##e, have generally seen a slowdown in their pace of decline since around the middle of 2014, although the levels of these rates were reduced somewhat very recently due to the introduction of qqe with a negative interest rate. medium - to long - term inflation expectations in various surveys and market indicators have been at a level that remains far from the price stability target of 2 percent, and some recent results showed a downward trend. under these circumstances, i believe it remains difficult to encourage a rise in medium - to long - term inflation expectations solely through the bank's policy measures. long - term real interest rates have become less likely to decline despite the continued increase in the amount outstanding of the bank's jgb holdings, and therefore the additional effects of qqe have been diminishing. given this situation, i consider that a reduction in the pace of the bank's jgb purchases will only marginally decrease the additional effects of qqe, while it can restrain the increase in its side effects, thereby enabling the balance between the positive effects and the side effects to improve. bis central bankers ’ speeches 2. attention required to potential side effects of qqe the side effects of qqe have not yet materialized fully because they are mostly potential effects. however, due attention needs to be paid because, once they do materialize, it will become difficult to handle them appropriately and promptly. given this, i am personally paying particular attention to the side effects of qqe arising from the bank's large - scale purchases and holdings of jgbs, which impair the proper functioning of the jgb market. specifically, these particular side effects include risks such as the following : ( 1 ) the proper functioning of the jgb market – in terms of liquidity and the price - discovery function – will be impaired and financial institutions'profits will deteriorate, both of which could lead to instability in the financial system ; ( 2 ) interest rates will rise in the course of normalizing monetary policy ; and ( 3 ) drastic fluctuations in jgb prices will cause revisions to prices of a wide range of financial products and assets, thereby exerting severe effects on the financial system and economic activity. with the bank's large - scale jgb purchases, i consider that attention should also be given to ( 1 ) the further heightening of the possibility that the bank's large - scale jgb purchases will be perceived as central bank financing of fiscal deficits ; and

purchases and therefore would only be an appropriate policy measure in a crisis situation. 3. thinking behind my proposal my proposal, which i have continued to submit at mpms since april 2015, has not been intended to reduce the stock of the bank's asset holdings, but to reduce the pace of increase in such holdings. i have considered the following as consequences of the bank's change in the current guidelines of the annual pace of increase in the amount outstanding of its jgb holdings to about 45 trillion yen, a level below the initial pace employed at the time of the introduction of qqe : the excessive pressure on the jgb market would be eased considerably, and the bank's jgb purchases, for the time being, would be more sustainable and stable as the risk that the bank faces a limit to its jgb purchases at an early stage subsides. meanwhile, even if the paces of increase in the monetary base and in the amount outstanding of the bank's jgb holdings were to be reduced, accommodative financial conditions would be strengthened in a cumulative manner as the amount outstanding of its asset holdings increases. given that it will take considerable time before the end of qqe – that is, when excess reserves are depleted and the amount outstanding of the bank's jgb holdings is normalized – the bank must be careful when deciding on policies. next, i would like to elaborate on the thinking behind my proposal, focusing on policy effects and side effects. b. policy effects and side effects 1. policy effects through long - term real interest rates i think qqe is effective in increasing domestic private demand, mainly through a decline in long - term real interest rates, bringing forward future real private consumption. in this regard, by way of pushing down long - term real interest rates, the cumulative policy effects already have firmly taken hold in japan's economy, as especially evident by the following developments : ( 1 ) the output gap in japan recovered to a more or less neutral level at around the end of 2013 and has generally stayed at this level ; and ( 2 ) the gap has narrowed between the actual inflation rate and the medium - to long - term expected rates of inflation, on which basis firms and households carry out their economic activities. however, i consider that the additional effects of qqe have been diminishing. this is because long - term real interest rates, which showed a marked decline for about a year after the introduction of qq