restore a situation in which economic agents can hold such a normal expectation that the economy will grow in the future. however, the expectations of private economic agents are far from being in a normal state. making a rough back - ofthe - envelope calculation, if the expenditure of firms and households increased an additional 2 %, then nominal gdp growth would be 2 % higher. according to a household survey, the monthly consumption expenditures of the average japanese household in fiscal 2000 was 317, 000 yen, so a 2 % increase would be about 6, 000 yen. and, taking account of the multiplier effect, the expenditure necessary would be less. but things are not so simple. how expectations are formed is a difficult question. for example, while it was realized that the it boom in the us would eventually come to an end, relatively bullish views were still dominant until last autumn. in fact, at the last november meeting of the fomc, which is responsible for setting the shortterm interest rate, inflationary concern was pointed out as a potential risk factor for the us economy rather than economic weakness, and it was in november that private forecasters revised their forecasts downward. subsequently, the fomc has on successive occasions since january substantially reduced its target ff rate, though it has not yet succeeded in revitalizing the activities of it - related firms which once drove bullish expectations. looking back at the experience of japan during the bubble period, the expectations of economic agents became extremely bullish, to an extent which seems incredible in hindsight, and now we are facing a completely opposite situation. then, how do the expectations of firms and households become bullish? at this moment, i do not have a clear answer. but if one believes bullish expectations naturally emerge when an economy grows, then i think the key is simply to make efforts to raise productivity. measures to this end were outlined in the cabinet ’ s ‘ basic plan ’ for structural reform which was announced this june. what is important is to make clear that emphasis will be on market mechanisms, that the public understand that the government is directing its efforts toward increasing productivity of the economy as a whole through such mechanisms, and implementing policy measures consistent with such a direction. speed of structural reform the second point concerns the speed of structural reform. in this regard, economists abroad have voiced concern that if various structural reforms are implemented simultaneously, there would be a substantial deflationary impact on the economy in the short run and the def

developments in such accounts affect the credit creation function of financial institutions. monetary base, which is the sum of bank of japan current accounts and banknotes issued, increased as high as 8 % a year. however, despite such extremely ample liquidity provision from the bank, the lending of commercial banks declined by half a percent a year and money supply grew only 3 %. the decline of bank loans compared with the increase in money supply means, on the part of financial institutions, that assets other than loans have been increasing, which turned out to be mainly government bonds. despite the increased provision of liquidity by the bank of japan to the money market, financial institutions only increased investment in credit risk - free government bonds and lending to firms rather declined. as such, under the circumstances where the credit creation function of financial institutions is inactive, economic activity cannot be robust, as evidenced by nominal gdp growth of only 0. 6 % a year and the consumer price index being almost flat. such figures illustrate the fact that even if the bank of japan provides ample liquidity to the market and guides nominal interest rates to an extremely low level of virtually zero percent, such action itself cannot lift economic activity. keynes once used the term ‘ liquidity trap ’ to point out the possibility that the effectiveness of monetary policy might be hampered, and the current state of japan ’ s economy is quite close to such a situation. policy duration and quantitative easing however, even though japan ’ s economy is in a situation close to a liquidity trap, a central bank cannot be a bystander when the economy is anticipated to deteriorate further. against this backdrop, the bank thus took decisive monetary easing measures in march. in this regard, let me bring your attention to two points. first is the rationale behind having the outstanding balance of bank of japan current accounts as the main operating target and increasing it. the target of increasing the outstanding balance of current accounts to around 5 trillion yen is substantially more than required reserves of around 4 trillion yen. as previously mentioned, under such ample provision of liquidity, short - term interest rates will move close to zero percent under normal circumstances. in addition to a decline in interest rates, it is hoped that the quantitative increase in bank of japan current accounts itself will have positive effects. if financial institutions hold excess no - risk no - return current account balances, an incentive will emerge to increase the holding of such assets as loans, corporate bonds, stocks, and foreign currency - denominated assets