recent strengthening of auditing rules for evaluating the use of deferred tax assets as bank capital is a step in the right direction. however, insufficient capital continues to plague the banking sector, and without the cushion of a strong capital base, banks give evidence of remaining extremely risk averse. commercial bank lending has thus continued to decline, while banks ’ holdings of less risky long - term government bonds have soared. because banks play an even more crucial role in japan ’ s financial system than in other industrialized countries, problems in its banking sector are particularly damaging to the transmission of monetary policy and to the economy more generally. finally, demand for business and consumer credit in japan is weak according to the results of various surveys. in a deteriorating economic environment, businesses as well as banks appear to have pulled back from risk - taking. as evidenced by very low long - term interest rates, expectations of future economic growth seem bleak. capital - output ratios are still high, returns on assets are low, corporate profits are poor, and the economic outlook is fraught with uncertainty. it is not surprising then that firms are not borrowing to finance new investment. rather, observers argue that much bank lending will keep ailing and inefficient firms afloat and further crowd the field against the dynamic, innovative enterprises needed to fuel sustained expansion. japan appears to have become a society in which economic agents - banks, insurance companies, corporations, and households - have lost their appetite for risk. this risk aversion has hurt japan ’ s economic performance, since risk - taking is critical to growth in a market economy. these crucial factors have limited the effectiveness of both conventional and unconventional monetary policy measures in japan. in the united states, economic and financial fundamentals are much sounder than those prevailing in japan when the bank of japan started to implement unconventional measured inflation, even after adjustment for the hike in the value - added tax in 1997, showed small positive rates during 1996 and 1997. but changes in the consumer price index are widely considered to be biased upward, suggesting that true inflation probably remained negative. measures. the available evidence suggests that the u. s. real economy is currently stronger, better balanced, more productive and more dynamic than the japanese economy was at a comparable period. the economy ’ s ability to weather the adverse shocks of recent years reflects flexible and efficient markets for labor and capital and dramatic gains in information technology, which have markedly improved the ability of businesses to address incipient economic imbalances before

japan implemented the quantitative easing framework in march 2001, yields on long - term government securities had already reached a very low level. in the united states today, by contrast, the relatively steep treasury yield curve affords greater scope for reducing longer - term interest rates. in conclusion, the risk of deflation, a decline in the general price level, appears remote in the united states. although the near - term outlook is uncertain, the fundamentals are sound. furthermore, i am confident that, in the unlikely event a harmful deflation emerges in the united states and the federal reserve needs to turn to a broader range of monetary policies, such tools will be effective in boosting aggregate demand and putting the economy back on track to sustainable growth. we at the federal reserve have been able to glean much from the bank of japan ’ s experience with monetary policy at the zero bound. in particular, the bank of japan ’ s implementation of many innovative policy measures has enhanced our understanding of the monetary transmission mechanism in a low - inflation environment, a valuable ingredient in monetary policy decisionmaking today. for that reason, i am pleased to have had this opportunity to address the japan society today.