kiyohiko g nishimura : a tale of two programs in the early resolution of the deflation problem speech by mr kiyohiko g nishimura, deputy governor of the bank of japan, at a meeting with business leaders, niigata, 5 december 2012. * * * introduction i am privileged and honored to be here today to exchange views with administrative and business leaders in niigata prefecture. i deeply appreciate your support and cooperation in taking part in interviews and surveys conducted by our niigata branch. the information from these interviews and surveys is invaluable for the bank of japan in grasping japan ’ s financial and economic developments and conducting monetary policy. what is more, we are delighted to share with you information – not only on what is happening in japan but also around the globe – on various occasions, including events at branches like the opportunity we are enjoying today. i would like to express my sincere gratitude and also ask for your continued cooperation. today i will be talking about the early resolution of the deflation problem and the bank ’ s two programs. in the first half of my talk, let me outline financial and economic developments since the summer. in the latter half, i will explain the bank ’ s basic thinking on monetary policy conduct, focusing on its two programs : the asset purchase program, the total amount of which the bank at the end of october decided to increase for the second month in a row ; and the loan support program, which it decided to newly establish. i. developments in overseas economies deceleration in overseas economies becoming more severe looking at developments in overseas economies since the second half of 2011, the negative impact of the european debt problem has spread globally through the effects on trade and business sentiment. as a result, economic activity in many countries and regions, especially in the manufacturing sector, has remained in a deceleration phase. every april and october, the bank releases the outlook for economic activity and prices ( hereafter, the outlook report ), which presents policy board members ’ assessment of economic activity and prices based on their forecasts. in addition to the semiannual outlook report, the bank also releases interim assessments in january and july that present the bank ’ s revised forecasts. the interim assessment in july 2012 listed uncertainty regarding overseas economies as one of the risk factors for japan ’ s economy, and frankly speaking, my impression is that these risks actually materialized within a short period of time since this summer. specifically, risks related to

months. although conducting the basic evaluation roughly every three months, we need to closely examine the ever - changing state of the economy and prices and to carefully deliberate on the need for policy changes at every monetary policy meeting. as has always been the case, if the need arises, the bank will adjust its policy in a timely and appropriate manner, regardless of the frequency and timing of the release of the outlook and risk assessment and interim assessments. the second question concerns the risk that more detailed description of the commitment to maintaining the quantitative easing policy may affect the bank ’ s ability to conduct monetary policy in a flexible and timely manner in future. it may be natural to ask this question, because it is extremely unusual for a central bank to link its future policy conduct to a particular economic indicator, such as the core cpi in the case of japan. while paying due attention to this kind of risk, we have come to the conclusion that, with a number of obstacles still confronting japan ’ s economy as it seeks to overcome deflation and settle onto a more solid recovery path, such a detailed description of the commitment is necessary at the current time. this detailed description is a manifestation of our strong determination regarding the future conduct of monetary policy. iv. current state of the financial system on the whole, the current state of the financial system in japan remains severe. it should be noted, however, that at some financial institutions, especially major banks, efforts to improve financial conditions have gradually begun to bear fruit. for the financial year ending in september, profitability improved significantly at all major banks, except for resona group, which received an injection of public funds. this was mostly thanks to successful reductions by all major banks of losses from nonperforming loan disposals, on a year - on - year basis at the end of september 2003. these reductions were partly due to large capital increases and higher provisioning in the previous financial year ending in march 2003. after registering a record high at the end of march 2002, the amount outstanding of nonperforming loans continued to decrease as progress was made in the removal of nonperforming loans from balance sheets. major banks improved stability of their profitability by reducing their shareholdings, which had been blamed for large fluctuations in profits. in fact, banks ’ shareholdings had decreased to levels well below tier 1 capital at the end of september. to strengthen profitability, major banks made efforts in cutting costs and increasing fee incomes. these efforts have gradually begun to