kikuo iwata : quantitative and qualitative monetary easing and japan ’ s recent economic and financial developments speech by mr kikuo iwata, deputy governor of the bank of japan, at a newspaper editorial writers ’ meeting, kyodo news, tokyo, 26 may 2014. * * * introduction thank you for providing me with an opportunity to speak in front of this large group of columnists. today, i want to explain the content and basic thinking behind quantitative and qualitative monetary easing ( qqe ) introduced by the bank of japan in april last year. i will also touch on the role - sharing between our monetary policy and the growth strategy being implemented by the government. i. inflation targeting policy and deflation a. downside of deflation let me ask two basic questions. why is deflation problematic, and why did the bank adopt an inflation targeting policy? deferring spending and decline in aggregate demand deflation, which can be defined as a persistent decline in prices, causes economic stagnation through several routes ( chart 1 ). first, if prices decline persistently, one can purchase more goods and services with the same amount of money as time passes. in other words, the value of cash and deposits will rise simply by hoarding them ; thus, firms and households will defer their investment and spending. consequently, this will lead to a decline in aggregate demand. such a decline will make firms reduce their production activity at a level consistent with the drop in sales. corporate profits will deteriorate and employee income will fall accordingly, and these factors will contribute to a further decrease in spending, housing investment, and firms ’ business fixed investment. all this will lead to yet another decline in aggregate demand, which will induce a further drop in prices. hence, a vicious cycle of price declines and stagnation prevails. increase in effective debt burden a persistent decline in prices means that the value of money for goods and services will increase. for those who borrow money, the value of money that they will have to repay will increase. this represents an increase in the effective burden of debt. thus, firms and households will become cautious about borrowing money. the effective burden of debt brought about by money that has already been borrowed will become heavier, weighing on consumption and investment. as a result of shrinking aggregate demand, a vicious cycle of price declines and stagnation will prevail once again. such a mechanism can also be referred to as

the chiang mai initiative. if asia succeeds in strengthening its own financial system, it can play an even more important role globally in designing new international financial architecture and discussing governance systems. 5. conclusion : how can japan contribute? to conclude, i would like to address the question, what can japan do to contribute to the realization of the asian century? the answer to this question is not singular. as i mentioned earlier, japan can contribute through trade, investment, and financial cooperation. japan can also assert its identity as a member of the asian region, to participate in the stronger regional ties and cooperation, through which japan can achieve higher growth. this would be mutually beneficial for both japan and other asian economies. in its early - april monetary policy meeting, the bank of japan introduced a new policy framework, quantitative and qualitative easing ( qqe ), with the aim of achieving the price stability target of 2 percent in terms of the year - on - year rate of change in the consumer price index ( cpi ) at the earliest possible time, with a time horizon of about two years. the bank believes this will lead japan ’ s economy to overcome the deflation that has lasted for nearly 15 years, and reinvigorate the economy, adding substance to japan ’ s efforts to contribute to the realization of the asian century. bis central bankers ’ speeches