Home > About the Bank > Speeches and Statements > Speeches 1996–2010 > Speeches 1996 > Speech given by Yasuo Matsushita, Governor of the Bank of Japan, to the Keizai (Economic) Club in Tokyo on April 3, 1996 (Recent Monetary and Economic Conditions and Issues Facing the Japanese Financial System)

Recent Monetary and Economic Conditions and Issues Facing the Japanese Financial System

This article is excerpted and translated from a speech given by Yasuo Matsushita, Governor of the Bank of Japan, to the Keizai (Economic) Club in Tokyo on April 3, 1996.

Introduction

Thank you for the kind invitation to the Keizai Club. It is a great honor to have this opportunity to speak to such distinguished guests from various fields.

Since becoming Governor of the Bank of Japan in December 1994, I have made it my rule to focus on a specific theme when speaking on this kind of occasion. Today, however, I will take up the various questions and concerns often raised by people in economic circles and by the public, and present my thoughts on these issues.

As you know, the Japanese economy today is faced with two tasks: to ensure economic recovery and to restore the credibility of the financial system. The nation is presently in a very delicate and therefore crucial phase on both fronts, with still many uncertainties, but slightly brighter prospects opening up.

Given this situation, the questions and concerns about Japan that the Bank encounters are quite varied. In my speech today, I will group these issues into three broad categories: (1) those related to the current economic condition of Japan and monetary policy management; (2) those concerning immediate problems facing the financial system; and (3) those related to future financial institution supervision.

I will be covering a broad canvas today. However, I would like you to understand, through my talk, in what sense the Bank of Japan attaches importance to the market, and how the Bank intends to utilize the intrinsic functions of the market in this age of a worldwide transition to market economies. These will, in fact, be the common thread that will run through my entire talk today.

Let me start with the recent economic and financial conditions and monetary policy management.

Recent Economic and Financial Conditions and Monetary Policy Management

Current Economic Conditions and Prospects

I believe that a moderate economic recovery is beginning in Japan. In terms of demand, public and housing investments continue to grow significantly, and personal consumption and business fixed investment are on a moderate recovery trend. Reflecting such developments in demand, production is also trending upward in general, although with fluctuations. Inventory adjustment also seems to be progressing on the whole, while excess inventory remains in some segments of the materials industry.

However, I am often asked, both in and outside Japan, whether continued recovery is assured, and how much possibility there is of the recovery running out of steam, especially since the Japanese economy stalled in1995 after barely starting a long-awaited recovery.

In fact, recovery this time has, up until now, been dependent mainly on public investment and interest rate-sensitive housing investment; namely, it has been supported by the effects of monetary and fiscal policies. Thus, the important question now is whether the current momentum of recovery will gather further strength and stimulate private demand such as business fixed investment and personal consumption. In light of the following factors, we at the Bank believe that compared to 1995, there is a far smaller risk that the recovery will be disrupted.

First, corporate profits are gradually increasing and, in addition, firms’ profitability has been strengthened due to restructuring efforts.

The key to a full-scale, self-sustained recovery is more vigorous business activity in terms of production, employment, and investment, and corporate profits provide the foundation for such activity.

The current profits-to-sales ratio of large manufacturers is slowly recovering after declining to the 2 percent level in fiscal 1993, the lowest level since the first oil crisis in 1973-75. In the second half of fiscal 1995, the ratio appears to have risen to almost 4 percent. In past economic recoveries, this ratio reached 4 percent approximately one year after the recovery began, when the forces of recovery became fairly robust. This time, it has taken almost three years since hitting bottom to reach that level. This in itself is symbolic of the depth of the recession triggered by the bursting of the bubble as well as of the size of the structural adjustment pressures during those three years.

Low corporate profits inevitably make business activities vulnerable to external shocks, and thus, firms tend to become cautious about investment. It is true that the economic recovery in 1995 was affected by excessive yen appreciation. But the economy stalled essentially because the appreciation occurred when the recovery was premature in terms of the level of corporate profits.

Recent profit trends of the non-manufacturing sector and small and medium-sized manufacturers have also been showing improvement. This may be taken as an encouraging sign of the sustainability of the current recovery.

Second, there now is much less risk of a deflationary spiral--a vicious circle in which price declines put downward pressures on income and in turn on economic activity, thus leading to further price declines--which has been a concern for the past two years.

Looking at price indices, the annual rate of change in the consumer price index fell below zero in mid-1995, but has been positive since autumn 1995,although only slightly. The rate in terms of the wholesale price index is still negative, but it has stopped declining further. Above all, the recovery in corporate profits as mentioned earlier and an improvement in wage conditions, as seen in the results of the 1996 spring labor offensive, are clear evidence that a deflationary spiral has been prevented.

As significant price discrepancies still exist between Japan and overseas, it is likely that downward pressures on prices will persist. However, price declines resulting from improved productivity brought about by increased competition and new technologies may benefit the public and may lead to renewed economic growth. The recent recovery in consumer demand, centering on personal computers, and the launch of new types of distribution businesses are cases in point.

Third, the excessive yen appreciation has been corrected. Although the exchange rate may still fluctuate from time to time due to speculation, weakening of inflationary pressures in the United States and a decrease in Japan's current account surplus have reduced the upward pressure on the yen's exchange rate.

Causes of Concern and Monetary Policy Management

It thus seems that compared to last year, a greater number of the preconditions necessary for leading the Japanese economy onto a sustainable recovery path are in place.

Having said that, there remains some cause for concern regarding economic prospects. What should be borne in mind include the developments of the world economy, which has been slowing somewhat, and consequences of this on the Japanese economy, the meager growth of monetary aggregates, and land prices which do not yet seem to have hit bottom. Most important of all, however, is the pace and scope of recovery of business fixed investment.

The results of the Bank of Japan's Tankan--Short-Term Economic Survey of Enterprises in Japan in February and of other surveys show that while large firms plan to increase their fixed investment somewhat in fiscal 1996 for the second consecutive year, small and medium-sized companies are planning a further cut back from the reduced fixed investment of 1995. The prospect for fiscal 1996 business fixed investment may later become brighter, considering that the figures in the above surveys were likely understated since many firms had not finalized their investment plans by the survey deadlines. Furthermore, if corporate profits continue to improve, then this will encourage firms to add to their business fixed investment. Given these and other uncertainties, I feel it is still too early to draw any conclusion as to the strength and scope of the recovery of business fixed investment.

As companies will soon be finalizing their business plans for the new fiscal year, the present period is crucial in determining whether the economy can attain a self-sustained recovery led by private demand. Therefore, in managing monetary policy, we at the Bank believe that we should watch various economic developments carefully, especially the investment behavior of the private sector, with a view to laying a solid foundation for economic recovery.

The Bank of Japan's Interpretation of Market Interest Rate Movements

Looking at recent developments in the financial markets, long-term interest rates have risen gradually since late 1995, and short-term rates underwent a relatively large swing from February of this year to early March. I would like to explain the Bank's interpretation of these market rate movements and respond to the several questions I have received.

First, let me briefly review the market rate developments in recent months. The long-term interest rate on benchmark Japanese government bonds stayed at around 2.7 percent for some time after the monetary easing measure in September 1995, but the rate began to rise slowly at the end of the year, and more recently has been at around 3.1 percent. In the case of short-term market rates, upward pressures began to build in mid-February, pushing the three-month Euro-yen rate, for example, up by 0.3 percentage point. However, with the results of the February Tankan survey published in early March, which pointed to a more gradual recovery than had been expected by market participants, the short-term rates once again declined to the level seen before the rise in mid-February.

When interest rate changes as large as these occur, people tend to view such movements as disruptive to the market and anticipate market instability.

On this score, my view is totally different: I think that the market is skillfully seeking a level consistent with economic developments, based on the information it has absorbed.

My interpretation of the market rate developments of the past several months is that the slow rise of long-term rates since late 1995 reflects the steadily improving economic situation. And the fairly large shifts in the short-term rates in February indicate that the market, after fully digesting the implications of official statements and of newly released economic indicators, arrived at the conclusion that although the economy is recovering, the pace is still moderate and will likely remain so for some time.

I have been asked in connection with these market rate developments whether a rise in market rates anticipating a firm economic recovery will adversely affect economic developments in the immediate future.

It is indeed true that, when expectations of economic recovery grow in the market, this alone often triggers a rise in market interest rates. However, higher expectations of recovery also mean an expectation of improved profitability, or a rise in the expected rate of return on projects. When considering entry into new business areas or whether to make new fixed investment, entrepreneurs essentially base their decisions on whether the expected rate of return on projects is sufficiently high compared to the prevailing market interest rates. In other words, it is only natural that higher expectations of economic recovery should accompany a rise in interest rates. Such a rise should not immediately constrain business activity to the extent that it is consistent with the improvement in the expected rate of return, allowing a rise in the market rates and an economic recovery to proceed concurrently. This is often observed in normal recovery phases.

I also hear concern these days that a rise in interest rates in Japan might lead to higher rates internationally, with a negative effect on the world economy. It is true that with growing international linkage between financial markets, a rise in interest rates in one country, especially in real interest rates, may extend to other countries. However, if the higher rates in Japan reflect Japan's economic expansion, this should increase global demand by boosting the nation's imports. A rise in interest rates in Japan due to economic recovery, therefore, may push up interest rates internationally, but it is too simplistic to think that such a rise would immediately dampen the world economy. To illustrate this point more clearly, consider two countries with close economic relationships, and suppose economic recovery takes place in one country. If the interest rate linkage were the dominant channel through which the two countries influenced each other, this would mean that one country's recovery would necessarily have a negative impact on the other's economic activity. But this is intuitively not so and is not borne out by experience.

What is important is whether interest rates are determined in line with the developments of the real economy and with the expectations of people based on those developments. There certainly are times when market rates overshoot for various reasons. However, as demonstrated by the recent interest rate movements in February and March, market rates may swing up and down, but sooner or later will settle down to a reasonable level. Based on such understanding, we at the Bank carefully examine the outlook for corporate profits and growth expectations to judge whether the interest rate level is consistent with the expectations of people at that time.

As I mentioned earlier, the Bank of Japan's stance in managing monetary policy is to consolidate the foundation for economic recovery. We at the Bank will continue to monitor market trends carefully on the basis of this policy stance to see what kind of response we receive from the market rates.

The Japanese Financial System

Immediate Issues

Let me now turn to issues related to the Japanese financial system.

With regard to the jusen (housing loan company) issue, which is at present of utmost importance, the Diet has resumed deliberations on the budget proposal for fiscal 1996, which includes an outlay of government funds for the resolution of this issue, and on jusen-related bills.

The going has been difficult in Diet deliberations, above all because the public’s doubts on utilizing government funds for the resolution of the jusen problem have not been dispelled. There have been many twists and turns to the jusen issue, and the interests of the parties concerned are also extremely complicated. It therefore seems inevitable that time will be needed to gain a sufficient understanding from the public of the solution to this problem.

However, the current resolution proposal was devised following thorough discussions among the parties concerned. Furthermore, as I have stated on other occasions, use of government funds is essential if we are to solve the nonperforming-asset problem promptly and restore the strength of the Japanese financial system, while protecting the valuable deposits of the public.

In addition, bills to organize a comprehensive framework for resolving not only the jusen issue but the nonperforming-asset problem as a whole are to be submitted to the Diet. These bills include important legislative measures needed (1) to carry out a revision of the Deposit Insurance System;(2) to expedite the disposal of failing financial institutions; and (3)to take prompt corrective action in relation to troubled institutions.

Therefore, although it may take time, I strongly hope that serious deliberation will continue in the Diet, and that the fiscal 1996 budget and the jusen-related bills will be passed smoothly with the public's support for the measures for resolving not only the jusen issue but also the nonperforming-asset problem as a whole.

However, resolution of this issue will still mean there is much to be done to solve the nonperforming-asset problem and to restore the domestic and international credibility of the Japanese financial system. In this regard, it is most important to actually put into practice as soon as possible the comprehensive resolution framework introduced by the new laws to bring about the resolution of the problems of failing financial institutions.

At the same time, it is essential that individual financial institutions accelerate their write-offs of nonperforming loans. In this respect, significant progress can be expected in view of the policies adopted by the major banks in closing their books for the half-year term which ended in March 1996.As the solution to the jusen issue is yet to be determined, it will be somewhat difficult to settle the accounts at the end of this term. Nevertheless, the major banks seem resolved to make lump-sum write-offs of nonperforming loans including those other than jusen loans. Quite a few banks project significant losses for the term due to these write-offs. This stance of financial institutions should be held in high regard, and it is hoped that creditors and investors both in Japan and overseas will not be confounded by the resultant financial reports.

In addition to solving the nonperforming-asset problem, financial institutions must also make positive efforts to perform their financial functions in a way that will adequately support Japan's economic recovery and further development. This will require them to set forth their management strategies, including decisive restructuring, such as scaling down of non-profitable operations, cost reductions, and a shifting of emphasis to areas with comparative advantage. This setting out of management strategies is also important for procuring external funds to improve their capital adequacy. In this connection, let me briefly discuss the issue of capital increase, which is one of the means available to financial institutions to improve their capital adequacy.

Issues Involved in Capital Increase

Since last year, I have stated from time to time that it is essential to utilize the functions of the capital markets in restoring the capital adequacy of financial institutions which has deteriorated due to nonperforming assets.

One recent advance in this respect is that the guidelines which, in consideration of the sluggish stock market, had placed constraints on capital increase through equity financing at market price are to be abolished. This de fact liberalization of capital increase through market-price equity financing will mean expanding management opportunities for financial institutions, which urgently need to rebuild capital adequacy, and for ordinary business firms as well. I very much appreciate the efforts of those who have contributed to this process.

What I often hear regarding the Bank of Japan's argument for the utilization of the capital market is the concern that liberalized market-price equity financing might trigger a rush of capital increases, loosen equity market conditions, and thereby amplify downward pressures on stock prices. This could unfavorably affect both economic recovery and the solution of the nonperforming-asset problem.

However, I believe that such a situation would occur only if the stock market were not functioning properly.

Rises and falls in stock prices essentially hinge on the outlook for a firm’s business performance. The reaction of stock prices to equity financing depends on how the funds raised will be used, or whether the profit outlook after equity financing is satisfying to investors. In other words, stock prices are not affected by the equity financing itself, but by the firm’s management plan. In this respect, the critical factors are how an institution devises and discloses its management strategy, including restructuring measures. If the management plan announced ahead of the capital increase is satisfactory to the investors, stock prices will not decline; if itis unsatisfactory, stock prices will quickly respond and force a review of the equity financing program itself. In that case, the restructuring plan or the disclosure method may have to be reviewed, and it might also be necessary to consider financing through other means, for example, through subordinated debt.

I recognize that, in reality, stock markets do not always operate in such a manner. However, restricting the behavior of stock issuers and investors will not provide fundamental solutions. If the problem lies in the functioning of the market, then measures should be taken which would improve it, such as promoting further disclosure and developing the market infrastructure.

Discussions by market participants in this regard are, I hear, in fact proceeding very much in the direction I have just described. With regard to financial institutions, I hope that they will present clear-cut management plans that incorporate drastic restructuring in order to reestablish their credibility with both domestic and overseas investors and depositors.

Financial Institution Supervision and the Role of the Bank of Japan

The Significance of Financial System Oversight

I mentioned that heated discussions have occurred among various parties regarding the ways and means of restructuring and strengthening the Japanese financial system while addressing the immediate problem of nonperforming assets. Other issues which have attracted much attention are financial institution supervision and financial administration, which I would like to take up in the remaining time.

The administrative supervision of financial institutions in Japan is undertaken by the Ministry of Finance, the Ministry of Agriculture, Forestry and Fisheries, and other relevant ministries and agencies, as well as by local governments. The Bank of Japan also conducts regular on-site examinations and daily monitoring of financial institutions in order to stay informed on their market behavior and on their financial and management conditions.

I had an occasion recently to discuss the Bank's basic thoughts on this issue. In brief, I said that the functions of examination and monitoring are indispensable in allowing the Bank of Japan to fulfill its missions of maintaining the stability of the currency and ensuring the stability of the financial system, and that these functions are performed in close coordination with the policy and operational management of the Bank.

Today, I would like to go back to the basics and take a somewhat broader approach, sharing with you my thoughts on what is demanded of financial institution supervision and what the role of the Bank of Japan is in this regard.

The first thing I would like to point out is that the basic philosophy underlying the design of the institutional framework and the conduct of economic policy management in the years to come should be to fully utilize, in all aspects of the Japanese economy, the inherent strength of the market economy--the forces of innovation induced by competition. Structural policies such as deregulation, which is currently being promoted, are also based on the same philosophy.

This philosophy also applies to the financial industry. As typically shown by the development of financial services in Europe and the United States, the innovative strength generated by competition is indispensable to encouraging a further development of the financial industry itself, and also to increasing the efficiency of the financial functions which support the country's economic activities.

While that is the case, we must note that the financial system--the network linking financial institutions--has a unique feature not seen in non financial industries. That is the existence of systemic risk--the risk that a problem in one part of the system might quickly spread through the entire system.

The risk arises due to the fact that (1) a large part of the payment of funds resulting from all kinds of economic activity is made through interbank settlements, and therefore, financial institutions are linked in an intricate network of lending and borrowing of funds as well as of daily settlement of financial transactions; and (2) both the network itself and the individual financial institutions which constitute the network are underpinned by credit, or credibility, which is in large measure a psychological factor.

The financial system is an important infrastructure supporting a country’s economic activity, not simply in terms of intermediating funds between borrowers and lenders, but also because it provides a settlement system. Any malfunctioning of the settlement system will undermine confidence in deposits and daily fund settlements, seriously affecting every aspect of people’s daily lives.

Therefore, in the financial system an appropriate balance must at all times be struck between the need to draw out the dynamism of the financial market and the need to secure the stability of the system. This is an extremely difficult task, as the most desirable balance between the two requirements will naturally differ depending on the country's prevailing economic situation as well as on past developments.

For example, from the days of turmoil immediately after World War II through the reconstruction period, the most urgent task for Japan was to rehabilitate the intermediation functions of financial institutions and utilize those functions for the policy objective of economic reconstruction. In the next stage, when the Deposit Insurance System was as yet underdeveloped, and the operations of financial institutions and financial instruments were not as complex as they are today, it was necessary and indeed effective to give priority to ensuring sound financial institution management by restricting the behavior of institutions through regulations and individual guidance.

Things have changed drastically since then, however. Interest rates have been liberalized, and the walls between different kinds of financial business are being lowered. Japanese financial markets are becoming sufficiently mature in terms of diversity of market participants, market size, transaction volume, as well as the establishment of the interest rate mechanism. Growing international competition in the financial industry, diversifying needs for financial services, and the development of high-tech financial instruments have significantly changed the environment. Thanks to these developments, business opportunities of financial institutions are expanding, but at the same time, the risks involved in their business are increasing.

If the past practice of restricting the behavior of financial institutions were to be continued, the following problems would likely emerge.

First, the innovative forces induced by competition would not work fully, preventing the Japanese financial sector from developing into an internationally competitive, strong, and efficient industry. As a result, financial institutions would not be able to respond adequately to the diversifying financial needs of firms and individuals. In fact, most of the technological innovations in the financial industry to date have originated in the United States or Europe, and it is undeniable that Japan's achievements in this area have been less impressive than the numerous technological innovations presented to the world by the nation's nonfinancial industries.

Second, as it is impossible to regulate every aspect of financial institutions’ increasingly complex and diverse behavior, regulations and constraints imposed with the aim of securing stability could only lead to increased risks in financial institution management. For example, regulations could induce excessive behavior in unregulated areas or hamper overall allocation and hedging of risks.

Incidentally, excessive lending by financial institutions during the bubble period is often perceived to have been a manifestation of the problems inherent in a deregulation process, which relates to the problem I just mentioned. It was also from this very perspective that the Bank of Japan abolished its so-called "window guidance," the system of providing direct guidance to influence the lending activities of financial institutions.

In view of this, I conclude that the basic philosophy behind financial institution supervision in the days ahead should be, first of all, to essentially trust the market mechanism and encourage financial institutions to base their behavior on the principle of self-responsibility, instead of attempting to correct their behavior through individual regulations and guidance. Second, in order to ensure financial system stability, what is needed is to carefully monitor the operation of the system as a whole together with the behavior of individual institutions and, should a problem occur, to take the necessary measures to prevent its impact from spreading. In other words, it is now more essential to oversee the functioning of the entire financial system rather than to regulate and supervise individual institutions.

I have often stated my basic thinking on the expected future role of financial administration--that is, (1) to establish the minimum of highly transparent rules needed to ensure sound financial institution management; (2) to oversee compliance with these rules; and (3) to devise, if necessary, prompt corrective measures for individual financial institutions. All these, again, are based on the same basic philosophy outlined earlier.

The Role of the Central Bank

What role then should the central bank play within the revised system of financial institution supervision?

As you are aware, the Bank of Japan has two missions: maintaining the stability of the currency and ensuring the stability of the financial system. With regard to the latter, the Bank is expected to fulfill its duties by (1) securing smooth operation of the payment and settlement systems, which constitute the core of the financial system; and (2) preventing erosion of market confidence in the system by exercising its lender-of-last-resort function in the case of an emergency.

The basic thinking behind these roles is to ensure the stability of the financial system by utilizing the market mechanism and avoiding excessive reliance on individual regulations and guidance. This thinking is in line with the view I have expressed on financial system oversight.

Central banks in other countries also play important roles, one way or another, in overseeing the financial system. This is precisely because the objectives and operations of the central bank are inseparably linked to the functions of financial system oversight.

In the United States, for example, the Federal Reserve plays an important part in bank supervision and examination alongside the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and state authorities. In the United Kingdom, the Bank of England exclusively undertakes this task.

In Germany and France, independent administrative bodies undertake bank supervision; the Federal Banking Supervisory Office (FBSO) in Germany and the Banking Commission (CB) in France. In the case of Germany, however, a statutory requirement mandates the submission of audit documentation to the Bundesbank in addition to the FBSO, and thus the central bank in effect plays a major role. In France, the CB is chaired by the central bank governor, and its secretariat is established within the Bank of France.

Accordingly, the central bank in many countries plays a major role in monitoring and supervising the operation of the entire financial system and in securing financial system stability. Central banks are therefore required to make unyielding efforts to improve their functions of financial system oversight.

I would like to discuss more specifically the points the Bank of Japan has emphasized in recent years.

First, to have an accurate grasp of the market behavior and risks of financial institutions, it has become increasingly important to upgrade the Bank’s on-site examination and daily monitoring skills so that they adequately cover derivatives and other new financial transactions in addition to conventional lending operations. The Bank has recently organized a financial engineering team--a group studying new financial technologies, particularly the accompanying risks--which will support the development of new methods of on-site examination and monitoring and will assist risk analysis by the Bank. The Bank has already begun cooperation with overseas central banks in this regard.

Second, it will be important in the future to check and monitor financial institutions' internal risk management systems. A greater sophistication of on-site examination and daily monitoring methods is an absolute requirement in overseeing the risks in the financial system, but that alone is not sufficient. As financial transactions expand and grow increasingly complex, a more effective way to strengthen risk management is to encourage financial institutions to improve their internal risk management systems, rather than for authorities themselves to try to assess the risks involved in individual financial transactions.

Third, with financial institutions engaging in an increasing number of cross-border financial transactions as they become internationally active, it has become indispensable to monitor financial systems at the international level. One good example was the response by the monetary authorities of various countries to the Mexican currency crisis in 1994. International coordination of risk management--for instance, at the meetings of the Bank for International Settlements--is becoming increasingly significant in securing the stability of a country's financial system.

Conclusion

I have so far explained the concept of financial system oversight and discussed the roles of the central bank, citing some examples from overseas. In connection with this question of the future supervision of financial institutions, I am frequently asked for my views concerning revision of the Bank of Japan Law. Let me share with you some of my thoughts on this issue, although I may be repeating myself since I have discussed the issue on certain occasions in the past.

As you may be aware, the existing Bank of Japan Law was enacted in 1942, during World War II. That being the case, some aspects of the law, including the expressions used, no longer suit the present circumstances. The extensive supervisory authority over the Bank granted to the government reflects an era of strong government control.

Interest rate policy, however, was placed under the exclusive purview of the Bank of Japan in the 1949 revision of the law, whereby the Policy Board, the Bank's decision-making body, was established to take charge of monetary policy decisions, including interest rate changes. In addition, the various roles undertaken by the Bank of Japan in running the settlement system and in ensuring the stability of the financial system--for example, through the conduct of on-site examinations and daily monitoring--have been construed as conforming to the Bank's duty of maintaining and fostering a safe and sound financial system as stated by the law, although the roles themselves have not been specifically stipulated.

Thus, while it has some problems, the existing Bank of Japan Law has been administered very carefully, with the understanding of all concerned, so as not to hinder the Bank in fulfilling its missions. With regard to the independence of monetary policy, I wish to state unequivocally in the light of my own experience during the past 16 months since becoming Governor, that the Bank of Japan has managed policy based on its own responsibility and judgment.

Due to the nature of the existing law, however, the Bank may not be able to secure appropriate management of monetary policy while maintaining the credibility of a central bank, in view of the continuing trend toward market economies and globalization of financial markets.

I therefore consider it necessary to review the existing Bank of Japan Law to accommodate economic and financial changes and to make it comparable with the central bank laws of other countries.

The Bank of Japan Law is one of the basic laws governing the monetary and financial activities of Japan. Its revision will have a major influence on the Japanese economy over a long period of time, and therefore will need to be discussed in depth and from a broad perspective by the public. If this view wins public support and if the question of central banking is to be discussed, we at the Bank are prepared to contribute actively to that discussion.

I would like to conclude by expressing the Bank of Japan's hope that constructive discussions in the future will indeed bear fruit.