toshiro muto : outlook for economic activity and prices and the conduct of monetary policy in japan summary of a speech by mr toshiro muto, deputy governor of the bank of japan, at the keizai club, tokyo, 4 april 2007. * * * introduction today i would like to talk about the recent state of the economy and prices, as well as to explain the basic framework of, and thinking behind, the bank of japan's conduct of monetary policy, including the reasoning behind the policy adjustment at its monetary policy meeting ( mpm ) in february. i. the economy and prices – current situation and outlook a. overseas economic developments let me start with the current state of overseas economies and their future outlook. in the united states, the pace of economic growth has been decelerating, mainly reflecting adjustments in the housing market. so far, however, the influence of the adjustments in the housing market on the economy has been limited. labor market conditions remain tight, with a marginal slowdown in employment gains. in this situation, the pace of deceleration in private consumption has been moderate, supported mainly by an increase in household income. developments in the u. s. corporate sector are generally firm, since profits remain at high levels and business fixed investment, although decelerating somewhat, is maintaining its uptrend. with regard to housing finance, some people voice concern that the delinquency rate for mortgage loans to subprime borrowers ( those with relatively low credit standing ) has been rising recently, but the prevalent view is that this is unlikely to pose a threat to the overall economy or the financial market because the share of subprime loans in overall mortgage loans is not very large. nevertheless, given that the likely extent of future adjustments in the housing market is still uncertain and the core consumer price index ( cpi ) continues to increase at a relatively rapid pace, attention should be paid to both the downside risk of a further economic slowdown and the upside risk of inflation. taking all available data for the u. s. economy and prices into account, however, the economy is likely to realize a soft landing – that is, after experiencing a moderate slowdown for a while it will move onto a path of stable growth, at a rate near its potential, as adjustments in spending in the household sector abate. in the euro area, economic recovery continues to be solid, since the increase in production and improvement in corporate profits have led to recovery in

. the aim is to prevent firms ’ and households ’ sentiment from deteriorating through volatility in financial markets, thereby supporting positive economic activity. regulatory responses also have been made to ensure financial system stability. based on an international agreement, full implementation of the finalized basel iii standards has been deferred by one year, and banks have been encouraged to use their capital and liquidity buffers. moreover, the bank announced with the financial services agency in april an easing of the leverage ratio requirement. these responses have been effective. although financial markets are still nervous, tension has eased. premiums for u. s. dollar funding, which expanded through the increased demand, have declined. although corporate financing is still stressed, the environment for external funding has remained accommodative. financial institutions ’ lending attitudes have remained eased, and 1 / 2 bis central bankers'speeches issuance conditions for cp and corporate bonds have been favorable, as seen in a narrowing in issuance spreads that expanded temporarily. under these circumstances, the year - on - year rate of increase in the amount outstanding of bank lending has been about 6. 5 percent and that of cp and corporate bonds has been exceeding 10 percent, with both at high levels. now, let me turn to the outlook for japan ’ s economy. the spread of covid - 19 has not subsided globally, and domestic and overseas economies have remained in extremely severe situations. however, since many countries have been resuming economic activities gradually while containing the spread, the situation has changed slightly. in japan, after the government lifted the state of emergency in late may, economic activity has resumed gradually. despite extremely high uncertainties, domestic and overseas economies are likely to improve gradually from the second half of this year. however, the pace of improvement is expected to be only moderate, since preventive measures will constrain economic activity while vigilance against covid - 19 continues. in the july outlook report, the growth rates of japan ’ s economy are projected to be significantly negative, in the range of minus 5. 7 to minus 4. 5 percent for fiscal 2020, but enter the ranges of 3. 0 to 4. 0 percent for fiscal 2021 and 1. 3 to 1. 6 percent for fiscal 2022. the inflation rate is likely to be negative for the time being, mainly affected by covid - 19 and crude oil prices. thereafter, with the economy improving, it is expected to turn positive and then increase gradually. the cpi for all items