kiyohiko g nishimura : recent economic and financial developments and the conduct of monetary policy speech by mr kiyohiko g nishimura, deputy governor of the bank of japan, at a meeting with business leaders, tochigi, 29 january 2009. * * * introduction the bank of japan regularly holds a meeting of this kind in various regions where a member of the policy board explains developments in japan's economy and the thinking behind the conduct of monetary policy, and exchanges opinions with business leaders in the region. today, i am much honored to have my first opportunity to visit tochigi prefecture and speak before business leaders here. i understand that our staff in the research and statistics department and the financial systems and bank examination department visit you frequently to collect information on the economic and financial situation of the region. the information is very valuable for accurately understanding japan's economic and financial situation as well as for formulating the conduct of monetary policy. i would like to take this opportunity to thank you for your cooperation. today, i would first like to explain the bank's view on japan's economic and financial situation and our thinking behind the conduct of monetary policy. the bank publishes semiannually, in april and october, a document called outlook for economic activity and prices, which explains the bank's economic outlook and its thinking behind the conduct of monetary policy, and three months after its publication, in july and january, mid - term assessments of the projections are conducted. we just conducted a midterm assessment at the monetary policy meeting ( mpm ) held last week, and revised the projected growth rates and inflation rates significantly downward. to explain the reasons for this downward revision, i must begin by discussing the financial crises in the united states and western europe as well as the deceleration in overseas economies, which are major factors responsible for the deterioration in japan's economic conditions. then i would like to proceed to japan's financial conditions, the current situation of and outlook for japan's economy, and the bank's policy responses. i. the u. s. and western european financial crises and the deceleration in overseas economies the turmoil in global financial markets stemming from the subprime mortgage problem in the united states was exacerbated by the bankruptcy of lehman brothers in september 2008. the turmoil has advanced to become a financial crisis where not only u. s. but western european financial institutions either failed or faced severe difficulties. currently, the influence of

interest on excess reserves held in bankers'banks on a pass - through basis. so i hope that from these examples you see that the interests of community banks have been considered in many aspects of the government's effort to return financial stability. federal reserve initiatives to promote the strength of minority depository institutions recently, the markets have shown signs of modest improvement, suggesting that government support of the financial system is having a positive effect. but the effects of the current recession continue to be seen in the financial performance of banks of all sizes and types. indeed, some banks have not yet made their way across the " bridge to stabilization " that serves as a theme for this conference. like their competitors, minority depository institutions have weakened in the current environment. for example, for the full year 2008, 43 percent of the 217 minority depository institutions reported a loss, resulting in an aggregate return on assets of negative 0. 16 percent. as with other banks, much of this deterioration stemmed from higher loan loss provisions, expanded noninterest expenses, and tighter net interest margins. loan delinquencies also rose for these institutions, producing an average ratio of noncurrent loans to total loans of more than 3 percent. however, despite these pressures, minority depository institutions generally maintained sound capital positions at the end of the first quarter, with a 10. 5 percent average tier 1 leverage ratio, tier 1 risk - based capital of 14. 2 percent, and total risk - based capital ratio of 15. 4 percent. the average reserve for loan losses reached 1. 7 percent of total loans. additional peer group statistics are available on the federal reserve's partnership for progress website at www. fedpartnership. gov. partnership for progress is a federal reserve initiative launched last year in recognition of the importance of healthy minority depository institutions to the overall strength of communities in this country. the program seeks to promote the soundness and success of your institutions by increasing the level of technical assistance and support that we provide to minority depository institutions and de novo banks. since the program was started, management of several state member banks and bank holding companies have contacted the reserve banks directly to provide helpful feedback and suggestions. as part of the partnership for progress program, we have assigned dedicated contacts in each federal reserve district to work with minority - owned and de novo institutions. mike collins, the executive vice president in charge of supervision at the federal reserve bank of philadelphia, who spoke with you yesterday, chairs the program on