seiji nakamura : japan ’ s monetary policy and developments in economic activity and prices speech by mr seiji nakamura, member of the policy board of the bank of japan, at a meeting with business leaders, fukuoka, 4 february 2010. * i. the current economic situation a. overseas economies * * the world economy has been on a moderate recovery path, supported by fiscal stimulus measures such as the promotion of car sales and accommodative monetary policies implemented around the world. increased production, reflecting progress in inventory adjustment and a recovery in trade, also contributed to the recovery. the international monetary fund ( imf ) saw the economic recovery as sustained, and on january 26, 2010 revised upward its outlook for world economic growth in 2010 to 3. 9 percent, up 0. 8 percentage points from its forecast released in october 2009. the high growth in emerging economies such as china has been upholding the economic activity of industrialized countries, including japan, through increased trade. emerging economies have marked higher - than - expected growth as the balance sheet problems of financial institutions and individuals were small relative to those of industrialized countries. as a result, the stimulus measures within these economies were particularly effective. the strong domestic demand boosted by a virtuous cycle of production, income, and spending, inflow of overseas capital, and recovery in exports to industrialized countries also contributed to the high growth. for example, in china, the real gdp growth rate for the october - december quarter of 2009 increased 10. 7 percent from a year earlier, and growth remains particularly strong in areas such as personal consumption and fixed asset investment. furthermore, exports, which had been sluggish, saw double - digit month - onmonth growth in december, spurred by high - value - added products such as high - tech goods and electrical machinery, and turned positive on a year - on - year basis for the first time in 14 months. in order to maintain robust growth, the chinese government appears to have started to implement preemptive measures to cool down the overheating seen in part of the real estate market, as well as the surge in bank lending. emerging economies, including china, are expected to maintain high growth for the time being. given that these economies are now the main engines of the world economy, it is necessary to watch out for any signs of a possible economic bubble and monitor the sustainability of their economic growth. in industrialized countries, economic conditions are improving, although the pace of recovery has

as well as the sharp decline in global demand resulting from the financial crisis. therefore, in view of the current economic outlook that the recovery will be sluggish, demand – which is well short of supply at present – is unlikely to recover quickly, and the downward pressure on prices will not ease in the short term. the bank ’ s current policy measures have been helping to underpin demand, by encouraging money market rates to decline and by providing ample liquidity to financial institutions. fiscal measures have also been taken to stimulate demand for consumer durables. further restructuring efforts in the private sector are necessary to achieve sustained growth in demand. in other words, it is vital that the bank, the government, and the private sector each play their part and jointly work to boost demand. the frequently voiced opinion that, to end deflation, the bank should provide massive amounts of liquidity to private financial institutions as a quick fix to overcome the situation, ignores longer - term issues that have major implications for the future. looking back at the bank ’ s quantitative easing policy implemented from 2001 to 2006, the bank provided ample liquidity to financial institutions via their current accounts held at the bank, but private banks ’ lending to other private sector entities did not rise relative to the increase in the outstanding balance of current account deposits, indicating that the policy ’ s direct impact on ending deflation was small. recently, the bank ’ s accommodative stance on money market operations has enhanced the sense of an abundance of liquidity, causing market rates, including those on longer - term instruments, to decline further toward 0. 1 percent, which is the rate applied to the complementary deposit facility. nevertheless, due to weak corporate demand for funds, the bank ’ s ample supply of funds once more has failed to lead to an increase in bank lending, although financial institutions have not been averse to lending. in sum, the ordinary operation of the transmission mechanism of monetary easing has not been working. based on this observation, i believe that japan will not be able to end deflation via policy measures such as simply increasing the supply of liquidity. in addition to the bank ’ s contribution to price stability, it is essential that all economic entities work together to create demand at home and abroad through innovation and steady day - to - day efforts, to ensure, and attain the prospect of, higher income over the medium - to long - term through increased productivity. c. announcement of the “ understanding of medium - to long -