that credit institutions are facing. firstly, not having adequate controls to prevent, for example, money laundering or terrorist financing will be unacceptable for regulators, who - as illustrated by the fines levied against abn amro in the united states - will not hesitate to take formal measures against your institutions. secondly, and perhaps even more importantly, involvement in serious compliance related incidents can lead to reputational damage, the impact of which may be even larger than that of regulatory interference. as confidence remains one of the financial sector ’ s cornerstones, a substantial impairment of an institution ’ s reputation could very well lead to its collapse. nevertheless, whereas the basel accord, of course, requires institutions to set aside capital to cover credit -, market and operational risk, “ compliance risk ” is not covered. is this a missed opportunity? should the drafting panels of the new capital accord have spent time on a concept like “ compliance capital ”? in my opinion, requiring institutions to set aside capital to cover losses from compliance incidents is not the issue. i believe that it is justified that the basel committee has not included compliance risk in its capital accord. whereas ( potential ) credit losses can be financially compensated by holding additional capital, compliance incidents will not be mitigated by financial means. after all, compliance incidents will impact the reputation of a credit institution, which cannot be measured in financial terms. compliance is not a financial matter, but a matter of principle. nevertheless, the question about the position of compliance continues to intrigue me. you will undoubtedly be aware that pillar ii ( the so - called supervisory review process ) of the new capital accord deals ( amongst others ) with the treatment of risks that are not fully covered by the requirements under pillar 1 14. under pillar ii, the accord requires banks to address all material risks faced in the capital assessment process, even those risks that cannot be measured or quantified precisely 15. banks are expected to further develop techniques for managing unquantifiable risks like reputational risk 16. although the language in the capital accord gives the impression that ‘ something ’ needs to be done, it also implies that holding additional capital for unquantifiable risks is not the solution. so, what then is the solution? i would argue that, whereas it remains necessary to mitigate compliance risks, a more structured and coherent approach is necessary. as previously discussed, banks are faced with challenges like the increasing globalization, issues with the corporate governance of complex institutions, the continuously changing understanding

to talk about the conduct of monetary policy. in april this year, the bank committed to achieving the 2 percent price stability target at the earliest possible time, with a time horizon of about two years, and introduced the qqe to underpin the commitment. specifically, it would increase the monetary base at an annual pace of about 60 – 70 trillion yen and double the monetary base in two years. in order to do so, it would purchase japanese government bonds ( jgbs ) so that the amount outstanding of jgb holdings would increase at an annual pace of about 50 trillion yen ( chart 12 ). while the chart shows the outstanding amounts of the monetary base and jgb holdings as of end - 2013 and end - 2014, these are projected amounts under the current policy and do not suggest in any way a time limit of the policy conduct. as i will mention later, the bank will continue with the qqe, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining the target in a stable manner. the effects of the qqe are expected to carry through the economy via several different routes, and the most important of these is to lower real interest rates. to be specific, first of all, by committing to achievement of the 2 percent price stability target at the earliest possible time and announcing the continuation of a new phase of monetary easing into the future to underpin that commitment, the bank aims to drastically change people ’ s expectations and raise inflation expectations. second, it will put strong downward pressure on nominal long - term interest rates through massive purchases of jgbs. consequently, real interest rates could be lowered if the extent of a pick - up in nominal rates can be contained within the extent of a rise in inflation expectations. and the decline in real interest rates is expected to have the effect of stimulating business fixed investment and household spending. for the last eight months, our endeavor on this front has been successful. according to surveys on households and economists, inflation expectations seem to have been rising on the whole ( chart 13 ). by contrast, long - term rates have remained stable at a low level of around 0. 6 percent in japan despite the rise in long - term interest rates in other advanced economies ( chart 14 ). therefore, real interest rates have been declining. under such stimulative effects, japan ’ s economy has been recovering moderately and the year - on - year rate of change in the cpi has turned positive.