hirohide yamaguchi : strengthening growth potential, role of the market, and “ production of information ” remarks by mr hirohide yamaguchi, deputy governor of the bank of japan, at the securities analysts association of japan annual conference commemorating its 50th anniversary, tokyo 15 october 2012. * * * introduction thank you for having me at the annual conference jointly hosted by the securities analysts association of japan ( saaj ) and asian securities and investments federation ( asif ). all the participants here have been striving for the development of securities markets, and, through such efforts, have been contributing to the sound development of japan ’ s economy. on behalf of the bank of japan, i will pay great respect to your efforts. today, under the title “ strengthening growth potential, role of the market, and ‘ production of information ’, ” i will talk about my views on the importance of the financial function that supports economic growth and how securities markets should be, and then i will send cheers to securities analysts while referring to their expected roles. i. japan ’ s economy and securities markets 50 years ago, in 1962 when the saaj was established, japan ’ s economy was in the midst of a high growth period. japan ’ s economy grew by an annual average of 9. 7 percent from 1956 up to 1970. it made a transition to stable growth, triggered by the oil shocks, but was on a constant growth path until a bubble burst at the beginning of the 1990s. after the burst of a bubble, things changed completely and the average growth rate declined substantially to around 1. 5 percent in the 1990s and around 0. 5 percent in the 2000s. the history of securities markets developed in tandem with such a long - term trend in the real economy. during the high growth period, firms ’ buoyant fund demand was mainly supported by indirect finance. however, even during such period, the securities markets gradually came close to people as the phrase “ goodbye banks, hello securities firms ” began to be heard in the early 1960s when investment trust started to spread among people. subsequently, the markets continued to grow by weathering trials, including securities markets ’ slump after the tokyo olympics and, in the 1980s, both the stocks market and the corporate bonds market got into full swing amid financial liberalization and globalization. while equity finance by convertible bonds and warrant bonds rapidly increased during the bubble period on the back of strong expectations for a rise in stock prices, market expansion based on excessive expectations did

##ties. turning to the monetary analysis, the annual growth rate of m3 declined to 1. 7 % in december 2010, from 2. 1 % in november. the annual growth rate of loans to the private sector also declined, albeit marginally, to 1. 9 % in december, after 2. 0 % in november. these declines partly reflect the reversal of special factors that operated in november and do not indicate a general weakening of monetary dynamics. overall, however, broad money and loan growth is still low, confirming the assessment that the underlying pace of monetary expansion is moderate and that inflationary pressures over the medium to long term should remain contained. looking at m3 components, annual m1 growth moderated further to stand at 4. 4 % in december 2010, reflecting the prevailing low remuneration of overnight deposits. at the same time, the yield curve has steepened somewhat further, implying that the attractiveness of short - term instruments included in m3 continues to decline compared with more highly remunerated longer - term instruments outside m3. on the counterpart side, the annual growth rate of bank loans to the private sector continued to conceal differences in the magnitude of growth across sectors. the growth of loans to non - financial corporations stood at – 0. 2 % in december, after – 0. 1 % in the previous month, while the growth of loans to households strengthened to 3. 0 % in december, after 2. 8 % in november. taking into account the effect of derecognition of loans from bank balance sheets and looking through short - term volatility, the latest data confirm a continued gradual strengthening in the annual growth of lending to the non - financial private sector. at the same time, the latest data point to the overall size of bank balance sheets having contracted again after expanding for most of 2010, mainly on account of a reduction in lending between banks. it is important that banks continue to expand the provision of credit to the private sector, in an environment of increasing demand. to address this challenge, where necessary, it is essential for banks to retain earnings, to turn to the market to strengthen further their capital bases or to take full advantage of government support measures for recapitalisation. to sum up, the current key ecb interest rates still remain appropriate. we therefore decided to leave them unchanged. taking into account all the new information and analyses which have become available since our meeting on 13 january 2011, we continue to see evidence of short - term upward pressure on overall inflation