initiation of the aggressive fiscal policy under finance minister takahashi in 1931. furthermore, if demand begins to rise for the current account balance going forward, the bank of japan can easily accommodate it. i believe, and strongly hope, that the current policy by the bank of japan will make a significant contribution from the monetary side to the structural reforms led by the government and to the consequent creation of private demand. then, what should be done to create demand? this point is discussed in the interim report of the advanced - reform program and the reform schedule approved by the council on economic and fiscal policy. among them, i myself would like to stress the following points. to nurture competitive and attractive business environment to promote investment. important steps for that purpose are decisive deregulation measures, revision of tax system, and reform of special government entities. to promote private consumption by alleviating households'concern for future through the overhaul of social security system including the pension scheme. to deal with the associated problems of excessive debts in the business sector and the non - performing loans in the banking system. it is not realistic to expect an instant economic upturn simply by eliminating the non - performing loans. at the same time, however, with a large amount of non - performing loans left, financial intermediaries cannot function properly. under malfunctioning financial system, it is difficult to expect a sustainable economic growth. progress has to be made in dealing with the non - performing loans based on the policy stated in the interim report of the advanced - reform program approved by the council on economic and fiscal policy. finally, i would like to touch upon the possible role of fiscal policy. keynes claimed that, when the economy fell into a liquidity trap, monetary policy was no longer effective and fiscal policy was required to play its role. at the same time, however, given the high level of government debts in japan, it is also true that only limited room is left for fiscal policy. such limited room calls for decisive new measures. according to the minutes of the council on economic and fiscal policy, members argue that it is dispensable that the components of fiscal expenditure be reviewed with a view to creating private demand. we hope that analysis will be made on the way spending reallocation can stimulate private demand and that decisive actions will follow accordingly. i would also like to add that, looking at the globally prevailing view about fiscal policy, standard prescription for an economic downturn is to leave room for the built

bank of japan, both assets free of credit risks. then, why doesn't bank lending increase? i will try to give an answer to this question by focusing on financial institutions'lending behavior against the background of the relatively weak credit demand. at the time of an economic downturn, creditworthiness of corporations generally deteriorates and banks have to widen spreads for lending ; otherwise they lose profits. however, with deteriorating corporate profits, banks face a decline in the number of projects with sufficient profits to cover wider spreads. in ordinary financial environment, even with the widening of spreads, monetary easing brings lending rates down by lowering banks'funding costs and, consequently, can eventually promote an increase in lending. in the current situation, banks'funding costs cannot go down further because interest rates are effectively at zero. to make matters worse, banks hold a large amount of non - performing assets and unprofitable loans in their portfolio built up in the past. by holding such unprofitable loans for a long time, it will become more difficult for banks to cover by operating profits the necessary cost to deal with the non - performing assets. needless to say, banks are making efforts to improve profitability of their lending activities by enhancing the credit quality of unprofitable but viable companies through various supports. nevertheless, there are a substantial number of non - viable companies. furthermore, making progress in structural reforms in the economy and industries means, looking from the other side, a reduction of banks'unprofitable loans and non - performing assets. therefore, from a macro perspective, it is inevitable to a certain degree that banks'lending and balance sheet shrink in the process of structural reforms in the economy and industries. also, for the purpose of restoring sound financial system, it is a necessary condition that banks put emphasis on profitability. to sum up, the bank of japan's abundant liquidity provision has induced desirable impact on the cp and corporate bond markets but the overall effect has not sufficiently transmitted to agents outside the financial system. as a result, we have not seen improvement in economic and price developments. how can we change such a situation? that is the big challenge for japan's economy and for the conduct of monetary policy. 5. inflation targeting i would like to offer some of my thoughts on this difficult challenge in the final part of my speech. but before doing that, i would like to touch upon inflation or price level targeting, which has been frequently discussed. can