphasized long-term relationships among firms as well as between firms and banks, based on the assumption that high growth would continue. These rules and practices enabled firms to expand their business over the long term while absorbing moderate economic shocks. Nonetheless, they are no longer adequate to address the problems resulting from the everchanging nature of today’s global economy. We have made substantial progress in reforming the rules and practices that used to support the economy but had grown obsolete. Without such progress, we might never have been able to reach the point where we now stand: on the verge of achieving a solid footing for the revitalization of our economy. The more than ten years following the bursting of the bubble have often been termed the “lost decade”. They were longer than expected, but may have been necessary to achieve the step-by-step reforms. B. Roles of financial services in the future We must keep forging ahead because, from now on, both firms and financial institutions will need to continuously improve their competitiveness to create new business value. Firms’ operating environments are changing significantly. For example, competition from emerging economies has intensified, and rapid progress in IT has reduced the life span of existing competitive strengths by lowering the barriers of time and geography. Japanese businesses have been making great efforts to survive this tidal wave of structural change. Their performance depends on not only business activities, such as the development of new goods and services as well as company-wide increases in productivity, but also financial activities, such as reduction of funding costs and control of market- and payment-related risks. We can also observe changes in the financial needs of households. The diversification of employment and rapid aging of the population have been significantly affecting how people, both young and old, plan their lives. This is evidenced by the fact that pension reform became a major issue in the recent election for the House of Councillors. Such a change in the attitude of households has inevitably come to influence their financial activities such as choices of asset investment, life insurance, and consumer loans. Demand for financial services has grown quite diversified among differing generations and at different stages of individuals’ lives. Let me describe the roles of financial services that are expected by both businesses and households based on their ever-changing needs. The first role is to support dynamism in corporate activities. Firms require sophisticated financial services such as financing of newly developed businesses, arranging of capital to satisfy shareholders, reorganizing of global businesses, and hedging of wide-ranging business risks. The second role is to contribute to increasing households’ wealth. The financial system as a whole should efficiently provide a broad range of financial products and services enabling households to invest and raise funds according to their various financial needs. By performing these roles appropriately, financial institutions will both contribute to increasing households’ wealth and promote revitalization of the economy through the efficient allocation of resources. C. Challenges of creating a new financial system Thus, financial institutions are expected to enable firms and households to expand their potential activity and participate vitally in the future of Japan’s economy. In this regard, a wide range of institutions involved in financial services should take on three challenges. 1. Efficient division of labor and provision of services through diversified channels The first challenge is to establish an efficient division of labor in the financial services industry and the provision of services through diversified channels. The financial services industry is immense, developing a variety of financial products, taking on various risks through the sale of such products, and reallocating these risks to economic agents. As such, it can be described as not only a provider of financial services but also a manufacturer and distributor of these services. In nonfinancial industries, particularly manufacturers who are in the front rank of global competition, we observe various types of division of labor in the efficient provision of goods and services. Similarly, I think that in the financial services industry there should be a more diversified division of labor, not only within each financial group, but also among a wide range of economic agents with substantial expertise in the development and sale of financial services as well as in risk-taking methods. Under such a system, institutions with superior monitoring capability should focus on extending loans. Those with a customer base of affluent households should focus on providing investment and savings services. And those with highly-advanced financial engineering techniques should focus on performing advisory functions in cutting-edge financing activities such as securitization. In this way, various combinations of division of labor could produce multiple business models. As for the extension of credit, I have been advocating the need for diversified channels by constructing a “seamless credit provision system”, in which customers can choose any type of credit in the spectrum from borrowing from banks to raising funds in capital markets. Such a seamless system for credit provision can be developed within the context of a diversified division of labor. If and when a diversified division of labor is achieved, the discussion on the ideal number of financial institutions is likely to lose its meaning. Currently, we hear comments about the rather complex situation of Japan’s financial system. For example, some have voiced criticism that the provision of financial services is not sufficient, while others say that Japan’s financial system is over-banked. As the division of labor becomes diversified, however, the complex situation should gradually be resolved. 2. Improvement of integrated risk management and prompt and appropriate actions to changes in the environment The second challenge is how to make the integrated risk management framework more sophisticated as well as take prompt and appropriate actions to respond to changes in the environment. Many financial institutions need to take on various risks over the short term and long term to smoothly satisfy their customers’ needs. The more capital a financial institution holds, the more risks it can manage. What is required of financial institutions is to take on risks using a finite amount of capital, thereby satisfying customer needs and maximizing their profits. Thus, financial institutions need an entity-wide framework in which they can handle various types of risks stemming from routine businesses and carefully judge the balance between risks and financial strength as well as sector-by-sector profitability. This framework is called the “integrated risk management system”. Under this system, we measure the magnitude of various risks such as market risks and credit risks, and integrate the results using Value-at-Risk and other benchmarking methods. Then, we calculate the magnitude of entity-wide risks and appropriately allocate risk capital to various business areas. It is inevitable that the risk profiles taken on by financial institutions will change as the financial needs of firms and households become more diversified and complex. Consequently, we should continuously upgrade the framework of risk management by adopting the most recent theories of finance and utilizing new financial engineering techniques. Having said this, let me emphasize that the most significant factor for the effective functioning of the risk management framework lies in human judgment, particularly that of the top management. In fact, operating environments sometimes move in a direction different from that initially expected due to factors such as a change in the economic situation, the volatile movement of market prices, and the emergence of geopolitical risks. On such occasions, financial institutions’ management should be able to make decisions calmly and promptly. Such ability depends on continual updating and preparation on a daily basis. For financial institutions to be able to react promptly and appropriately to changes in the environment depends on the efforts of both staff and management. For example, staff should, regularly and concretely, provide management with information and analysis about not only the current situation but also future scenarios such as demand forecasts. At the same time, management should always strive to retain a broad perspective, solid insight, strategic ability, and strong determination. 3. Reform of public finance including the postal savings system The third challenge is the need to reform the postal savings system and other public financial institutions. It has been pointed out that a fairly large portion of funds is intermediated outside of the market mechanism, reflecting the substantial share of postal savings among financial assets in Japan. Some claim that this may result in distorting the efficient allocation of resources. Furthermore, due to the full protection of demand deposits, the share of deposits with public protection is extremely high among financial assets. In such an environment, individuals are less inclined to closely review risk-return profiles of various financial assets and hold diversified types of savings. This appears to be one of the obstacles hindering innovation in Japan’s financial system. The Japanese government has therefore already taken action. For private banks, the removal of blanket deposit insurance is scheduled in April 2005, a little more than eight months from now. The privatization of Japan Post is also under serious discussion. In discussing the privatization of the postal savings and insurance system, we consider three points especially important from the viewpoint of the central bank. First, equal footing with private banks must be maintained. Second, a sufficient risk management system must be established and profits must be earned. Third, financial businesses must be clearly insulated from the risks associated with nonfinancial businesses. I strongly hope that the discussion of postal savings privatization will produce a concrete blueprint, which contributes to fair competition and further innovation in the financial system. II. Effects of sophisticated financial services on the economy The financial services industry offers a variety of services, including payment and settlement services, means for customers to raise funds and invest, hedging of risks, managing of assets for customers, and provision of information. I will now take up some of these categories and use them as examples to show the kind of sophisticated services required by firms and households. A. Supporting firms’ activities 1. Provision of credit When providing credit to firms, financial institutions need to continually find ways to satisfy the complex and diverse requirements of their customers in developing new business. In fact, Japanese financial institutions have started to review their heavy dependence on real estate collateral, and expand the scope of loans that are without collateral and based on the evaluation of future cash flow. To promote this trend, financial institutions should improve their methods for evaluating cash flow in line with new business projects created by firms. They also need to make use of various forms of tangible and intangible assets such as accounts receivable and intellectual property in order to complement credit in place of real estate collateral. For large corporations with easy access to capital markets, the role of intermediation through securities business is vital. For example, some domestic and foreign securities firms recently underwrote convertible bonds (CBs) publicly issued by internationally active Japanese firms, separated the bonds into equity options and straight bonds, and sold them to a wide range of investors including foreign investment funds. Going forward, financial institutions need to perform higher levels of credit intermediation to satisfy both firms and investors. Moreover, it is also important for financial institutions to establish deeper relationships with firms. The relationships between lenders and borrowers are so complex that much research has been conducted in areas such as the “principal-agent problem” and “information asymmetry”. I think the traditional relationship between banks and firms in Japan may have been behind the strong tendency toward mutual restraint and interdependence as exemplified in cross-shareholdings. Moreover, the traditional business practices of pursuing profitability not of individual transactions but rather of business as a whole may have weakened business discipline between lenders and borrowers. For financial institutions, maintaining close relationships with firms is critical to fully utilizing their information production capability. If such a relationship creates too much mutual restraint and weakens mutual discipline, however, it may result in inefficiency and work unfavorably in a competitive environment as both financial institutions and firms face continual and frequent change. This relationship cannot be regarded as desirable. The long-term close relationship between firms and banks in Japan has attracted attention globally as a model for corporate finance. But it is now necessary to modify this relationship into one that is more suitable to a world in which lenders and borrowers make proactive proposals and check each other. Under such new relationships, both firms and banks are expected to take advantage of opportunities. For example, banks should closely monitor the condition of a firm’s business, and promptly revise the conditions attached to credit when the firm’s situation changes substantially. The firm can then accelerate its actions to improve performance in response to the changes, and both firms and financial institutions can move forward in a dynamic environment. To this end, it may be useful to clarify the covenants of loans from their origination, or to differentiate debt and equity functions by utilizing financial techniques such as giving a lender an option to purchase new stocks issued by a borrower in the future. If we are able to rebuild the sophisticated relationship between firms and banks, eventually it may even be possible to present this as a “new” model for corporate finance. 2. Hedging of risks Firms are exposed to a wide range of risks in the form of foreign exchange risks, market risks, and credit risks of business counterparties. Financial institutions play an important role in providing firms with financial services including hedging of risks. It is expected that the request for risk hedging tailored to the business profile will increase as business activities diversify further in the future. The development of financial theories and cutting-edge technologies has enabled financial institutions to hedge even extremely complex risks. And yet, it is not easy to satisfy such demands with specialized hedging. The more specific the request, the more difficult it will be to find risk takers. Financial institutions that routinely bear broader risks may nonetheless be able to unbundle the customized risks into standardized risks and take on the risks by themselves or transfer them in the relevant derivatives markets. In the process of unbundling and transferring risks, the division of labor may be effective among a wide range of financial institutions with specialized skills. The provision of risk-hedging tools to firms will be of primary importance on a par with the provision of loans. B. Supporting households’ activities 1. Investment Turning to households, I will begin by looking at investment needs. The risk preferences of households occasionally shift in response to changes in the environment. For example, the year-on-year growth in banknote issuance outstanding reached 16 percent in April 2002 when blanket deposit insurance was partially lifted. Currently, the growth rate has declined as low as the 1-2 percent level as stability returns gradually to the financial system. Furthermore, households began to take a positive attitude toward equity investment as corporate profits recovered. As a result, the share of equities traded by individuals increased to over 20 percent in fiscal 2003, second only to nonresident investors. Financial institutions have already started taking advantage of this opportunity. For example, the sales of mutual funds and insurance products through bank branches have increased dramatically over the past two years. The increase may be partly due to deregulation. It may also partially reflect the successful division of labor between banks and providers of these products such as asset management companies and insurance companies, which work effectively to satisfy a wide range of customer demand. Furthermore, the government is taking up the challenge to satisfy the diversified investment needs of households by increasing the issuance amount of government bonds that specifically target individual investors. In the retail financial area, from now on various business strategies implemented by financial institutions will emerge following the efforts of the most advanced retailers. In this regard, I emphasize the importance of solidifying mutual trust between financial institutions and households rather than focusing on marketing techniques. If financial institutions can establish solid relationships with households as well as explain to them the risk profile of each product and the effects of diversification and if households can make wise decisions about portfolio management with full understanding of the information provided by financial institutions, this system will lead to a more efficient allocation of resources. From the perspective of consumer protection, financial products are already governed by various regulations. However, solid and well-maintained relationships between households and financial institutions could potentially protect consumers even more effectively than such regulations, and therefore help to promote the efficient allocation of resources. 2. Financing Next, I will turn to the issue of how to support households to raise funds. In the past, when households in Japan needed temporary and short-term funds, they appeared to prefer to withdraw money from time deposits or sell financial assets such as stocks rather than borrow money. This may be partly because the consumer loan market in Japan is dysfunctional: for example, there is a substantial divergence between interest rates on consumer loans by banks and those offered by consumer finance companies. Such a large gap may indicate the existence of unsatisfied financing demand of households. Although there may still be difficulties in risk management of consumer loans as distinct from corporate loans, the law of large numbers is as effective a way as any other to manage credit risks of consumer loans. I do not think there is any problem with the method of risk management. Financial institutions are utilizing their extensive branch network to improve their marketing strategies for consumer loans, or strengthening business alliances across different types of institutions in light of the current situation in which banks, credit card companies, and consumer finance companies are all segmented. These efforts will contribute to the improvement of financial services. III. Role of the Bank of Japan Finally, I will touch upon the role of the Bank in improving the efficiency of financial services. A. Sophisticated financial services and financial system stability First, I should mention the relationship between enhancing the activities of financial institutions and maintaining financial system stability. The Bank has been striving to ensure financial system stability by providing ample liquidity to the market and by fulfilling the function of the lender of last resort. However, if too much emphasis is put on the goal of minimizing the risks taken on by banks to avoid failures, the financial intermediary function may lose its vigor and financial innovation may become difficult to promote. After the removal of blanket deposit insurance, we should think dynamically by aiming to maintain financial system stability with the assumption that new entries into and exits from the financial system naturally occur. In this regard, the new Basel Capital Accord that was published on June 26, 2004 is based on the assumption that banks may fail. The new regulation requires banks to hold minimum capital to cover the maximum annual loss which may occur once in 100 years. In case of even larger losses, a bank may go bankrupt. Conversely, if there are 100 banks with the bare minimum of capital, one bank could fail per year. After the removal of blanket deposit insurance, we must strike a balance between maintaining managerial flexibility of financial institutions and avoiding systemic risks. Furthermore, it will become increasingly important in the future to design bank supervision and regulation to avoid hampering financial innovation by the private sector. Such thinking has already been adopted in the new Basel Capital Accord. In the new regulation, the manner in which the amount of required capital is calculated has become more sophisticated. A framework has been adopted that carefully reflects the risk profiles of various assets and allows banks with greater risk management skills to use their internal risk management models. Thus, the new regulation has been designed to give banks an incentive to further improve their own risk management systems. In general, regulation or supervision of financial institutions should not be conducted by giving institutions detailed instructions in advance on how to act, which proved workable during the crisis mode. Rather, we should respect the unique management of each bank and back managerial innovations by financial institutions. On-site examinations by the Bank are being conducted with a recognition of the importance of supporting such innovation. B. Financial market functioning and monetary policy Let me turn to the relationship between financial market functioning and monetary policy. A look at economic developments at home and abroad during the last decade indicates that central banks should make an appropriate evaluation of economic and financial conditions in conducting monetary policy, with a view to not only developments in real economic activity but also the interaction between real economic activity and financial activity. This issue appears to be a common one for the world’s central banks given the rapid and continuous expansion of financial and capital markets, and the dramatic rise in the role of these markets against the background of deregulation, globalization, and developments in IT. For example, such interaction was a factor behind the increased and prolonged interdependence between economic and financial developments after the bursting of the bubble economy as well as the economic turbulence in affected countries at the time of the Asian financial crisis. Currently, the need for close communication between the central banks and markets has become more important than ever in the discussion of the conduct of monetary policy after the long period of low interest rates around the globe. This should also be understood in the context of the interaction that I just mentioned. The Bank will do its utmost to pursue an appropriate monetary policy while closely monitoring the changes in financial markets and their influence on the activities of financial institutions and firms as well as on the economy as a whole. We must continue improving the functioning of financial markets and financial institutions. This is very important, particularly in Japan, from the viewpoint of strengthening the transmission mechanism of monetary policy and nurturing the dynamism of the Japanese economy over the long run. To improve the functioning of financial markets, the Bank has been expanding the scope of assets that are eligible to be purchased or to be pledged as collateral for open market operations. We will continue to work together with market participants to enhance the functioning of financial markets including credit markets. To improve the functioning of financial institutions, the Bank will use its on-site examinations and off-site monitoring to provide an environment in which banks can build new business models and function efficiently with a highly sophisticated and integrated risk management system. Conclusion Today I have focused my talk on the future of financial services. I strongly hope that financial services in Japan will open up new possibilities for firms and households and contribute to strengthening the economy. Let me conclude by expressing my wish that Japan’s financial institutions will export new, enhanced financial technologies and services from Japan and play a greater role in the development of the world economy.
|
bank of japan
| 2,004 | 7 |
Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting in Osaka, 2 September 2004.
|
Toshihiko Fukui: Economic situation in Japan and abroad Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting in Osaka, 2 September 2004. * * * Today I will discuss the economic situation at home and abroad, and the conduct of monetary policy. Amid the continued expansion of the world economy, Japan’s economy has been on a recovery path since the summer of last year. The recovery has been initially driven in large part by an increase in exports. In addition to the favorable external conditions, the foundation has been laid domestically for a self-sustaining recovery. We should also note that the current recovery has been achieved while prices have been on a declining trend. World economy and Japan’s economy Let me start with the world economy. The economies of numerous countries including Japan have become closely interrelated as globalization has progressed. This is evidenced by the growing prevalence of the international division of production processes. For example, IT-related investment has been undertaken all over the world, led by the United States. High-value-added components of ITrelated goods are being produced in Japan, while processing and assembly have been concentrated in other East Asian countries. Overseas economies, particularly the United States and China, continue to expand. The U.S. economy has been maintaining expansionary momentum with a steady increase in capital spending and a large jump in corporate profits, despite several weak economic indicators. The Federal Reserve Board raised its target federal funds rate by 25 basis points in June and August, respectively. The East Asian economies have been growing steadily, with China likely to continue its high growth. In Japan, real GDP growth slowed to an annual rate of 1.7 percent in the second quarter, following high growth in the two preceding quarters. Nevertheless, it is our overall judgment that Japan’s economy has been in a recovery process, leading to a return to a sustainable growth path in light of the background I have just described. A rise in exports has raised industrial production and corporate profits, which in turn generates an expansion in business fixed investment. In the labor market, the number of employees has been increasing. Japan’s economy is thus expected to continue recovering, gathering stronger momentum. The positive effects of the increases in production and corporate profits on household income are expected to become visible, laying stronger foundations for a gradual recovery in private consumption. Corporate sector It is accurate to say that Japan’s current recovery is due to the better-than-expected growth of the world economy. It is also the result of the progress being made in adjusting excessive capital stock, debt, and labor of the corporate sector as well as dealing with financial system fragility. Corporate restructuring has spread from large manufacturers to nonmanufacturers and small businesses, producing tangible results. The ratio of current profits to sales and return on assets in fiscal 2004 are projected to be the highest for both manufacturers and nonmanufacturers since the bursting of the asset bubbles. While dealing with the legacy of the asset bubbles, firms have been pursuing forward-looking business strategies, particularly in IT-related areas. For example, the markets for digital electronic appliances and environment-related products have been growing rapidly. To take advantage of the international division of production processes, Japanese firms have increasingly concentrated resources in the areas where they enjoy a comparative advantage. As a result, they have succeeded in raising productivity at home and maintaining competitiveness. Financial system For Japan’s financial sector, the major challenges are restoring financial soundness and pursuing profitable business opportunities. To restore financial soundness, banks have made steady progress in disposing of nonperforming loans (NPLs) recently. The ratio of NPLs to total loans has declined significantly at regional banks, which had previously been slower than major banks to address the NPL problem. Credit costs, the costs incurred by banks when they dispose of NPLs, have clearly been on a declining trend. The financial soundness of banks and the managerial soundness of borrowers are two sides of the same coin. In this context, banks have been tackling the remaining issues necessary to resolve the NPL problem, including the revitalization of borrower firms. In view of the full removal of blanket deposit insurance scheduled for April 2005, it is vital for firms and banks to step up their efforts to resolve the NPL problem to revitalize Japan’s economy. In pursuing profitable businesses, financial institutions face the challenge of meeting the diversified needs of households and firms appropriately and efficiently. Banks have been seeking to strengthen their management and construct a more efficient system for the division of labor and collaboration through alliances and wide-ranging consolidation. Major banks have also been seeking dynamic consolidation to better compete globally. Given the reduced restriction in terms of credit costs, financial institutions have been gradually taking on new challenges such as increasing loans to small and medium-sized firms, originating syndicated loans, and selling mutual funds and insurance. Thus, we can say that the financial system as a whole is restoring its soundness and evolving a forward-looking, more dynamic style of management. To sustain these actions, financial institutions need to upgrade the integrated risk management system, in which various types of complex risks are controlled in a consolidated manner, and construct a framework to deploy capital more efficiently. A draft of the new Basel Capital Accord released at the end of June has adopted a risk-sensitive framework to encourage the upgrading of risk management. In line with this global trend, the Bank of Japan is working to improve the functioning of financial institutions through on-site examinations and off-site monitoring. Price developments While the corporate goods price index, particularly raw materials and intermediate goods, has been rising partly because of higher crude oil prices, the consumer price index (CPI) has been on a slight downtrend. A small decline in the CPI is largely due to the unit labor cost reductions in the corporate sector reflecting higher productivity and the restraint on labor costs. Thus, the outlook for prices depends on future developments in productivity and wages. Three factors underpin the rise in productivity. First, resources are being used more efficiently as a result of the adjustment of excessive capital stock and labor as well as deregulation in a variety of areas, including the labor market. Second, progress continues in IT and technological innovation. Third, as is generally observed during an initial phase of economic recovery, higher utilization of labor and equipment is increasing productivity. While the third factor is cyclical, the first two factors could spur structural changes, raising the potential production capacity of Japan’s economy. Many countries have experienced a situation in which prices do not necessarily increase in tandem with an upturn in economic activity. Economists and central bankers have been exploring a plausible explanation of this discrepancy. From the viewpoint of conducting monetary policy, we are carefully monitoring price developments while keeping in mind the following questions. If the recovery continues, will the growth in productivity slow? Or, will such growth continue thanks to deregulation and the progress in IT? Or, will wages rise along with the growth in productivity? In terms of developments in prices over the shorter term, we should pay attention to the effects of higher crude oil prices on the general price level. Crude oil prices have been around record-high levels against the background of a rise in global demand and heightened concern about geopolitical risks. We have seen the impact of higher crude oil prices on the domestic corporate goods price index, which marked a year-on-year increase of 1.6 percent in July, the largest since the latter part of the bubble period. Higher crude oil prices are also affecting the CPI through the rise in prices of gasoline and other petroleum-related products. We should also pay attention to the effects of the increase in crude oil prices on economic activity. The steady expansion of the world economy including the United States may be adversely affected. At home, higher crude oil prices may have a negative impact on corporate profits and households’ spending behavior. Conduct of monetary policy Let me turn now to the conduct of monetary policy, bearing in mind the current situation in which prices are not increasing together with the economic recovery. The Bank has made a commitment to continue the current quantitative easing policy until the year-onyear change in the CPI registers zero percent or higher on a sustainable basis. Such a commitment is unusual for a central bank. Since the CPI is still on a declining trend, the Bank is determined to pursue an easy monetary policy even as the economy continues to recover. The positive impact of the current easy monetary policy on economic activity is strengthening as the economy recovers. The Bank’s policy commitment allows firms to continue enjoying low funding costs through the stability of expectations about future interest rates. As the economic recovery raises the expected rate of return on new investment with interest rates remaining low, firms will become more inclined to undertake investment. We expect consumer prices to continue declining slightly year on year due to the decrease in rice prices in the fall as a flipside of the increase of last year, despite higher crude oil prices. So far, we have not observed any major changes in the discrepancy between economic activity and prices, productivity, and wages. It is our judgment that we remain at the stage where we should maintain the current commitment and firmly continue the quantitative easing policy. Eventually, we must return to the conventional monetary policy of using short-term interest rates as an operating target, from the current policy of using the current account balance at the Bank as an operating target. The process of returning to the conventional monetary policy consists of two elements. One element is how to reduce the current account balance at the Bank of Japan. Financial institutions have a legal obligation to hold about 6 trillion yen in the current account at the Bank as required reserves. At present, given the ample provision of liquidity by the Bank, they are holding 30 to 35 trillion yen in their current accounts, far exceeding the required reserves. The ample provision of liquidity has contributed greatly to financial market stability and thus prevented a deflationary spiral as it dispels concern about liquidity risk. As we return to the conventional policy framework, we will need to reduce the current account balance at the Bank. The other element involves the pace at which short-term interest rates, which are now virtually at zero, should be raised. How should we go through the process as we return to the conventional monetary policy? What is the most appropriate way to communicate our thinking on monetary policy as we eventually shift the policy? These are the important issues we must address in the future. We will seek a smooth transition from the current monetary policy to conventional policy by taking full account of the economic and financial situation. Japan’s economy is moving steadily toward achieving sustainable growth and overcoming deflation. The Bank is determined to support the private sector’s efforts to move forward by firmly pursuing the appropriate monetary policy.
|
bank of japan
| 2,004 | 9 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Annual Meeting of the World Federation of Exchanges, Tokyo, 13 October 2004.
|
Toshihiko Fukui: Global imbalances and exchanges Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Annual Meeting of the World Federation of Exchanges, Tokyo, 13 October 2004. * * * Introduction Ladies and gentlemen, it is an honor as well as a pleasure to be invited to the annual meeting of the World Federation of Exchanges, to offer some thoughts on recent developments in the international financial system. Taking this opportunity, I would like to congratulate you on the tremendous success exchanges around the world are achieving in promoting trading of various financial instruments, and on the role your association has played in facilitating such developments. Today, having just chaired this month’s first Monetary Policy Meeting, I would like to briefly comment on the monetary policy of the Bank of Japan. The Japanese economy continues to recover steadily, but mild deflation persists, reflecting factors such as increasing productivity. Against this background, the Bank of Japan decided to maintain the so-called “quantitative easing” framework. For the rest of the evening, I would like to focus on a medium term structural issue that never seems to go away - global imbalances, and offer my views on what role exchanges will be able to play in meeting this challenge. Global imbalances Let me begin by briefly laying out how unbalanced the world is. At the beginning of this month, I attended a series of meetings in Washington. Those meetings were held in conjunction with the annual meetings of the International Monetary Fund and the World Bank Group, and included the meeting of the finance ministers and central bank governors of the Group of Seven countries. A common theme running through those meetings was surprisingly robust growth in 2004. The global economy is expected to grow by 5% this year, which is the highest growth in 30 years. The above-potential growth would probably have to slow down next year, but the estimate given in the World Economic Outlook by the International Monetary Fund is 4.3%, still somewhat higher than the potential. Against this relatively favorable outlook, we have identified some risks. After all, central bank governors are paid to worry. One risk is obviously the high prices of oil. I will not go into details of this issue today, because so much is written about it. Another risk is global imbalances. The current account deficit of the United States reached 542 billion dollars last year. This is almost 5% of the nominal GDP of the United States. For this year, we have seen no sign of this deficit shrinking to any significant extent. If we look back to the middle of the 1980’s, the last time global imbalances were considered to be a problem of the world economy, the current account deficit of the United States peaked at 3.5% of GDP. Looking at the details, however, there are some interesting differences between 2004 and the middle of the 1980s. First is the size of the imbalances, which I have just mentioned. The second is who are in the deficit club. In the mid-eighties, not only the United States but also many other countries were running deficits. On the other hand, today, most of the deficits are concentrated in the external account of the United States. Third, related to the point I have just mentioned, the emerging Asian economies are now in the black instead of being in the red. Having said this, I must make this clear: I am not saying that imbalances per se are bad. As a matter of simple arithmetic, if there were no trade in the first place, there would be no imbalances. When we start trading, unless everyone is balanced, imbalances are inevitable. We are certainly better off trading than not. More conceptually, an economy with abundant investment opportunities relative to its savings, most notably a developing economy, is likely to run a deficit. In this sense, some imbalances are a reflection of enhanced economic welfare. Furthermore, the size of the imbalances is not necessarily disruptive, either. At present, the United States is financing a current account shortfall amounting to 542 billion dollars, the size of the economy of Netherlands, with no visible difficulties. You may perhaps remember the concerns voiced in the market some twelve months ago. There were worries that the U.S. dollar might fall sharply, were it not for continued and heavy currency market interventions by Asian monetary authorities. That has not been the case so far. In the case of the yen, even in the absence of official interventions in the foreign exchange market since mid-March, the dollar has held up well against the yen. This suggests that private capital flows are now playing a more important role in determining market dynamics. I might even say that we should be proud of ourselves in allowing the international financial markets to develop into such a resilient system. If this is so, why are we saying that global imbalances risk the stability of the international financial system and the global economy? Large imbalances are worrisome, because imbalances cannot grow forever. In fact, the imbalances we saw in the middle of the 1980s led to a rather painful correction of the dollar. As one accumulates more dollars, he or she would begin to worry about the danger of putting all his or her eggs in one basket. Alternatives are there. It can be the euro, the yen or any other currency or a physical asset. If sentiment shifts suddenly in such an environment, there would be a rush to convert dollars into alternative assets. With the large accumulation of deficits to start with, the resulting flows could be quite large. They might be of a magnitude that could impair the smooth functioning of the international financial system. Though unlikely, that is still a risk we must not ignore. In order to reduce such risks, we must think about how to adjust the imbalances to more comfortable and manageable levels. Policy makers cannot adopt benign neglect in this context. I believe many things are best left to the market and the government should keep out of its way. We cannot, however, always say that the market would take care of itself. If left to the market, there is a risk, however remote, of a sudden shift in sentiment over the dollar. Policy makers must reassure the market that they are not letting imbalances get out of hand. We need to have a good mix of policies. To begin with, we need to ensure flexibility in the financial system and the economy. In many cases, unleashing market forces is a key to efficient adjustment, and flexibility is essential to the financial system and the economy to withstand shocks arising from adjustments. Beyond this, there are basically two routes to reach a level of imbalances that would be more comfortable and manageable in the long run: realigning exchange rates and rethinking policies that influence absorption in economies. Adjusting imbalances entirely through exchange rate realignments is neither practical nor desirable. Meanwhile, policy choices can influence absorption. If dissavings by the government are resulting in current account deficits, consolidation of fiscal expenditure would be necessary. Governments of deficit-running economies might also review any policies that are discouraging private savings or adopt policies that encourage private savings. Surplus-running economies can adopt policies to encourage domestic absorption. For example, enhancing confidence in social security systems would persuade households to avoid excessive savings. It is responsibility of policy makers to formulate and implement an appropriate mix of policies. Imbalances and Asia Adjusting imbalances, however, is easier said than done. The United States now imports 50% more than it exports. If imports are to grow by 5% per year, exports must grow by 7.5% just to keep the dollar amount of current account deficits at present levels. Viewing from a slightly different angle, even if the income elasticity of U.S. imports to U.S. demand growth were to suddenly drop to zero while exports continued to grow at 5%, it would take nearly 5 years before the deficit halved. How then could we realize this significant adjustment? What should Asian economies, which are running surpluses, do in the context of global imbalances? First of all, economies should, in principle, accept adjustment through market forces. Rigidity can lead to a build-up of stress in the system. Many words have already been spent on this subject, and I will not repeat them. I would just note that, in our recent meetings with central bank colleagues from Asia, they were fully aware of the need for flexibility and the challenges facing them in pursuing that goal. In addition to enhancing flexibility, today I would like to explore another option: the possibility of Asian economies enhancing absorption in their economies. For Japan, demography would aid the adjustment process. Academic literature tells us that the rate of savings tends to decline in an aging society. In our case, as baby-boomers begin to retire in the next few years, they would start drawing down their savings. This should gradually influence the overall rate of savings and hence the level of external surplus. In this context, one important element would be rebuilding confidence in the social security systems that are now under pressure from the rapid aging of the population. In many non-Japan Asian economies, the government does not provide a sufficient social safety net. This is one area where a quick action is needed. In a financial context, one challenge is to explore a better use of capital. Emerging Asia collectively earns about 150 billion dollars a year in surpluses. These dollars are often invested in the United States. Meanwhile, as developing economies, emerging Asia has an almost insatiable appetite for capital. There are still numerous investment opportunities out there in the region. Today, these ventures are often financed by overseas investors, often from the United States. At a risk of oversimplification, I would say that dollars earned by emerging Asia are invested in the United States, which are, in turn invested in emerging Asia. We should ask if there are better ways for capital to flow. Having put this question on the table, let me spend a few minutes on investment opportunities in emerging Asia. Emerging Asia has a huge population. China alone has 1.3 billion people. If one adds India with 1.1 billion, there are almost three billion people in the region. These people are not just inexpensive sources of labor for goods and services exported to markets in industrialized economies. These people will become happier if they enjoy material wealth like we do. You can see vending machines virtually at every corner in Tokyo, peddling one-dollar cans and bottles of soft drinks. If the three billion people in emerging Asia can each drink just one can or bottle a day, the sales add up to three billion dollars. In a year, it will become more than one trillion dollars. To put this into perspective, the annual revenue of the Coca-Cola Company was 21 billion dollars in 2003. Of course, this is not yet a plausible story because many of these people are living on just a couple of dollars a day. For example, 3 dollars in China, 2.6 dollars in Indonesia and 1.5 dollars in India. Today, not every one can afford to spend one dollar for the pleasure of drinking a refreshing can of soft drink. However, if jobs are created for these people, huge untapped demand could be unleashed. Workers are at the same time consumers. Investments in goods and services targeted for intraregional consumption can create jobs and, in turn, the market for those goods and services. If and when this happens, domestic absorption will increase in emerging Asia. Global imbalances will be alleviated. This scenario is not a pipe dream. In many parts of emerging Asia, consumer demand is picking up. From Myondong in Seoul to Nanjin Lu in Shanghai to Siam Square in Bangkok, consumers are flocking to fashionable shops and cafes. This demand is creating a favorable cycle by creating new jobs and hence greater consumer demand. For this model to work, however, a thorough understanding of the region and the needs of the people is essential. The deepening of regional integration will, I hope, give birth to a new breed of intra-regional investors, who will focus on these opportunities. In connection with this scenario, an interesting question is how to finance the efforts of the region’s entrepreneurs. A key issue here is how can we mobilize the region’s rich reservoir of savings to finance regional investments. Financial institutions in this region must enhance their ability to intermediate between savings and investments. I also find it important to strengthen the financial infrastructure of the region. There are many important initiatives now underway. Since I have recently had a chance to explain them, I will not repeat them here. I would just like to draw your attention to ongoing efforts, such as the launch of the Asian Bond Fund by EMEAP central banks and the Asian Bond Market Initiative by ASEAN+3 countries. These efforts attempt to become catalysts for developing the bond market in the east Asian region, which still remains in an infant stage. In the case of the Asian Bond Fund, the seed money provided by central banks ought to strengthen confidence among investors contemplating to enter the market. Imbalances and exchanges Let me now turn to possible roles that exchanges can play in this world with imbalances. You know more than I do that exchanges are important channels to distribute funds for various investment opportunities. Exchanges facilitate the flow of funds in the market. Since financial markets are interconnected, efficiency gains accorded by exchanges contributed to the expansion of global capital flows. In this regard, exchanges are part of the international financial system that helps finance global imbalances. Before moving on, I would like to discuss one important efficiency-enhancing feature of exchanges. Exchanges are highly transparent form of connecting sellers and buyers of financial assets. In the over-the-counter market, a seller must search for buyers. The seller does not know precisely at what price the asset traded. The seller does not have an idea of the depth or the liquidity of the market. Exchanges bring together sellers and buyers in one place to maximize the chance of a seller finding a buyer. Prices are available and the distribution of bids and offers could also be seen in some cases. In short, exchanges facilitate the trade matching process through its transparency. Exchanges can also be a mitigating factor of imbalances. In the context of Asian economies, one should look at a common structural problem in the domestic financial systems of emerging Asian economies. In these countries, much financing still moves through the banking channel. Strengthening of capital markets is therefore a common goal. The initiatives related to the bond market, which I referred to a few moments ago, should be seen in this light. Exchanges can play a role here as well. Providing a full range of financing options to entrepreneurs is a key element in the mobilization of the region’s rich reservoir of savings to finance regional investments. Another contribution that can be made by exchanges is enhanced transparency. In some cases, investors are said to be discouraged from investing in the emerging Asian market, partly because transparency is so low. With their transparent trading systems, which I have just mentioned, exchanges may help overcome this problem. Finally, exchanges could be linked across borders. Such linkages would create additional efficiency. In the context of emerging Asia, it is important to strengthen the intra-regional as well as extra-regional linkages between exchanges. Listing of overseas assets, cross-listing of products and trading links between exchanges can all be designed to enhance intra-regional capital flows. I hope the distinguished leaders of established exchanges assembled here today would assist their emerging Asian colleagues to achieve these goals. Concluding remarks Central banks operate in the markets to achieve its policy goals. As a result, the effectiveness of monetary policy depends on the sound development of financial markets. In this context, central banks have more than a passing interest in enhancing market infrastructure. Exchanges are important building blocks of this infrastructure. I should stress that in a globalizing world supported by information technology, the certainty of transactions is a crucial factor for sound development of the financial system. Central banks provide certainty through the finality of payments effected through their accounts. Exchanges provide certainty through its settlement arrangements. In light of these common roles, I believe that we can cooperate in many ways to enhance the efficiency and soundness of the financial system. I look forward to working together with you in this regard. Thank you for your kind attention, and good evening.
|
bank of japan
| 2,004 | 10 |
Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Kisaragi-kai meeting, Tokyo, 11 November 2004.
|
Toshihiko Fukui: The current situation and outlook for the Japanese economy Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the Kisaragi-kai meeting, Tokyo, 11 November 2004. * * * Today I will talk about the Bank of Japan's assessment of the economy and the thinking behind its conduct of monetary policy with reference to the Outlook for Economic Activity and Prices (hereafter termed the Outlook Report) published in October 2004. I. Recent economic developments The Japanese economy is currently in the process of recovery. Since the early 1990s, it has on a number of occasions appeared to be entering a recovery phase. Each time, however, the recovery soon ran out of steam and the economy slipped back into recession. These recessions were without exception marked by deep troughs. Excesses in production capacity, the work force, and debts, coupled with weakness in the financial system, increased the severity of the slowdowns. The 1990s have often been called Japan's “lost decade,” but they have not passed entirely without accomplishment. On the contrary, there has been progress in structural adjustment over this period, as excess production capacity and debts have been dealt with. On the managerial front, new forms of collaboration have emerged between firms regardless of the sectors to which they belong, and individual firms have aggressively undertaken new and innovative investment, raising their ability to generate new products and services offering high value added. The fruits of these endeavors are clearly visible in recent corporate profitability. According to the forecast in the September Tankan (Short-Term Economic Survey of Enterprises in Japan), the ratio of current profits to sales for fiscal 2004 should exceed the peak reached during the recovery phase of the 1990s, and is expected to attain a level comparable to the high point of the bubble period. Underpinned by such broad-based efforts by firms, the current economic recovery may be viewed as having a stronger foundation than previous ones. Turning to the economic environment in which Japan finds itself, we observe continued worldwide economic expansion led by countries such as the United States and China. In the United States, productivity surged in the 1990s reflecting continuing technological innovation, particularly in IT. Moving into the first decade of the 21st century, despite a brief period of adjustment following the bursting of the IT bubble, since 2002 the economy has been in a recovery phase and has been achieving high growth. Although the rise in crude oil prices and slowdown in demand for IT-related goods have recently been restraining the pace of economic growth, it appears likely that the U.S. economy will continue to expand at a steady and sustainable pace. China continued to achieve high economic growth as it increasingly adopted open-market policies throughout the period from 1992, when Chinese leader Deng Xiaoping made a famous speech during his tour of southern China, to 2001, when it joined the World Trade Organization. Its presence in the global economy is growing rapidly. Although there is a risk of investment overheating, the fundamentals remain in place for continued robust growth. It is worth mentioning the projections by the International Monetary Fund for growth in the world's real GDP in 2004 and 2005 - at 5.0 percent and 4.3 percent, respectively - which support the view of continuing worldwide economic expansion. Against the background of economic expansion overseas, Japan's exports and production are likely to continue increasing, and in turn, corporate profits and business fixed investment are expected to rise, reflecting the efforts of firms in Japan mentioned earlier. Thus, the economy is expected to continue recovering underpinned by a virtuous cycle where the improvement in corporate profits and the employment situation leads to an increase in household income and furthermore household consumption. In the Outlook Report published in October, the majority of the nine-member Policy Board forecast real GDP growth for fiscal 2004 ranging from 3.4 to 3.7 percent, with the median at 3.6 percent. Comparable figures for fiscal 2005 ranged between 2.2 and 2.6 percent, with the median at 2.5 percent. Although ostensibly this represents a slowdown, it should be noted that the growth rate for fiscal 2004 is pushed up by the high growth rate in the second half of fiscal 2003. In fact, the figures suggest that the Japanese economy is in the process of shifting to a sustainable growth track. Turning to prices, domestic corporate goods prices are likely to continue increasing for the time being owing partly to rising domestic and international commodity prices, particularly crude oil prices. It is noticeable, however, that higher corporate productivity and restraint on labor costs have meant that consumer prices remain relatively resistant to increases in economic activity, and this tendency is likely to persist. In the Outlook Report, the forecasts provided by the majority of the Policy Board members envisioned the year-on-year rate of change in the consumer price index (CPI; excluding fresh food, on a nationwide basis) for fiscal 2004 as ranging between minus 0.2 and minus 0.1 percent, with the median at minus 0.2 percent, and for fiscal 2005 as ranging between minus 0.1 and plus 0.2 percent, with the median at plus 0.1 percent. I will return to this subject in more detail later in my remarks. Forecasts are always subject to qualification. Factors that may cause either positive or negative deviations from the forecasts in the Outlook Report published in October include (1) developments in overseas economies, including movements in crude oil prices and demand for IT-related products; (2) developments in domestic private demand; (3) developments in domestic financial and foreign exchange markets; and (4) issues relating to the health of the financial system and the disposal of nonperforming loans. Details on these factors are provided in the Outlook Report. Here, I will touch upon two issues with an important bearing on the direction of both overseas and domestic economies, that is, crude oil prices and demand for IT-related goods. Crude oil prices are hovering around the highest level ever recorded: West Texas Intermediate (WTI) crude oil prices have been around 50 U.S. dollars per barrel. While prices for light crude oil (which has a larger gasoline component) have surged, those for heavy crude oil (with a smaller gasoline component) have remained at a relatively low level, with the unprecedented large price difference continuing between the two. Thanks to its large refining capacity for gasoline, Japan's imports of crude oil are concentrated among medium and heavy crude oil, so that the rise in the overall price of crude oil imported to Japan is relatively small. In addition, considering factors such as the consumption of oil per unit of real GDP, which is about 70 percent of that of the United States, as well as the highly efficient utilization of energy resources in Japan, the direct impact of crude oil prices is not expected to be particularly large for the time being. More worrisome is the indirect impact from overseas economies. If crude oil prices remain at high levels, major energy-consuming nations will see their household spending power adjusted for inflation come under pressure, considerably affecting economic activity. Some observers claim that the rise in crude oil prices will cause a decline in the pace of expansion of the global economy, and as a result push down crude oil prices. However, there is considerable uncertainty as to when this endogenous mechanism will come into play. Meanwhile, the fact is that, given the limited supply-side potential vis-à-vis rising demand and the further threat to the supply side offered by heightened geopolitical risks, the risk of a further rise in crude oil prices cannot be ruled out completely. So far, there seems to be very little risk of a slowdown in the global economic expansion, but developments in crude oil prices, along with their effects on the world economy, will have to be monitored closely. Equally important are developments in demand for IT-related goods. At present, the Japanese IT industry, which had witnessed an unintended buildup in levels of stocks, has been in the process since the summer of adjusting production and the level of stocks in response to the slowdown in international demand for IT-related goods. This adjustment is very likely to be mild, since not only have firms adopted a more cautious production stance and been quick to take action with regard to stock levels, but also the base of IT-related demand has been expanding in response to, for example, growth in the market for digital household appliances. However, on top of the volatility and unpredictability of worldwide demand for IT-related goods, the widespread international division of the production process has meant that it is increasingly becoming difficult to gain a clear picture of developments in IT-related sectors. There is a risk, therefore, of an unexpected fall in shipments that may lead to a sizeable adjustment. In this connection, sales around the year-end both at home and abroad will have to be monitored closely. II. Three features of the current recovery phase Next, I would like to discuss some of the more distinctive features of the current recovery phase. The first of these is the recovery in the household income situation which, although production and corporate profits continue to increase, remains moderate to date. The second is the fact that, in spite of the moderate nature of this recovery in household income conditions, household consumption continues to show some positive movements. The third feature is the underlying price trend, with the year-on-year change in consumer prices continuing to register a slight decline notwithstanding the ongoing economic recovery. Since there is a close relationship between these features and the outlook for the Japanese economy projected in the Outlook Report, I would like to explain the Bank's view of each of them in turn in some detail. A. Moderate improvement in the household income situation The course of the current recovery has seen the pace of decline in household income gradually shrinking, with 2002 marking the low point. However, the year-on-year change in household income has yet to turn positive, even this year. Movements in household income can be decomposed into movements in the number of employees and in the average wage per worker. Looking at movements in the number of employees, we see that although there has been a general decline in recent years, since the middle of 2003 the year-on-year growth rate, while fluctuating on a monthly basis, has moved into positive territory. Within these figures, we observe that while numbers of regular employees continue to decline, numbers of so-called “non-regular employees” - in other words, part-time and temporary workers as well as those working on pro rata contracts - have continued to increase rapidly, so that the proportion of non-regular employees in the work force has expanded significantly. Statistics compiled by the Ministry of Internal Affairs and Communications show that non-regular employees now make up about 30 percent of all employees. On the other hand, while the rate of decline in the average wage per worker has been abating, the year-on-year change remains slightly negative. The point here is the significant influence of the increase in non-regular employees just mentioned. There is inevitably a substantial difference in the average wages of regular employees, consisting mostly of long-term company employees and managers, and of non-regular employees who work mainly on fixed assignments. When the proportion of non-regular employees, with their lower average wages, increases, this pushes down the overall average wage per worker. In fact, looking at the wages of both regular and non-regular employees, we see that since 2003 they have finally either stopped declining or started to rise. Clearly, it is the rise in the proportion of non-regular employees in the work force that is responsible for the continuing decline in the average wage per worker. Of relevance in this regard, as firms strive to restrain their labor costs by making aggressive use of part-time and temporary workers, is the progress made in the deregulation of the labor market, and in particular amendments that have relaxed the laws governing the employment of temporary workers. Another factor likely to have played a role is firms' increasing emphasis on raising profitability. For example, the share of labor in income distribution, i.e., household income divided by nominal GDP, which remained at a high level throughout the 1990s, has now been declining at a significant rate for several years and has recently been hovering below its 1980s average. Such movements in labor's share are likely to have been influenced by changes in firms' attitudes to corporate management, as they take effective advantage of deregulation of the labor market to review the distribution of their income between capital and labor. I often hear the claim that Japan's economic recovery has not made itself properly felt. The delayed recovery of household income which we have been discussing may well be one reason for this. From the standpoint of the individual, if his or her wages do not increase, then it is perfectly natural that he or she has no genuine sense of a recovery. However, when we consider the extremely high level of corporate profits, it seems reasonable to expect that the beneficial effects of this will gradually feed through from the corporate to the household sector and at some point household income will start to increase. Some firms have commented that there may be a limit to the increase in the number of non-regular employees because job-specific skills and expertise cannot be fully shared and passed on among such employees. In fact, there are signs that the increase in the proportion of part-time workers in the work force has recently been slowing slightly. In this context, we will continue to carefully monitor these and other developments in household income. B. Firmness in household consumption The second feature of the current recovery phase is that, despite the fact that the improvement in the household income situation has remained moderate, household consumption has continued to show some positive movements. Although household consumption recovering ahead of household income is a phenomenon often seen in the United States, it is almost unprecedented in Japan, where households are usually unwilling to borrow to spend. The recovery in household consumption in the absence of a significant improvement in household income has occurred not only as a result of structural factors such as Japan's changing demographics, meaning that there is a larger proportion of elderly people who have a higher propensity to consume, but also because the propensity to consume among elderly people has itself been rising recently. A number of reasons may be put forward for this rise. For example, there are those who point to the influence of the nursing insurance scheme introduced in 2000. Our view at the Bank is that a significant contribution has been made also by firms' efforts to gain a better grasp of the needs of customers and to provide them with new and attractive products and services that meet their requirements. Firms that have tailored their marketing strategies to specifically target the elderly have induced the latter to part with some of their liberal endowment of disposable financial assets. For example, it is said that flat-panel TVs and expensive guided tours are most actively purchased by the elderly. Moreover, a recovery trend has also been discernible recently in the propensity to consume of people other than the elderly. It seems that firms have succeeded in inducing consumption across a range of customer age groups. A breakdown by spending behavior shows that spending is increasing in a wide range of areas: these include travel both within Japan and abroad, education geared toward lifelong learning and self improvement, and health and sports-related services. This suggests abatement of pessimism about future household income as the economy continues to recover. In this regard, the momentum for recovery in household consumption may be expected to receive a further boost as household income starts to increase. C. Divergence between developments in economic activity and prices As I mentioned earlier, consumer prices have recently been less responsive to increased economic activity. The third feature of the current recovery phase is therefore the divergence between developments in economic activity and prices. Underlying this divergence is the fact that firms are now able to produce a greater number of products more efficiently and at a lower labor cost. Higher productivity has been achieved in a number of ways. Firstly, as in previous recovery phases, a cyclical mechanism has been working to put to good use idle labor and capital. Secondly, labor and capital resources have been used more efficiently than in previous recoveries, due both to firms' own streamlining efforts and to deregulation in various fields. Thirdly, there may have been steady long-term improvements in economic efficiency, due to technological innovation, especially the progress made in IT. At the same time, on the wage front, firms have been restraining labor costs by hiring part-time and temporary workers instead of regular employees. As a result of this higher productivity and wage restraint by firms, unit labor costs, or labor costs per unit of output, have been declining significantly for the past few years and have reached an unprecedented low level. The declining unit labor costs have absorbed rises in various other costs, stopping consumer prices from increasing despite the continued economic recovery. The current decline in prices thus seems to be undergoing a qualitative change: from being rooted in a large outgap, it has gradually sprung more from improvements in productivity and firms' efforts to trim labor costs to enhance their competitiveness. It is unlikely, however, that this situation will continue forever. It is undoubtedly the case that higher productivity increases the potential supply capacity, causing a temporary easing of labor market conditions which is unfavorable to wage increases. Nevertheless, so long as a rise in productivity does not occur continuously, sooner or later the labor that has been freed up will be re-employed and wages will start to rise. Along with developments in wages and household income, we will also need to monitor closely whether productivity gains will slow as the economic recovery continues, or whether they will continue to increase due to deregulation and innovations in IT. Another factor that has caused prices to be less responsive to increased economic activity is firms' caution about changing their price-setting stance in view of intensified competition. Materials prices and intermediate goods prices are clearly rising at present according to the corporate goods price index, reflecting the surge in domestic and international commodity prices. Many firms have so far avoided passing this rise in costs on to final goods prices and have kept prices unchanged for the time being, with some claiming that they have been unable to raise final goods prices because of consumers' price sensitivity. It is necessary, however, to keep a careful eye on firms' price-setting stances, which may remain constant or change as the rise in materials prices gradually spreads to intermediate goods prices in line with the continuing economic recovery. This divergence between developments in economic activity and prices is not a development unique to Japan. Industrialized countries around the world, including the United States and the United Kingdom, have been experiencing a similar phenomenon. The extent of the divergence varies of course by country and region. However, one common factor is increases in productivity and structural changes in the labor market, specifically deregulation and changes in the attitudes of employers and employees. Another potential factor is the reduction in price-setting power suffered by firms all over the world, following the advance of economic globalization. The intensified competition in the global market economy may perhaps be explained by the major shifts in political, economic, and social frameworks after World War II, including the entry of East European countries into the global economy after the fall of the Berlin Wall, the miraculous growth achieved by Asian economies, as well as the rise of the BRICs (Brazil, Russia, India, and China) as regional economic powers. Whatever the case, assessing price developments requires a firm grasp of the issues underlying them, and in this regard, we will continue to monitor carefully the situation surrounding prices both at home and abroad. III. Conduct of monetary policy Three and a half years have passed since the Bank introduced the quantitative easing framework, in which current account balances are used as the main operating target. The Bank has made a commitment, unprecedented in the history of central banks, to continue with the quantitative easing policy until the year-on-year rate of change in the CPI (excluding fresh food, on a nationwide basis) registers zero percent or higher on a sustainable basis. With this commitment, the Bank has continued to provide ample liquidity. In the current situation where consumer prices have been less responsive to the economic recovery, the commitment has contributed to stabilizing expectations about future interest rates and thereby market interest rates, and this situation has allowed firms to continue to enjoy low funding costs. Furthermore, as returns on investment increase with the recovery, returns net of funding costs are expected to rise gradually. Thus, the positive effect of the commitment on the economy, acting via interest rates, will strengthen as corporate profits increase along with the economic recovery. With the upsurge of business initiatives in the private sector and the recovery on a more solid track, the economy will eventually achieve sustainable growth and overcome deflation. In the Outlook Report published in October, the median forecast of Policy Board members is for consumer prices to post a small year-on-year rise in fiscal 2005. However, the economy could deviate from the scenario set out in the outlook, either above it or below it, and future developments in prices may be influenced by movements in various factors, including crude oil prices, productivity, and labor costs. As things stand, it is uncertain whether or not an occasion will arise during fiscal 2005 requiring the present monetary policy framework to be changed. The conduct of monetary policy, more specifically the timing of the termination of the current monetary policy framework and the pace at which the Bank will raise short-term interest rates to keep them consistent with actual economic conditions, depends on future developments in economic activity and prices. If higher productivity and other factors continue to a large extent to contain upward pressure on prices as the economy moves to a sustainable and balanced growth path, this will likely give the Bank more latitude in conducting monetary policy. Central banks should respond appropriately and flexibly to changes in economic and financial developments. As the effects of monetary policy are transmitted first of all via the financial markets, it is extremely important that the appropriate monetary policy be communicated to market participants in a lucid manner. On occasion, speculation of various kinds arises about the future conduct of monetary policy in financial markets. Market expectations thus have the potential to become extremely unstable in the future as the end to the unprecedented monetary easing approaches. To prevent the emergence of this kind of instability, the Bank will endeavor to offer a lucid explanation of its assessment of economic activity and prices as well as the thinking behind its conduct of monetary policy. Furthermore, the Bank will continue to enhance its communication with market participants so that they will be better able to judge and predict the future conduct of monetary policy. The content of this communication will depend on future developments in the economic and financial situation. Some may comment that the explanation of the thinking behind the Bank's conduct of monetary policy and communication with market participants in the October Outlook Report is abstract and difficult to understand. This is to an extent inevitable, since the response of monetary policy must depend on the economic and financial situation at the time. In the current instance, the Bank's decision to present its thinking in the Outlook Report was taken under the premise that central banks and market participants should broadly share, to the extent possible, a common understanding about the conduct of monetary policy. This should make it possible to avoid undue speculation when changes are made to an unprecedented policy framework such as the current quantitative easing. With this in mind, the Bank will continue to maintain effective communication with market participants.
|
bank of japan
| 2,004 | 11 |
Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the 13th International Monetary Symposium, ¿The euro: five years on - Implications for Asia¿, organised by the Institute for International Monetary Affairs and the Delegation of the European Commission in Japan, Tokyo, 12 November 2004.
|
Toshihiko Fukui: The euro-dollar regime and the role of the yen - their impact on Asia Speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the 13th International Monetary Symposium, “The euro: five years on - Implications for Asia”, organised by the Institute for International Monetary Affairs and the Delegation of the European Commission in Japan, Tokyo, 12 November 2004. * 1. * * The euro as a key currency Let me begin today by reiterating that the birth of the euro in 1999 was an epoch making event. It was an enormous task to say the least in the context of the international currency system. I remember the endless discussions leading up to January 1999, asking if the euro could or should be launched at all. There were even discussions on the potential breakup of the euro. The euro has come a long way since then, and I am here speaking about an “euro-dollar regime.” Today, we can discuss the euro’s potential to bring a sea change to the global financial architecture, without being criticized for fantasizing. I should congratulate my colleagues at the European Central Bank for this significant achievement. The euro meets a number of criteria to function as a key currency alongside the dollar. First, the ECB has succeeded in building up confidence as the guardian of the euro, maintaining price stability. Second, the size of the euro area economy is equivalent to that of the United States. Third, there has emerged a deep and liquid capital market in euro-denominated financial instruments. In the past five years, the importance of the euro has increased considerably. I will let some numbers speak for themselves. We can count more than 50 countries that link their currencies to the euro. More foreign exchange reserves are held in euro: between end-1999 and end-2003, the share of the euro increased from 14% to 20%. Furthermore, during the same period, the share of outstanding euro-denominated bonds has increased to 30% from 20% in cross-border issues. How would this emergence of the euro impact the global economy? Looking at a currency’s function as the vehicle of international transactions, it would be most rational and economical if there were single global currency. There are obviously economies of scale and network externalities. On the other hand, from the perspective of a store of value, it would be desirable to diversify one’s currency exposures. Having said this, I would like to focus on the potential competition between currencies. The position as a key currency is not easily threatened. Inertia here plays a large role. In such a situation, the economy of the key currency is easily tempted to focus its economic policy on domestic considerations. In today’s globalized economy, this could lead to undesirable ripple effects on the rest of the world, through the fluctuations of the external value of the key currency. If we have two competing currencies, and the role of the key currency is contestable, competition between them could lead to more attention to the external value of key currencies. This should have a positive effect on the stability of the global financial system. 2. The role of the yen and its challenges In this context, what kind of role can or should the yen perform? I am a firm believer in the potential of the Japanese economy. Therefore, I believe that the yen can and should play a larger role in the global market. Looking back, Japanese prices have been stable for a long time. In addition, I can count a few more strengths: one of the largest pool of savings in the world; strategic location in Asia - the center of global growth; and state-of-the-art IT technology. These strengths must be funneled into the strengthening of the whole Japanese economy through appropriate economic policies. This, in turn, would assure the place of the yen in the global economy. What are such policies? The answer boils down to two factors: one is to support the private sector to realize a vibrant economy and the other is to build efficient and liquid financial markets. In other words, policies must support structural reforms. Reforms not only in the private sector but also in the public sector are important. From the central bank’s point of view, it is our responsibility to contribute to the sustainable growth of the economy through the maintenance of price stability. We must also enhance credibility through transparent formulation of policies. The central bank also has a role to play in invigorating financial markets. We are redoubling our efforts as a key player in the market and as a provider of market infrastructure. Considering the deepening economic relations between Japan and the rest of Asia, Asia should benefit if the use of the yen could be facilitated. The yen could become a viable alternative in both fund management and fund raising. Asia’s strong demand for capital and Japan’s vast pool of savings could be a win-win combination. 3. Asia’s single currency - a dream or a vision? If the yen could play a larger role in the global economy, does it mean that Asia would become an “yen economic area?” More generally, could there emerge a currency that becomes an anchor in the region? Furthermore, could we see a common currency area in Asia? For the near future, you would agree that this is quite unlikely. Economic structures of Asian economies are not only diverse but also ever-changing. Against this background, foreign exchange regimes vary greatly. Without a convergence of economic conditions, it would be most inappropriate to lose flexibility through the adoption of an artificial framework, be it a currency peg or a single currency. Such an adventure could lead to an accumulation of imbalances within the system. Looking back on Japan’s experience, such imbalances would always be corrected with a vengeance. This is a lesson that we should never forget. Even if we concur that currency integration in Asia is probably a dream in the short term, could it be a vision in the medium to long term? In Europe, it took about 50 years before the euro was introduced. My Chinese friends often tell me that 50 years is just a blink of the eye in their four-thousand-year history. Nevertheless, in this rapidly changing global economy, Asia could have a single currency 50 years from now. If this vision is to be realized, economies of the region must pass a few tests. First, we need to see further deepening of Asian countries’ mutual dependence through division of labor. In this process, Asia would become more important in the global economy. Second, we need the development of vibrant financial markets, capital markets in particular, in yen and other Asian currencies. In this context, liberalization of cross-border capital flows within the region is a key element. Last but not least, we need to build both domestic and global confidence towards economic policies of Asian economies. Already, I see encouraging developments in this direction. With regard to the first point, we are seeing a significant strengthening of economic linkages between Asian economies through trade and direct investment. For example, Asia’s share in Japan’s trade increased to around 45% in 2003 from around 30% in the first half of the 1990’s. For the second point, cooperative efforts to develop regional financial markets are beginning to bear fruits. An example is the Asian Bond Fund II project, being developed by the 11 central banks of EMEAP economies, where EMEAP central banks will jointly invest in local currency denominated funds. As regards the third point, central banks in the region are now firmly focused on price stability and there is considerable progress in financial system reforms in each economy. These encouraging signals are, if anything, rather endogenous and market driven in their nature. Yet, if we are to seriously explore the possibility of a single Asian currency, strong political will is going to be essential at some stage. This is because, if the Asian economies are to achieve convergence at a high level, rather painful reforms are indispensable. This is obvious if we look how difficult it is in Europe to comply with the Stability and Growth pact. The introduction of a single currency by itself does not solve problems in each economy. Neither does it yield economic growth. The full potential of a common currency can only be realized in so far as respective economies tackle structural problems in the process of achieving a monetary union. Asian economies would experience significant dislocations if they were to form a monetary union without disciplined economic policies. In this context, we are paying attention to see if Europe could succeed in advancing structural reform and achieve stronger growth by exploiting the heightened economic potential brought about by the introduction of the euro. Before I finish, I would like to emphasize that Asian integration would probably be soft-structured. Each Asian economy should endeavor to increase the attractiveness of their economy and currency for the time being. Initially, this would mean additional flexibility. We can then share our experiences. At the same time, we should ensure that cultural diversities in the region would be translated into creative energy, and not clashes of culture. Only then would we realize stable regional currencies, and the dream of a single currency would become a vision. Thank you very much for your attention.
|
bank of japan
| 2,004 | 11 |
Statement by Mr Toshihiko Fukui, 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 Councillors, Tokyo, 28 October 2004.
|
Toshihiko Fukui: Overall review of the Bank of Japan’s conduct of monetary policy Statement by Mr Toshihiko Fukui, 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 Councillors, Tokyo, 28 October 2004. * * * Introduction The Bank of Japan submitted its Semiannual Report on Currency and Monetary Control for the second half of fiscal 2003 to the Diet in June 2004. I am pleased to have this opportunity to present an overall review of the Bank’s conduct of monetary policy. I. Developments in Japan’s economy Japan’s economy continues to recover. Overseas economies, one of the factors behind this recovery, are maintaining their expansion, although decelerating somewhat from their high growth so far. In the United States, growth in private consumption has decelerated due partly to the rise in crude oil prices. The pace of increase in the number of employees has also slowed compared with early spring. However, it appears that momentum for economic expansion is being maintained, since corporate profits and business fixed investment have been increasing. East Asian economies, particularly the Chinese economy, continue growing relatively fast. Amid these developments in overseas economies, Japan’s exports and production have been on a rising trend, albeit at a slightly slower pace, leading to an improvement in corporate profits and an expansion in business fixed investment. This virtuous cycle is a factor behind the current economic recovery. Another factor behind the economic recovery is the considerable progress being made in dealing with structural elements such as excessive capital stock, debt, and labor in the corporate sector, and the vulnerability in the financial system, all of which had delayed the recovery of the Japanese economy. As a result of the progress in these adjustments, corporate profits have increased substantially and the employment situation has been improving. Looking forward, Japan’s economy is expected to continue recovering with the ongoing expansion of overseas economies and the easing of structural adjustment pressure in Japan, although attention should be paid to factors such as the effects of the significant rise in crude oil prices on both the domestic and overseas economies and developments in global IT-related demand. On the price front, domestic corporate goods prices have been rising due to the strengthening at home and abroad of the prices of commodities such as crude oil and to the improvement in supply and demand conditions. Consumer prices (excluding fresh food, on a nationwide basis), in contrast, continue to fall slightly on a year-on-year basis partly because the increase in productivity and the restraint on labor costs by firms have absorbed the effects of the rise in commodity prices. The money market remains stable overall against the background of the Bank’s provision of ample liquidity. In the capital markets, long-term interest rates rose somewhat toward the middle of 2004, but have been moving at around 1.5 percent recently. Stock prices have been generally firm with the ongoing economic recovery. The environment for corporate finance is becoming more accommodative on the whole, although it remains severe for firms with high credit risks. The lending attitude of private banks is becoming more accommodative, and the lending attitude of financial institutions as perceived by firms has been improving. The pace of decline in credit demand in the private sector is becoming somewhat moderate. Under these circumstances, the rate of decline in lending by private banks has basically been diminishing. Moreover, the fund-raising environment for firms in the capital markets through CP and corporate bonds remains favorable, and the amount outstanding of CP and corporate bonds issued continues to be above the previous year’s level. II. Conduct of monetary policy The Bank has been conducting the quantitative easing policy with the outstanding balance of current accounts held at the Bank as the operating target. In accordance with the current target range for the outstanding balance of “around 30 to 35 trillion yen,” the Bank is providing ample liquidity to the money market. The Bank has also made a commitment to maintain the quantitative easing policy until the year-on-year rate of change in the consumer price index (CPI; excluding fresh food, on a nationwide basis) registers zero percent or higher on a sustainable basis. The Bank’s commitment has contributed to stabilizing market participants’ projection of future interest rates, and thus market interest rates have been stable. In this situation, firms have been able to raise funds at low interest rates. The commitment’s positive effects through interest rates on the economy will strengthen as corporate profits increase with economic recovery. With these policy effects in mind, the Bank has firmly maintained its quantitative easing policy with the commitment based on the CPI. The Bank has been making efforts to make credit intermediation in the market more diversified and efficient so that monetary easing effects permeate throughout the economy, and these efforts are expected to improve the Japanese financial and capital markets in the long term. As part of such efforts, the Bank started to purchase asset-backed securities (ABSs) in summer 2003, and the total amount of ABSs purchased to date has reached around 1.5 trillion yen. In addition, in May 2004, with a view to enhancing the liquidity of Japanese government securities (JGS) markets, the Bank introduced a facility which temporarily provides the markets, as a secondary source, with JGSs held by the Bank when market participants experience difficulties in securing specific issues. The Bank has been making a wide range of efforts to improve the infrastructure of financial markets and will continue to do so. III. Purchases of stocks held by commercial banks The Bank had been purchasing stocks held by commercial banks since November 2002 to reduce the risk that stock price fluctuations might impact negatively upon the business management of individual financial institutions, potentially resulting in instability of the financial system as a whole. This program was wound up at the end of September 2004. The accumulated total of stocks purchased by the Bank amounted to 2,018.0 billion yen. Conclusion Japan’s economy is expected to continue recovering with the ongoing expansion of overseas economies. To ensure that this recovery will become sustainable and to overcome deflation, the Bank considers it essential that a wide range of economic entities continue to make efforts to revitalize the economy. The Bank is determined to firmly support Japan’s economy from the financial side by maintaining monetary easing with the commitment based on the CPI even in a situation where the economy continues to recover.
|
bank of japan
| 2,004 | 12 |
Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting with business leaders, Nagoya, 13 December 2004.
|
Toshihiko Fukui: Elaboration on the Bank of Japan’s assessment of the economic and financial situation Summary of a speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at a meeting with business leaders, Nagoya, 13 December 2004. * * * The Japanese economy has been in a recovery phase since the summer of 2003. With the recent release of weak economic indicators mainly related to exports and production, market participants seem to have become a little bearish about the economic outlook. We believe, however, that the current slowdown in the pace of recovery is temporary, and that the economy is likely to move gradually onto a sustainable growth path. Today, I will elaborate on the Bank of Japan’s assessment of the economic and financial situation, and the thinking behind the conduct of monetary policy. Developments in overseas economies Let me start with overseas economies, which provide the background to Japan’s economic activity. Overseas economies, the United States and China in particular, are expected to continue expanding, albeit at a slower pace. The U.S. economy is continuing its expansion supported by domestic private demand, including household consumption and business fixed investment. It seems to be emerging from a soft patch: the pace of increase in household consumption has picked up again, and growth in employee numbers has been recovering albeit with some fluctuations. Looking forward, the U.S. economy is expected to continue expanding steadily despite the fact that tax cuts have run their course and crude oil prices remain at high levels. The Chinese economy is continuing to show robust growth underpinned by steady demand at home and abroad, and still seems to be overheating. Since this spring, the public authorities have taken administrative measures to deal with this overheating. Furthermore, the People’s Bank of China raised its policy rates for the first time in nine years at the end of October 2004. We continue to closely monitor the effects of these measures on the economy. The current economic situation and the sustainability of the economic recovery Although growth in exports and production has been sluggish since the summer of 2004 and the annualized growth rates of real GDP for the April-June and July-September quarters of 2004 have both turned out to be more or less flat, there are several reasons for believing that a recovery mechanism remains in place. First, exports and production are expected to resume trending upward. Their recent sluggish growth has been attributed to the lagged effect of the slowdown in overseas economies, and they are picking up again as overseas economies start growing. In addition, adjustment in production and inventories of IT-related goods is unlikely to be as severe as at the time of the bursting of the IT bubble in 2001. This is because demand for IT-related goods, such as digital home appliances and electronic parts for automobiles, has been expanding, and manufacturers have been adjusting their production and inventories promptly. Second, with the rise in corporate profits, business fixed investment is expected to continue increasing. Although growth in business fixed investment slowed in GDP terms during the JulySeptember quarter and the pace of increase in shipments of capital goods moderated, manufacturers seem to have maintained positive investment plans, supported by the higher corporate profits evidenced in the semiannual financial statements of listed companies at the end of September. Construction starts have been increasing in a wide range of areas, such as factories, office buildings, shopping malls, and delivery centers. Part of the reason for this may have been the growing tendency for pricing in real estate transactions to be based on the discounted cash flow method. We will get a clearer picture of corporate profitability and business fixed investment, particularly of small businesses and non-manufacturers, with the release of the upcoming December Tankan (Short-Term Economic Survey of Enterprises in Japan). Third, the effects of improvement in the corporate sector are spreading steadily to the household sector, albeit at a moderate pace. Employee numbers are continuing to increase, and the perception that labor is in excess is becoming less acute among companies. The rate of decline in wages per worker is diminishing gradually despite companies’ continuing labor cost restraint. Household income has bottomed out, and is likely to rise gradually with the increase in corporate profits and the relaxing of companies’ perception that labor is in excess. Household consumption, underpinned by improved consumer sentiment, has been steady thus far, and is expected to increase at a moderate pace in line with the rise in household income. We will continue to be vigilant against downside risks to the economy, such as those stemming from developments in IT-related demand and crude oil prices. Although adjustment in IT-related goods is unlikely to be severe, it may be somewhat protracted due to the inherent volatility in IT-related demand. We cannot deny the possibility that a prolonged adjustment in IT-related goods, if it happens, may affect the ongoing recovery through deterioration in business and household sentiment. In addition, although crude oil prices have recently stopped rising, they remain at historically high levels. We need to continue closely monitoring their impact on economic activity and prices, including the effects of their past rises. In foreign exchange markets, attention has been paid to the downtrend of the U.S. dollar. Concern about the U.S. twin deficits is often cited as a reason for the weaker dollar. The U.S. economy, however, continues to maintain high growth, and with inflation rates remaining low due to increased productivity, it is still providing golden opportunities for investors in increasingly global financial markets. Confidence also remains high that fiscal and monetary policy will be directed toward securing sustainable economic growth. Given this situation, the United States is not experiencing difficulty in financing its deficit. Having said this, we need to carefully monitor foreign exchange rates and their impact on the economy since speculation may cause short-term volatility in foreign exchange and other financial markets. Let me briefly comment on the recently released GDP statistics, which some see as confirming the weak economic recovery. The recent introduction of the chain index method for calculating the GDP deflator resulted in a downward adjustment of the real GDP growth rate from the figure calculated using the previous method. The problem with the previous method was that the base year was fixed, and this caused an increasing downward bias in the GDP deflator the further it moved away from the base year. The chain index method, which revises the weighting of various goods and services every year, has thus been introduced to reflect changes in the economic structure more appropriately. GDP statistics, which describe overall economic conditions, have their own properties and limitations like any other statistics. Since our evaluation of the economy has incorporated these properties and limitations, the introduction of the new calculation method is not thought to affect our overall assessment of the economy. Progress in structural adjustments supporting economic recovery The difference between this recovery and the two previous recovery phases since the bursting of the bubble is that, in both the corporate sector and the financial system, there has been progress in dealing with the structural factors affecting the Japanese economy, and as a result, the private sector has become more proactive. Companies have made steady progress in addressing the structural problems of their excess holdings of debt, labor, and capital, and at the same time have made efforts to formulate business models generating high value added. Corporate profitability has therefore improved considerably. Ratios of current profits to sales in fiscal 2004, for both manufacturing and non-manufacturing companies, are expected to reach their highest levels since the bursting of the bubble. Turning to the financial system, considerable progress has been made toward restoring the system to soundness. Recessionary phases since the bursting of the bubble have tended to involve a vicious circle in which the fragility of the financial system has amplified the extent of the recession, but this risk has diminished in line with the improvement in the condition of the financial system. More concretely, financial institutions have made headway in dealing with their nonperforming-loan (NPL) problems, assessing and provisioning for NPLs more appropriately and employing a variety of measures to remove NPLs from their balance sheets and revitalize companies. Recently, progress has been made in the rehabilitation of large borrowers with a succession of schemes for radical reconstruction, some of which include the use of the Industrial Revitalization Corporation of Japan. Efforts to revitalize regional businesses are also gradually bearing fruit, and as the economic recovery takes hold, improvements in companies’ financial conditions and a more favorable assessment of these by market participants have become evident. In the semiannual financial statements released last month, the ratio of NPLs to total loans for major banks stood at 4.6 percent, within sight of the target of halving the volume of NPLs on their books. For regional banks, the NPL ratio has been steadily falling, down to 6.4 percent from 6.9 percent registered at the end of March 2004. The costs of writing off and provisioning for loan losses, otherwise known as “credit costs,” have declined overall, and this meant that most banks managed to close their books in the black. During this period unwinding of cross-shareholdings, which had been deemed excessive, progressed with a concomitant reduction in exposure to market risk. In addition, efforts geared toward reducing expenses and expanding fee business also began to bear fruit. Thanks to this reduction in their exposure to credit risk and the market risk pertaining to stock price volatility, financial institutions have been less constrained in the uses to which they can put their capital, and this situation has encouraged them to seek new business opportunities. Indeed, there has been an intensification of efforts to strengthen profitability and reorganize businesses: banks’ lending attitudes toward small and medium-sized businesses in particular have become more positive; some financial institutions are paying back previous injections of public funds; mergers between financial institutions are becoming widespread; and tie-ups with non-bank institutions are increasing. As the April 2005 date for the full removal of blanket deposit insurance approaches, individual financial institutions may be expected to redouble their efforts to improve business performance. This will not only further reinforce the soundness and stability of the financial system, but it will also inject fresh vigor into the financial system as a whole. At this juncture, a variety of businesses, including foreign companies and non-banks, will each be making use of their own particular strengths to compete by offering a wide range of financial services. In the markets for such diverse financial services, competitiveness will depend on the ability to accurately identify and respond efficiently to the full diversity of client needs. In their efforts to achieve this, it is hoped that various market players will generate a range of channels for financial intermediation, and that the financial system as a whole will become more innovative and increasingly robust to external shocks. Making full use of the functions of on-site examination and off-site monitoring of financial institutions, the Bank backs up private financial institutions’ efforts to develop creative new financial services, and hence to reinforce and improve the performance of the financial intermediary function. Against this general background, although bank lending remains down year on year, this may be considered largely due to factors affecting companies’ demand for loans. One of these factors is the problem of companies’ excessive debt. In the non-manufacturing sector, although progress has been made, the ratio of total liabilities to total sales remains high and companies continue to pay down their interest-bearing liabilities. The situation is somewhat different in the manufacturing sector, where this ratio has fallen to a rather low level compared to the first half of the 1980s. Considering that there has been a rise in corporate profitability, with the cost of raising funds remaining low, and that bankruptcy risk has fallen on the whole, it might reasonably be expected that companies, especially manufacturers, would be looking to increase their return on capital by raising their leverage. However, companies have become highly ratings-conscious. Their experiences in past periods of financial uncertainty remain fresh. And, their expectations of future growth are not yet sufficiently high. As a result, they retain an overall tendency to favor repaying their debts and strengthening their capital bases. To grasp future developments in bank lending and its corollary, movements in the money stock, it is necessary not only to pay attention to the behavior of financial institutions and to debt repayments, particularly in the non-manufacturing sector, but also to keep a close eye on the extent to which companies’ views regarding the economic outlook become more bullish as the recovery continues. Outlook for prices and the conduct of monetary policy The Japanese economy has been in a recovery phase since the summer of 2003. Domestic corporate goods prices have been rising partly due to high crude oil prices. Consumer prices, however, have been on a slightly declining trend due to the fact that the rise in corporate goods prices has mostly been offset by higher productivity and labor cost restraint. The Bank has been providing ample liquidity in accordance with its commitment to continuing with the quantitative easing policy until the year-on-year rate of change in the consumer price index (excluding fresh food prices, on a nationwide basis) registers zero percent or higher on a sustainable basis. The positive impact of the commitment on the economy, acting via interest rates, has increased as the economic recovery has progressed. This impact is expected to become stronger as corporate profits continue to increase in line with the economic recovery. The Bank’s thinking on the future conduct of monetary policy was explained in the Outlook for Economic Activity and Prices published in October 2004. The Bank said that if higher productivity and other factors continue to broadly contain the upward pressure on prices as the economy follows a sustainable and balanced growth path, this will give the Bank more latitude in conducting monetary policy. Here, the “conduct of monetary policy” includes monetary policy decisions relating to the timing of the termination of the current monetary policy framework and the pace at which the Bank will raise short-term interest rates to keep them consistent with economic conditions at the time. If prices remain less responsive to increased economic activity, the Bank can more flexibly and effectively respond to emerging economic situations. For example, it could choose to continue with the quantitative easing policy as long as possible, or it could choose to raise interest rates at a moderate pace after the termination of the policy. Whatever policy option is chosen in the future, it seems unlikely that the Bank will be required to take precipitate action. It is in this sense that it enjoys “latitude” in making monetary policy decisions. As an end to the quantitative easing policy approaches, the Bank will further endeavor to offer a lucid explanation of its assessment of the economic situation as well as the thinking behind its conduct of monetary policy. Furthermore, the Bank will continue to enhance its communication with market participants so that they will be better able to predict the conduct of monetary policy.
|
bank of japan
| 2,005 | 1 |
Summary of a speech by Mr Kazumasa Iwata, Deputy Governor of the Bank of Japan, at the Australia-Japan Economic Outlook Conference, Sydney, 7 December 2004.
|
Kazumasa Iwata: Japan’s economy under demographic changes Summary of a speech by Mr Kazumasa Iwata, Deputy Governor of the Bank of Japan, at the AustraliaJapan Economic Outlook Conference, Sydney, 7 December 2004. The references can be found on the Bank of Japan’s website. * 1. * * Introduction Japan is one of the most rapidly ageing countries in the world. The ageing process has been promoted by a lower fertility rate, preceded by a lower mortality rate and a higher life expectancy. This pattern is common to the ageing process in other countries. The higher life expectancy reflects improved living conditions, and thus can be regarded as a success in terms of economic development. It also implies the market expansion of new services for the elderly. On the other hand, the lower fertility rate implies a diminishing market size due to the decreasing population, if it falls below the threshold of the reproduction rate, which is 2.1. The ageing process brings about not only a sharp increase in the dependency ratio, but also a sharp decline in the working-age population as well as the total population. The total population is forecast to peak at 128 million in 2006 and decline to 100 million in 2050. It will diminish to about 40 percent of the current size in 2200, with aged persons above 65 years old exceeding 30 percent of the total population. Japan thus faces two problems: not only an increase in the proportion of retired elderly people, but also a decreasing population. The share of the working-age population had already peaked out in the early 1990s. Furthermore, if in the future the fertility rate remains at the current level (which is 1.29), then “the last baby will be born in about eight hundred years”.1 South Korea, Taiwan, China and Australia will follow a similar process in the absence of immigration, although the speed of their ageing process is divergent (Figure 1). 2. Effects on the macroeconomy To start with the issue of the decrease in the working-age population, it is clear that the economic growth rate will fall due to the decline in labor input. Krugman (1998) argued that the expected negative growth rate due to ageing is the basic cause of deflation in Japan, given the condition that the real interest rate cannot fall below zero under the constraint of a zero interest rate combined with persistent deflation. Nevertheless, the actual average economic growth rate since the bursting of the bubble economy has not been negative, and the expected growth rate cited by corporate managers has returned to slightly above 1 percent. There are three ways to prevent a decline in the economic growth rate. One is to raise the fertility rate. The second is to raise the labor participation rate of women and the elderly. The third way is to increase labor productivity, namely, the increase of labor input in the efficiency unit. In order to raise the fertility rate, several countries such as France and Sweden have introduced special tax measures to promote child-raising. Yet in Japan, government intervention to raise the fertility rate is unpopular due to lingering memories of efforts to promote a higher birth rate before and during World War II. The labor participation rate of women in Japan is still low, as compared with the United States and Australia (Figure 2), and there is room to expand job opportunities for women. Furthermore, it seems possible to maintain or raise the fertility rate by improving the working conditions for women and men to facilitate child-raising, while at the same time increasing the participation rate of women. In addition, there may be room to raise the participation rate of the elderly by changing the incentives for retirement and adopting new employment practices on the side of corporate management, even though the participation rate of the elderly in Japan is relatively high by international standards and has shown a declining trend in recent years. Broda and Weinstein (2004) argue, however, that the current fertility rate in Japan is in the bottom, and will return to a normal level in the future, because the preference for child-raising will increase as people become sufficiently prosperous to have more children. They assume that the population size will stabilize in 2060. Let me turn to the third way, namely, the increase in labor productivity. It is important to recognize that what is important in terms of individual welfare is the level of per capita consumption, not the GDP growth rate. Thus, we can pose the question whether the decreasing working-age population or smaller size of the labor force will lower per capita consumption. The neoclassical growth model predicts, although it is somewhat counterintuitive, that per capita consumption will increase, because capital equipment per worker will rise due to the diminishing number of workers, given the existing capital stock. Nevertheless, this conclusion is flawed, as the neoclassical model overlooks the existence of retired elderly people. They live on revenue arising from the return on savings which are accumulated during their working lives. The increase in capital intensity may induce a lower rate of return on real capital stock and thus savings, due to the law of decreasing marginal productivity of capital. This leads to a reduction in the per capita consumption of elderly people. For the retired elderly, it is crucially important to secure a higher rate of return on savings. In order to prevent a decline in the rate of return on capital, it is necessary to increase the labor input. In the absence of a change in the participation rate in the labor market and immigration, it is impossible to augment the labor input. However, it is possible to increase the labor input in the efficiency unit by raising labor productivity. It is well known that per capita consumption is maximized on the path where the economic growth rate is equal to rate of return on capital (called the “golden rule” growth path). The economic growth rate can be decomposed into labor productivity growth and the rate of increase in the labor input. This implies that in Japan, where the labor input will decline, the desirable increase in labor productivity should be larger than the rate of return on capital, if the nation seeks the maximum per capita consumption growth path.2 The next question, then, is how to increase labor productivity. There are two ways. One is to promote technological innovation and more efficient allocation of resources: that is, to increase the total factor productivity. The other is to increase capital intensity. Yet an increase in capital intensity is accompanied by a decline in the rate of return on capital stock. Therefore, what we should seek to attain is an increase in total factor productivity. It is interesting to note that the Japanese economy has suffered from distortions in resource allocation created during the bubble period. The size of the distortions is estimated by the Bank of Japan’s staff to be equivalent to nearly 0.5 percent of GDP growth (Figure 3). It is reasonable to assume that the final disposal of nonperforming assets by the banking sector implies the restructuring and reorganization of the corporate sector; this would lead to more efficient allocation of resources and thus the removal of such distortions. Furthermore, there exists a wide gap in labor productivity between the manufacturing and the non-manufacturing sectors. The labor productivity of the latter is less than half that of the United States. This points to the potential to raise productivity of the non-manufacturing sector through the application of advanced information technology and the more efficient management of firms. The wide productivity gap between the manufacturing and the non-manufacturing sectors has been a basic feature of the Japanese development process after the Meiji Restoration. It has caused mild inflation in the high-growth era under the fixed exchange rate system, and given rise to the internalexternal price differential problem under the flexible exchange rate system. I am inclined to the view that one of the aims of structural reform after the Plaza Accord in 1985 was to narrow the productivity gap. The effort to raise labor productivity in the non-manufacturing sector to the level of the manufacturing sector will result in a higher economic growth rate over the coming decade, although it works to delay the timing in overcoming deflation in terms of the core consumer price index, due to sustained downward pressure on the unit labor cost. The rise in productivity will nevertheless tend to increase the natural interest rate; that is, the equilibrium rate of return on capital stock in the absence of monetary disturbance. If it exceeds the real long-term market interest rate, then deflation will cease to exist. This doctrine was elaborated about one hundred years ago by the Swedish economist Knut Wicksell. His proposition can be summarized as “the higher the expected growth rate, the easier it is to exit deflation.” Krugman’s argument can be regarded as a corollary to this proposition. In this sense, the sustainability of recovery is the key to overcoming deflation. On the demand side of capital stock in the process of the ageing population, the decreasing working-age population leads to diminished demand for productive investment, because the capital stock required to maintain the capital equipment per worker decreases. In many countries, we observe that the change in the share of the working-age population in the total population is associated positively with the productive investment ratio. According to the study by Poterba (2001), this positive association can also be observed with respect to the level of asset prices (measured by the dividendprice ratio), although the relationship between the rates of return on various assets and the working-age population share is ambiguous.3 Several experts in demography argue that economic miracles such as those in Asia and Ireland are simply due to the rise in the share of the working-age population. In the case of Japan, the working-age population ratio increased from about 60 percent to about 70 percent in the high-growth era (from 1955 to 1970). In China, the working-age population ratio increased from 55 percent in 1975 to 60 percent in the early 2000s, and is expected to surpass 70 percent by 2010. Now I will turn to an example with respect to asset prices in Japan. Looking at the relationship between the nation’s asset prices and the working-age population, land prices continued to slide for more than ten years after the bubble burst, although land prices in the Tokyo metropolitan area seem currently to have stopped declining. The ratio of total value of land to nominal GDP, 2.8, has returned to the level of the pre-bubble period (Figure 4). The fundamental price of land in the long run can be formulated as determined by the land rent, the discount rate (that is, the rate of time preference) and In my calculation, the desirable rate of increase in labor productivity on the “goldenest golden rule” growth path ranges from 6 to 7 percent under the assumption of a zero time preference rate. See Iwata (2001). See Poterba (2001). The different effects of demographic change on rates of return on assets and asset prices may be due to the change in labor-saving technology to offset the decrease in the labor force, while the expected growth rate is affected by demographic change, resulting in an increase in asset prices. the expected growth rate of the population. It seems likely that elderly people have a shorter time horizon and a greater mortality risk than younger ones, and thus a higher discount rate on future rent revenue. Therefore, the combination of a decreasing population and a rising discount rate in the ageing process implies a lower ratio of total land value to nominal GDP. In my estimate, the decreasing size of the working-age population (minus 0.5 percent) coupled with a lower discount rate, is likely to further depress the ratio, to a new equilibrium ratio which is 2 in my calculation. It will take several years to reach a new equilibrium ratio of the nationwide total land value to nominal GDP. At the same time, it is encouraging to see that the market for land and real estate has revived during the process of corporate restructuring and final disposal of nonperforming assets. Prices are now based more closely on the future return on real estate, while investment in real estate by the corporate sector has begun to increase. This may suggest the start of an expansion in construction investment, which was subdued for a long time following the bubble period. As such, it constitutes one of the brighter aspects of the current recovery phase. Turning to the supply side of capital stock, the ageing process entails the decline of the household saving rate due to greater dissaving by the retired elderly. In the early 1970s, the household saving rate in Japan was more than 20 percent, yet it is now about 6 percent. The rate showed a particularly notable decline after 1998.4 Its current level seems to almost correspond to a new equilibrium rate under the decreasing size of the population. On the other hand, corporate saving has increased significantly in the recovery phase that started in early 2002. The corporate sector is enjoying a profit boom which is equivalent to the bubble period in the latter half of the 1980s. This is another encouraging aspect of the current recovery phase, in terms of its sustainability. The current account in the international balance of payments has registered a surplus in the face of the large government deficit (8 percent of nominal GDP) and the declining household saving rate. It is not excluded that the current account surplus may continue, even though the household saving rate will remain at a low level due to ageing, as investment demand also shrinks due to the decrease in the working-age population.5 3. Effects on the social security system and the financial system Now let me turn to issues involving the effects of ageing on Japan’s social security system and the financial system. The rapid ageing process may have a significant impact on the sustainability of the social security system. The existing public pension system in Japan consists of two parts: the National Pension System, which provides a flat benefit to all persons, and the Employees’ Pension Insurance System, which is an earnings-related benefit plan. They are unfunded based on a defined benefit scheme. The cap on the insurance premium was introduced at 18.3 percent in the most recent pension reform. Yet further reform is needed to sustain the public pension fund and correct the widening intergenerational inequality of burden sharing under the existing public pension system.6 I have argued that it is desirable to privatize the earnings-related portion of the public pension fund. Privatization would work to prevent an excessive fall in the household saving rate and to correct the intergenerational inequality of burden sharing. In addition to the public pension system, there are private pension funds such as unfunded severance benefit plans, the Employee Pension Funds, the Tax-Qualified Pension Plans and a new defined contribution plan similar to the 401(k) plan in the United States. They are funded based on a defined contribution scheme. If Japan moves further in a direction weighted toward a defined contribution scheme based on a funded system, then it becomes extremely important to secure a high rate of return on pension funds. The efficient function of the capital market mechanism is a precondition for the efficient management of public and private pension funds. It is unfortunate that the rate of return on assets at the corporate level is relatively low in the Japanese capital market, although a tendency toward recovery has been seen in recent years. Market-based corporate governance may strengthen the monitoring mechanism and market discipline in corporate management. In postwar Japan, the financial system has functioned on the basis of bank-based corporate governance. As a result, bank loans provided by main banks could be interpreted as subordinated debt or quasi-equity for the borrowing firms. Thus, economic risks have tended to be concentrated in the banking sector. This has made the disposal of nonperforming assets all the more difficult and gradual. The recent decline in the saving rate may be attributable to the introduction of a new system of elderly care in 1998, diminished interest income and the real balance effect. The money flow data suggest a further decline of the saving rate. The salient feature of Japanese households’ asset holding is the high proportion of life insurance coupled with the low share of investment trusts and government bonds. I once carried out a simulation analysis on longer-term development of the external balance between Japan and the United States in the ageing process. The main finding was that the current account surplus will remain until the mid-2020s despite the more rapid ageing process in Japan compared with the United States. The intergenerational inequality is so large that the young decline to pay their contribution to the National Pension System. According to the Annual Report on Japan’s Economy and Public Finance 2000-2001, lifetime net benefits including the tax and social security burden, in present value terms, are estimated to total 57 million yen for persons aged 60 or over. On the other hand, lifetime net benefits for those in their 20s are estimated to be 13 million yen in present value terms. Since Japan’s Big Bang in 1996, the nation’s financial system has been in transition to a market-based indirect financial system from a bank-based one. The major banks are in the process of transformation from corporate-finance oriented bank management to providers of comprehensive financial services. In this regard, it seems promising for them to extend their banking business to cover risk management of individuals’ assets, including human capital, over the life cycle as well as the assets of firms. In Japan, the major portion of household savings is held by the elderly, that is, people over 60 years old. It is well known that labor supply flexibility creates a kind of insurance against the risk of financial investment. Young people have greater labor supply flexibility and thus may take larger financial investment risks than the elderly.7 The preference for safe assets among Japanese households can be partly explained by the labor supply inflexibility of the elderly and the lower labor mobility. More specifically, the lifetime employment system combined with the seniority wage system has implied that workers invest in equity of the employed company by the difference between the received wage and the marginal productivity of labor when they are young. In old age, the workers receive a higher wage than marginal productivity and the severance payment at retirement. Therefore, there is much less need for young households to hold risky financial assets such as shares and investment trusts, because the return on human capital over the life cycle is associated positively with the return on risky financial assets. The long-term profit-sharing aspect of wage payment has been reinforced by employees’ deposits at their companies during the high-growth era and employees’ stockholding in more recent decades. Other factors bringing about a smaller share of risky financial assets held in the Japanese household portfolio balance may be the borrowing constraint and the relatively high share of risky real asset holding (housing and real estate). It may be noted that, in Japan, there is no system such as the “home equity loan” in the United States that promotes borrowing, consumption and equity investment when housing prices rise. The demographic changes are working to transform the traditional employment system into a new one. The structural changes in the Japanese labor market have tended to cause a shift from a seniority wage system to a performance-based system. The lifetime employment system has been eroded significantly by the increasing share of part-time and temporary workers. The delinking between the return on human capital and equity investment may enhance the tendency for the household sector to hold more risky financial assets such as shares and investment trusts in the future. It is accompanied by changes in the incentive structure for young workers; namely, an increasing number of young non-regular part-time employees (known as “freeters”) totaling nearly 4.2 million and 0.52 million discouraged young people who are not in education, employment or training (known as “NEET”). For these young people, it is difficult to form a long-term life plan and thus raise children. This aggravates the problem of fewer children and the decreasing population size. Finally, asset decumulation by baby boomers may exert an impact on the asset market. The public pension fund has accumulated about 130 trillion yen, which will be paid out as pension benefits for the baby boomers. Furthermore, the privatization of the postal saving and insurance system may complicate the debt management policy. It seems likely that a decline in the functioning of the asset market due to the decumulation of assets can be avoided by the gradual shifts in asset demand as well as the globalization of the financial market. Nevertheless, it seems important to develop the market for asset decumulation: that is, to transform the real capital stock held by the elderly into income streams. In Japan, the market for reverse mortgages has yet to be developed. The risk related to longevity and land price declines, in addition to underdevelopment of the secondary market for housing, impedes the development of the reverse mortgage market. It seems necessary not only to implement adequate assessment of the market value of housing stock, but also to improve the quality of housing stock, in order to increase the marketability. The securitization of housing loans seems to be the key to transform the financial system into a market-based one and to develop the market of released equities. In this regard, it is encouraging to see the recent expansion of real estate investment trusts, private real estate funds, asset-backed commercial paper, asset-backed securities, mortgage-backed securities and collateralized debt obligations. The Bank has contributed to the development of the securitization market by introducing the purchase of asset-backed commercial paper and asset-backed securities after July 2003 and initiating a survey related to securitized instruments. See Bodie, Merton and Samuelson (1992). 4. Conclusion To conclude, the ageing process in Japan is accompanied by systemic social changes including the employment system, the social security system and the financial system. For the central bank that is striving to overcome deflation, the ageing issue of society presents a challenging task, because it requires the establishment of a more efficient financial system to secure a higher rate of return on savings, while maintaining price stability and avoiding the risks of inflation as well as deflation.
|
bank of japan
| 2,005 | 1 |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.