koji ishida : economic activity and prices in japan and monetary policy summary of a speech by mr koji ishida, member of the policy board of the bank of japan, at a meeting with business leaders, aomori, 11 september 2013. * * * i. monetary policy a. introduction of the “ price stability target ” and the joint statement by the government and the bank of japan first, i would like to describe the status of the bank of japan ’ s monetary policy conduct at the beginning of this year. at the monetary policy meeting ( mpm ) held on january 21 and 22, 2013, the bank decided to introduce 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 same time, it released a joint statement with the government, which clearly stated that the government and the bank would strengthen their policy coordination and work together to overcome deflation early and achieve sustainable economic growth with price stability. in the statement, the bank announced that, under the price stability target, it would pursue monetary easing and aim to achieve this target at the earliest possible time. concurrently, the government announced that it would not only flexibly manage macroeconomic policy but also formulate measures for strengthening the competitiveness and growth potential of japan ’ s economy, and promote them strongly. the government also announced that it would steadily promote measures aimed at establishing a sustainable fiscal structure with a view to ensuring the credibility of fiscal management. b. quantitative and qualitative monetary easing ( qqe ) now i would like to talk about the bank ’ s current monetary policy measures, which aim at overcoming deflation. at the mpm held on april 3 and 4, 2013, the bank introduced qqe to achieve the price stability target of 2 percent in terms of the year - on - year rate of change in the cpi at the earliest possible time, with a time horizon of about two years. the features of this new monetary policy measure are as follows. first, with a view to pursuing quantitative monetary easing, the bank changed the main operating target for money market operations from the uncollateralized overnight call rate to the monetary base, which is the total amount of money the bank directly supplies to the economy. on this basis, the bank increases the monetary base – defined as the sum of banknotes in circulation, coins in circulation, and current account deposits held by financial institutions at the bank – at

provides long - term funds at a low interest rate to financial institutions that have increased their lending, at their request, up to an amount equivalent to the net increase in their lending, with a view to encouraging them to take more aggressive action and helping stimulate the proactive credit demand of firms and households. in addition, there is no upper limit to the total amount of funds provided by the bank under this facility. the outstanding balance of the total loans provided through both facilities of the loan support program has exceeded 7 trillion yen, supporting financial institutions ’ efforts to tap firms ’ proactive demand for funds. d. developments in financial markets reflecting such aggressive monetary easing measures, financial conditions in japan have been substantially accommodative. as for firms ’ funding costs, financial institutions ’ lending rates have been significantly low. cp issuance rates have declined to around 0. 1 percent – equivalent to the interest rate applied to excess reserve balances at the bank – and yield spreads between corporate bonds and jgbs have remained narrow on the whole. with regard to credit supply, firms have continued to see financial institutions ’ lending attitudes as being on an improving trend. from end - 2012 until the beginning of april 2013, long - term interest rates in japan declined significantly, reflecting heightened expectations for large - scale monetary easing by the bank and some anticipation of abolishment of the payment of interest on excess reserve balances. however, since the introduction of qqe at the beginning of april, the entire yield curve has risen, reflecting ( 1 ) the correction of the level of interest rates on instruments with mediumterm maturities due to a drop in anticipation of abolishment of interest payments as well as ( 2 ) the phenomenon of “ buying on rumors and selling on facts. ” moreover, since the middle of may, a rise in u. s. long - term interest rates stemming from speculation about possible changes in quantitative easing in the united states has been exerting strong upward pressure on japan ’ s long - term interest rates. at present, yields on 10 - year jgbs have been in the range of 0. 7 – 0. 8 percent, which in absolute terms are higher than those before qqe was introduced at the beginning of april. it should be noted, however, that while the rise in u. s. long - term interest rates has actually caused interest rates in germany and the united kingdom to follow suit, interest rates in japan have recently been more or less