takehiro sato : recent economic and financial developments, and monetary policy speech by mr takehiro sato, member of the policy board of the bank of japan, at a meeting with business leaders, hakodate, 4 december 2013. * i. * * introduction on april 1, 2013, the bank of japan ’ s hakodate branch celebrated its 120th anniversary. i would like to take this opportunity to express my sincere gratitude for your long - term cooperation with the activities of the hakodate branch. in today ’ s speech, i will begin by focusing on economic and financial developments in japan and abroad, as well as the bank ’ s recent monetary policy. i will then touch briefly on the economy of southern hokkaido. following my speech, i would like to hear your views on actual conditions in the local economy and on the bank ’ s conduct of monetary policy. ii. current situation of and outlook for japan ’ s economy and the global economy a. outlook for the global economy the general outlook for the global economy had temporarily become somewhat cautious due to the instability in global financial markets toward this summer. the global economy, however, is expected to gradually improve as global financial markets as a whole have regained stability, despite still showing nervousness. specifically, with regard to the direction of u. s. monetary policy, speculation among investors about an earlier - than - expected reduction by the federal reserve in the pace of its asset purchases became heightened from around late may 2013. this triggered instability in global financial markets, as evidenced by the simultaneous declines in stock prices, bond prices, and in the value of currencies in some emerging economies. the forecast for global economic growth presented in the world economic outlook released by the international monetary fund ( imf ), which had continued to be revised downward in the recent past, was revised further downward in october, mainly for emerging economies ( chart 1 ). this revision to the global economic forecast was mainly due to the revisions made to the outlook for emerging economies while that for advanced economies as a whole was left unchanged, and this seems to have certain implications for the outlook for the global economy, mainly in terms of risk factors. more specifically, the u. s. economy is on a recovery path, albeit at a moderate pace, against the background of progress in households ’ balance - sheet adjustments and an improvement in the housing market. the european economy is starting to pick up against the backdrop of the amendments in the fiscal austerity policy and the bottoming

forward guidance, which expects to influence longer - term interest rates by committing to continuing monetary easing as long as necessary and thereby bringing forward future demand. thus, it is not appropriate to categorize the bank ’ s current monetary policy as “ traditional ” forward guidance, as currently implemented by other central banks such as the federal reserve and the ecb ( chart 16 ). in addition, forward guidance entails the dynamic inconsistency problem ( or time inconsistency problem ) – that is, even if a central bank commits to continuing the policy as long as necessary, this commitment might be broken at some point. the notable example is that global financial markets became unstable after chairman bernanke of the federal reserve indicated a specific schedule for reducing the pace of its asset purchases in late may 2013. in this regard, other major central banks that adopt unconventional monetary policies are facing new challenges as to how to ensure the effectiveness of their forward guidance. that is to say, these central banks will keep trying to determine what kind of commitment is needed to make the public and market participants believe that such commitment will be fulfilled. d. toward accumulating the monetary base the bank has disclosed its monetary base target and balance sheet projections up until the end of 2014 as part of its efforts to achieve the price stability target with a time horizon of about two years. according to the projections, the expected amounts outstanding of the monetary base and japanese government bonds ( jgbs ) at the end of 2014 are around 270 trillion yen and around 190 trillion yen, respectively. the amounts outstanding of both the monetary base and jgbs have been accumulated almost in line with the bank ’ s projections, and they are within range of reaching the amounts projected for the end of 2013, to 200 trillion yen and 140 trillion yen, respectively ( chart 17 ). however, whether or not the bank will be able to accumulate the target amount of the monetary base as expected depends on the stance of financial institutions with regard to making bids for the bank ’ s market operations. this stance could change, reflecting not only economic factors, such as economic and financial developments as well as current and future levels of interest rates, but also non - economic factors ; for example, the extent to which financial institutions are allowed to increase their current account deposits at the bank from the viewpoint of their investor relations policies. therefore, there is substantial uncertainty over the future accumulation of the monetary base in a situation where financial institutions already hold huge amounts of excess reserves at