, as a result of progressing with structural reform under the growth strategy, the potential growth rate may rise, worsen the output gap temporarily, and put downward pressure on prices. nevertheless, the bank will continue with the qqe, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. thus, it can address such downward pressure on prices. we will steadily pursue the qqe with a view that japan ’ s economy will be able to grow at a higher rate in an environment of a stable inflation rate of about 2 percent. thank you. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches

kikuo iwata : quantitative and qualitative monetary easing and japan ’ s recent economic and financial developments speech by mr kikuo iwata, deputy governor of the bank of japan, at a newspaper editorial writers ’ meeting, kyodo news, tokyo, 26 may 2014. * * * introduction thank you for providing me with an opportunity to speak in front of this large group of columnists. today, i want to explain the content and basic thinking behind quantitative and qualitative monetary easing ( qqe ) introduced by the bank of japan in april last year. i will also touch on the role - sharing between our monetary policy and the growth strategy being implemented by the government. i. inflation targeting policy and deflation a. downside of deflation let me ask two basic questions. why is deflation problematic, and why did the bank adopt an inflation targeting policy? deferring spending and decline in aggregate demand deflation, which can be defined as a persistent decline in prices, causes economic stagnation through several routes ( chart 1 ). first, if prices decline persistently, one can purchase more goods and services with the same amount of money as time passes. in other words, the value of cash and deposits will rise simply by hoarding them ; thus, firms and households will defer their investment and spending. consequently, this will lead to a decline in aggregate demand. such a decline will make firms reduce their production activity at a level consistent with the drop in sales. corporate profits will deteriorate and employee income will fall accordingly, and these factors will contribute to a further decrease in spending, housing investment, and firms ’ business fixed investment. all this will lead to yet another decline in aggregate demand, which will induce a further drop in prices. hence, a vicious cycle of price declines and stagnation prevails. increase in effective debt burden a persistent decline in prices means that the value of money for goods and services will increase. for those who borrow money, the value of money that they will have to repay will increase. this represents an increase in the effective burden of debt. thus, firms and households will become cautious about borrowing money. the effective burden of debt brought about by money that has already been borrowed will become heavier, weighing on consumption and investment. as a result of shrinking aggregate demand, a vicious cycle of price declines and stagnation will prevail once again. such a mechanism can also be referred to as