in the chinese economy appear to be the adjustment of excess investment by manufacturers and restraint in public investment by municipal governments under the tightening of discipline. as bis central bankers ’ speeches a result, fixed asset investment decelerated but has now leveled off as municipal governments have resumed with public construction orders from the second half of 2015. in contrast, private consumption and automobile sales have remained firm, reflecting progress in the transformation of china ’ s economic structure from one centered on manufacturing to one centered on nonmanufacturing. instead of signaling a sudden deterioration in china ’ s fundamentals, the decline in stock prices can be seen as the correction of a bubble as well as a reaction to movements in the exchange rate of the yuan. the yuan is being sold on speculation of a devaluation, resulting in a decline in china ’ s foreign currency reserves. this has led to instability in markets. consequently, stock prices have declined globally and markets have become more pessimistic, with investors switching to a risk - off mode. in the foreign exchange markets, demand for the yen, which is regarded as a safe haven currency, has increased, leading to an appreciation of the yen. although markets have become more volatile, japan ’ s economic fundamentals remain sound ( chart 3 ). japan ’ s economy has improved significantly from three years ago. corporate profits are at historically high levels and the unemployment rate is 3. 2 percent, which essentially represents full employment. the year - on - year rate of change in the consumer price index excluding fresh food and energy has increased from minus 0. 8 percent in march 2013 to above 1 percent most recently. japan ’ s economy is likely to grow moderately and inflation is likely to increase toward 2 percent. this baseline scenario remains unaffected by the recent volatility. nevertheless, in light of their record profits, firms ’ investment in physical and human capital has remained rather subdued. under these circumstances, the volatility in global markets entails the risk that it may lead to a deterioration in firms ’ sentiment and a setback in the conversion of people ’ s deflationary mindset, which had been underway. in fact, price perceptions by firms have recently deteriorated. thus, the reason why the bank introduced “ qqe with a negative interest rate ” is that it judged it necessary in order to preempt the manifestation of these risks and to maintain the momentum toward achieving the price stability target of 2 percent. iii. effects of “ qqe with a negative

first, the same interest rate as before – a positive rate of 0. 1 percent – is applied to financial institutions ’ current account balances already held at the time of the introduction of the negative interest rate policy. specifically, such balances are calculated as the average amount outstanding on financial institutions ’ current account during 2015 – which are referred to as financial institutions ’ “ basic balances ” – minus required reserves. the total of “ basic balances ” minus required reserves for all financial institutions that have a current account at the bank is about 210 trillion yen or about 80 percent of the aggregate amount outstanding of financial institutions ’ current accounts. second, a zero interest rate continues to be applied to the required reserves held by financial institutions subject to the reserve requirement system ; a zero interest rate is also applied to the amount of current account balances that corresponds to the outstanding amount of borrowing from the bank of japan through the special facilities ( the stimulating bank lending facility, the growth - supporting funding facility, and the funds - supplying operation to support financial institutions in disaster areas affected by the great east japan earthquake ). the sum of these items is called financial institutions ’ “ macro add - on balance. ” the sum of such “ macro add - on balances ” of all financial institutions at the start of the negative interest rate policy amounted to about 40 trillion yen. and third, financial institutions ’ remaining current account balance is called the “ policy - rate balance, ” to which the negative interest rate is applied. at the start of the negative interest rate policy, the aggregate amount of “ policy - rate balances ” for all financial institutions that have a current account at the bank was about 10 trillion yen on a net basis. since the bank will continue to purchase jgbs at an annual rate of about 80 trillion yen and the proceeds of such purchases will be paid into financial institutions ’ current account at the bank, financial institutions ’ current account balances will increase. therefore, if the thresholds remain unchanged, the balances to which the negative interest rate is applied will increase over time. in light of this, the bank will raise the amount of current account balances to which a zero interest rate is applied ( “ macro add - on balances ” ) at certain intervals – for example, once every three months – in an incremental manner in order to keep the amount of current account balances to which a negative interest rate is applied ( “ policy - rate balances ” ) more or less unchanged. by