hiroshi nakaso : japan ’ s economy and monetary policy speech by mr hiroshi nakaso, deputy governor of the bank of japan, at a meeting with business leaders, okinawa, 3 march 2016. * * * accompanying charts can be found at the end of the speech. introduction it is my pleasure to have the opportunity today to exchange views with administrative, financial, and business leaders in okinawa prefecture. i would like to take this opportunity to express my sincerest gratitude for your cooperation with the activities of the bank of japan ’ s naha branch. at the monetary policy meeting held at the end of january 2016, the bank decided to introduce “ quantitative and qualitative monetary easing ( qqe ) with a negative interest rate. ” today, before exchanging views with you, i would first like to explain the bank ’ s view on the recent developments in and outlook for economic activity and prices. i will then move on to its recent conduct of monetary policy while elaborating on “ qqe with a negative interest rate ” that the bank has decided to introduce. i. recent developments in and outlook for economic activity and prices at home and abroad current situation of japan ’ s economic activity and the bank ’ s projection in the january 2016 outlook report to start with, let me talk about economic developments in japan. although global financial markets have been volatile since the turn of the year, i believe there is no need to be too pessimistic as the fundamentals of japan ’ s economy have been firm. with regard to japan ’ s recent economic activity, domestic demand has followed an uptrend, with a virtuous cycle from income to spending being maintained in both the household and corporate sectors. in the corporate sector, profits clearly have continued to improve, reaching a record high, with support from an improvement in the real economy as well as the low crude oil prices and the correction of the yen ’ s appreciation ( chart 1 ). against this background, business fixed investment has been on a moderate increasing trend. in the household sector, labor market conditions have continued to tighten. the active job openings - to - applicants ratio and the diffusion index for employment conditions in the december 2015 short - term economic survey of enterprises in japan ( tankan ) have improved to almost the same levels as around the first half of 1992. moreover, the unemployment rate has been declining and in the range of 3. 0 – 3. 5 percent for the first time since 1997. the labor market

is in a situation close to “ full employment, ” where unemployment is due solely to mismatches between job openings and job applicants ( chart 2 ). reflecting the tightening of labor market conditions, employee income has been increasing moderately. under such steady improvement in the employment and income situation, private consumption has been resilient. looking ahead, domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the household and corporate sectors. exports are expected to increase moderately on the back of emerging economies moving out of their deceleration phase. against this backdrop, japan ’ s economy is likely to be on a moderate expanding trend. as in the january 2016 outlook for economic activity and prices ( outlook report ), it is estimated that the economy will continue growing at a pace above its potential through fiscal 2016. in fiscal 2017, it is projected to maintain positive growth, although with a bis central bankers ’ speeches slowing in its pace to around a level somewhat below the potential growth rate, reflecting the effects of a front - loaded increase and subsequent decline in demand prior to and after the consumption tax hike, as well as the cyclical developments in the economy. the medians of the policy board members ’ forecasts for the real gdp growth rates are also indicated in the january outlook report, and those for fiscal 2015, 2016, and 2017 are 1. 1 percent, 1. 5 percent, and 0. 3 percent, respectively ( chart 3 ). price developments in japan and the outlook let me now turn to price developments in japan. [UNK] change in price developments has been observed after the introduction of qqe. the year - on - year rate of change in the consumer price index ( cpi, all items less fresh food ), which had been minus 0. 5 percent before the introduction of qqe, improved to as high as 1. 5 percent in april 2014, excluding the effects of the consumption tax hike ( chart 4 ). thereafter, the year - on - year rate of change in the cpi has declined, marking about 0 percent recently, but this was largely attributable to a substantial fall in crude oil prices since summer 2014. as for the underlying trend in inflation, the year - on - year rate of change in the cpi excluding fresh food and energy – both of which are with large fluctuations – had been negative before the introduction of qqe, but turned positive in october 2013. since then, it has