Why do we propose BOJ law revision?

          It is my great honour to be here and have an opportunity to speak 
      before you, distinguished foreign correspondents.
         I have organized a group in LDP to study a bill to revise the Bank
　  of  Japan law with aiming to introduce a price stability or an infla-
     tion target policy in Japan.  

        The basic reasoning for proposing such a bill is as follows ;

(1)     Japanese economy, the second largest economy in the world, is 
     now suffering from persistent deflation, mounting bankruptcies and 
     falling industrial output.

       On the other hand, the Prime Minister Junichiro Koizumi called for 
     drastic structural reform on all fronts.

      Although I strongly support Koizumi reform, I believe one 
     important necessary condition should be met before it, that is, we 
     should get rid of deflation first.

        In 1930, Hamaguchi Cabinet forced structural changes under 
     deflation with the outcome of disastrous chaos.

      In deflation, the consumers postpone spending with an expectation 
     of more price declines, and the corporations shrink from investment 
     with a fear of their products to be sold at cheaper prices.

       Will you take a look at Figure 1?

       S   −  I     =   G   +     C 
        SAVING       INVESTMENT             BUDGET  DEFICIT       CURRENT 
                                                                                                                 ACCOUNT  
           SURPLUS
           (28%)　　　   （19%）　 　　　(7%)　　　　(2%)        

       Japanese economy has at present excessive saving as much as 9% 
    of GDP, of which 7% is absorbed by the budget deficit and 2% by 
    the current account surplus.
       Koizumi reform will aim to curtail the budget deficit on the right 
    hand side of the equation. Without dramatic measures taken to 
    extinguish deflation, there will be no change on the left side. As a 
    result, the current account should increase in order to maintain the 
    equilibrium. How can this occur? Probably by stopping the imports 
    under the collapse of Japanese economy, and partly by increased 
    exports under the weakened yen.

This is the worst scenario we can foresee at this moment.

(2)    Then, how can we stop deflation? Since both inflation and 
    deflation are monetary phenomena, the Bank of Japan can only solve 
    these problems. Deflation occurs when the quantity of money falls 
    short of that of commodities. The Bank of Japan should increase the 
    monetary base which the BOJ can control directly when deflation is 
    under way.

         Hence I do not like hyper inflation either, I propose an inflation 
    target between 2% and 4% of CPI in 2 years.

        The actual measures taken to attain that target will totally be up to 
    the BOJ, appreciating the independence of the central bank.

        BOJ people criticize us, saying that there is no demand for credit. 
    Wherever I hear this comment, I doubt whether they understand or 
    recognize what their mission is. The credit demand is a function of 
    capital cost. The simple capital cost is a real interest rate, that is, 
    nominal interest rate minus inflation rate. In deflation, a real interest 
    rate is quite high, say, around 3.5% to 4% now, higher than the USA. 
    The BOJ’s mission should decrease this financial cost at any time.

        Since our banking sector is under bad-debt-plague, a traditional 
    transmission channel through bank lending has been weakened. 
    However, a new mechanism through asset market will take place.
     Our simulation shows in 2 or 3 months after the increase of the
    monetary base, the stock prices will pick up and in 4 to 6 months
    later, machine orders will rise and ignite private capital investments.

        Figure 2 tells even in the past the increase of the monetary base 
    moved up the stock prices quickly and then after a while GDP 
    followed.

(3)      This inflation targeting will also contribute to enhancing   
    transparency of the BOJ policies and clarifying its responsibility on 
    the results. An important component of Koizumi reform is the 
    establishment of the evaluation system of public policies, of course, 
    the BOJ is not an exception.

          This is another important merit of adopting an inflation targeting.

(4) 　 As shown in page 3, my draft has two major points.

           The one is to introduce an inflation targeting.

          The other is to strengthen the harmonization of the BOJ policies 
     with the government policies.

          Some members of the group such as Mr. Masuzoe insist to 
     include a new article to give the power to the Prime Minister to 
     dismiss the Governor of the BOJ. I am rather reluctant to this 
     opinion, because once we start this argument, we get into the 
     philosophical battle on the independence of the BOJ, which may 
     hinder our urgent task of stopping deflation.

(5)    We have now 56 members in our group. We will resume our 
     meeting from next week. We have scheduled to invite Mr. Richard 
     Welner on 13^th, Mr. Takuro Morinaga on 20^th, and someone from 
     the BOJ, hopefully vice-Governor Fujiwara and Professor
    Takatoshi ITO on 27^th. We plan to complete our proposal by early
    October and present it to the Prime Minister Koizumi, and LDP top
    leaders. I hope they will accept our proposal and agree to present a
    legislation in the coming Diet session. If they refuse it, I am afraid we
    have to prepare for the crash of 2001 in Japan in the coming months.

        Thank you very much for listening. I am happy to answer 
     questions as much as time allows.