Japan's Economy and Monetary Policy

Speech at a Meeting with Business Leaders in Toyama

Introduction
I am honored today to have this opportunity to speak and to exchange views with business leaders in Toyama Prefecture.
I will express my gratitude for your cooperation in interviews with the staffers from the Kanazawa branch and the local office in Toyama and for the Bank of Japan's surveys.Information from these interviews and surveys is invaluable and utilized fully in assessing economic and financial developments and conducting monetary policy.

Before exchanging views with you, I will talk about the recent economic and financial developments as well as the conduct of monetary policy.

I. Global Economic Developments
Advanced Economies and the Balance-Sheet Problem
Before talking about Japan's economy, I will begin with the developments in the global economy.

In the past several years, the global economy experienced a great turmoil. On the financial
front, starting with the subprime mortgage problem in the U.S. housing market, the global
financial crisis broke out in the autumn of 2008, triggered by the failure of Lehman Brothers. Hand in hand with that, the global economy deteriorated rapidly and significantly. Since the spring of 2009, the global economy has been emerging from such plunge. However, the improvement in economic conditions in the United States and Europe has been modest, and international financial markets have recently become increasingly volatile triggered by the fiscal problem in Greece and some European
countries.

The financial crisis and the fiscal problem I have just mentioned might seem to be a different phenomenon at a glance, but, in fact, they have a common underlying factor that has shaped a big picture of the global economy in the past several years. That was the problem of "balance-sheet adjustment" associated with the burst of a credit bubble in the United States and Europe. In those economies, toward the mid-2000s, households and 2 firms made excessive borrowing on the premise that asset prices such as housing prices
would rise and, in retrospect, made excessive investments and consumption.

In response, financial institutions lent aggressively and continued to increase credit. In such a process, not only mortgages but also financial activity in general overheated, including new types of transactions such as in securitized products. Such phenomenon has spread internationally and capital inflows to European peripheral countries, including recently highlighted Greece, have overheated. Such developments were reversed rapidly once asset prices such as housing prices started to fall. In those circumstances, households and firms had to cut back on their consumption and investments to reduce their borrowing that had accumulated, namely to repair the impaired balance sheets. Moreover, financial institutions had to struggle with the disposal of massive impaired assets, and were thus forced to take a cautious stance in new lending. That was exactly a process of balance-sheet adjustment
Japan suffered in the 1990s after the burst of the bubble economy...

For the full speech visit: http://www.boj.or.jp/en/type/press/koen07/data/ko1007a.pdf