price index ( cpi ) excluding fresh food for october 2019 is 0. 4 percent, a long way off the target. 10 you might think that it is not a problem that prices are not rising if employment is improving, productivity is rising, and fiscal conditions are improving. however, if prices do not rise, neither will interest rates, which poses a problem for financial institutions. 11 when asked " why are interest rates in japan low? " one might answer : " because that is the bank's very intention. " however, this is not necessarily the case. from a theoretical perspective, maintaining interest rates at low levels will cause the economy to overheat and prices to rise, possibly resulting in inflation that significantly exceeds 2 percent. in order to avoid this, interest rates will need to be raised. alternatively, they will rise over time in due course. in a nutshell, in the long term, a low interest rate policy brings about increases in prices and nominal interest rates. looked at from a different angle, what this means is that japan fell into deflation and a situation of low interest rates because interest rates were not according to the statistics bureau, ministry of internal affairs and communications, the cpi figure becomes 0. 2 percent when the effects of the consumption tax hike and the introduction of free preschool education are excluded. 11 i have explained the importance of the 2 percent price stability target in the section titled " why is the 2 percent inflation target important? " in yutaka harada, " economic activity, prices, and monetary policy in japan : speech at a meeting with business leaders in nagasaki, " bank of japan, may 2019. lowered sufficiently during economic downturns in the past. 12 moreover, this decline in interest rates is actually not unique to japan, but rather a global phenomenon. chart 3 shows 10 - year government bond yields for major countries. for visual clarity, each point represents a five - year average. interest rates have been declining globally and, although not visible in the chart, 10 - year government bond yields have been negative in japan, germany, and france since around the middle of 2019. chart 3 10 - year government bond yields for major countries % - 2 cy 1981 - 85 1986 - 90 1991 - 95 1996 - 00 2001 - 05 2006 - 10 2011 - 15 2016 - 19 france germany japan united kingdom united states note : figures for japan through 1988 are based on those of the cabinet office. sources : oecd ; cabinet office. harada yutaka

december 5, 2019 bank of japan economic activity, prices, and monetary policy in japan speech at a meeting with business leaders in oita yutaka harada member of the policy board ( english translation based on the japanese original ) introduction thank you for giving me this opportunity to exchange views with you and for having taken the time to be here despite your busy schedules. it is indeed a great honor to be here today. please allow me to express my gratitude for your great cooperation with the business operations of the bank of japan, particularly of the oita branch. the bank has implemented quantitative and qualitative monetary easing - - or qqe for short - - since april 2013 and introduced various additional measures such as the negative interest rate policy, yield curve control, strengthening the framework for continuous monetary easing, and clarification of forward guidance for policy rates, all with the aim of achieving the inflation target of 2 percent. as a result of these measures, japan's economy has been improving. it is true that the economic expansion has not exactly been robust, reflecting such events as the consumption tax hike in fiscal 2014 from 5 percent to 8 percent, the latest hike in october 2019 from 8 percent to 10 percent, the slowdown in the global economy observed from mid - 2015 through early 2016 and from the second half of 2018 to the present, and the downtrend in the working - age population. nevertheless, the economy has managed to continue its expansion so far. today, i would like to explain monetary policy measures conducted by the bank and what they have achieved. first and foremost, the achievements are obvious. the unemployment rate has declined to its lowest level in nearly three decades and productivity has been increasing. the challenge lies elsewhere ; namely, in the fact that prices have not been rising. it is increasingly being argued that interest rates consequently have remained low, eroding banks'profitability. however, i believe that the deterioration in banks'profitability is caused by the structural problem that banks are accumulating more deposits than they can lend. banks therefore need to deal with this problem. moreover, if interest rates were raised, this would lead to a decrease in the demand for loans, a decline in prices, an appreciation of the yen, an economic downturn, an increase in bankruptcies ( raising banks'credit costs ), and so forth. therefore, raising interest rates would not solve the problem. considering that the current low interest rates are partly attributable to the def