kiyohiko g nishimura : the current state of japan ’ s economy and monetary policy stance speech by mr kiyohiko g nishimura, deputy governor of the bank of japan, at a meeting with business leaders in kanagawa, kanagawa, 21 april 2011. * * * introduction more than a month has now passed since the great east japan earthquake. the disaster claimed many lives and many people are still missing. i would like to express my sincere condolences to the victims of the disaster. moreover, many continue to face severe hardship, and i would like to offer my heartfelt sympathy to all of those who are suffering. even in kanagawa prefecture, many people have been affected by the disaster, due, for example, to rolling blackouts. i appreciate being given this opportunity to speak and to exchange views with government and business leaders in the prefecture, despite these difficult times. and i would like to express my gratitude for your cooperation with the various business operations of the bank of japan ’ s yokohama branch. before we start to exchange views, let me talk about developments in economic activity and prices in japan, taking into account the effects of the disaster, and about the bank of japan ’ s response following the earthquake. i. developments in the global economy before outlining developments in japan ’ s economy, let me first discuss developments in the global economy. in the first half of 2010, the global economy continued to recover from the sharp downturn caused by the financial crisis triggered by the failure of lehman brothers in the autumn of 2008. however, the pace of recovery slowed temporarily during the summer and autumn of 2010 and the recovery seemed to be pausing at one point. in the early phase of economic recovery following major downturns, we can often observe a sharp rebound as inventories, for example, are restored to previous levels. thus the slowdown in 2010 was attributable to a tailing - off of this strong rebound, combined with the fact that the effects of various demandboosting measures, such as subsidies for car purchases, implemented in many countries as a means of addressing the financial crisis, had almost run their course. nevertheless, from around the end of the autumn of 2010, the global economy exited this temporary deceleration phase and its growth rate has since been increasing again. looking at developments by region, growth in emerging and commodity - exporting economies started accelerating in the autumn of 2010. at present, in addition to high growth in household consumption

the japanese situation, the zengin system moved its platform to the 6th generation in november 2011, and one of the new features at that time was to accept the iso 20022 xml format as an option for transfer messages. nevertheless, because the adoption of this format is not an obligation and it requires coordination among a wide range of stakeholders, neither banks nor customers have taken advantage of the new format. from the viewpoint of maintaining competitiveness against their peers overseas, japanese firms would need to articulate the means through which to reduce costs by realizing financial edi as well. to be fair, the japanese bankers association has already started looking into the issues of whether to extend the operating hours of the zengin system and how to make use of financial edi within the japanese context. it is expected to release the results of its study by the end of this year. these initiatives show that japanese banks have started taking measures to build infrastructure surrounding retail payment systems as a foundation to underpin their basic payment services. iii. japan ’ s economy and monetary policy thus far, i have focused on the rather technical issues concerning payment and settlement systems. however, given the continued interest in our monetary policy, and particularly in the latest action we have taken, i want to spend a few minutes on monetary policy at this point. in april last year, the boj introduced the quantitative and qualitative monetary easing policy, dubbed the qqe, to achieve the price stability target of 2 percent at the earliest possible time, with a time horizon of about 2 years. the main objectives of the qqe have been to dispel a view that took root among people over a long period of deflation that prices would not rise – in other words, a deflationary mindset – and to create a situation in which households and firms behave on the assumption that prices would moderately increase. specifically, in terms of the policy transmission mechanism, we intend to raise inflation expectations through a strong and clear commitment to achieve the price stability target of 2 percent, and at the same time to exert downward pressure across the entire yield curve through massive purchases of government bonds. as a result, real interest rates will decline, thereby stimulating such private demand components as business fixed investment, private consumption, and housing investment. the upward pressure on prices will grow stronger as demand increases and the output gap narrows accordingly. rises in actual inflation rates will be translated into higher expected rates of inflation and thus lower real interest rates. this will reinforce the vi