period are taking place. let me highlight two of these changes. the first is that japanese firms are seeing record profits and their investment stance has become increasingly positive. the other change is that wages have clearly risen for the first time in two decades, reflecting that the tight labor market has brought about “ full employment ” – that is, a situation in which, from a statistical perspective, there is no unemployment other than that due to the frictional mismatch between job openings and job applicants. what i would like to focus on today are the remarkable changes that have been taking place in japan ’ s economy during the past two years under qqe. i would also like to review the transmission mechanism of qqe and how qqe has brought about those changes. i believe that at the end of my speech you will share our outlook for japan ’ s economy. bis central bankers ’ speeches i. changes in japan ’ s economy record profits and firms ’ positive investment stance i would like to start by touching on the improvement in the corporate sector. as i mentioned, japanese firms have been making record profits. in fact, their profits have considerably exceeded those around 1990 at the peak of the bubble economy ( chart 2 ). let me briefly review what has happened in japan ’ s economy over the past several years. japan ’ s economy was hit much harder than the u. s. economy by the global financial crisis triggered by the failure of lehman brothers in 2008, even though the united states had been the epicenter of the crisis caused by subprime mortgages. in fiscal 2008, industrial production in japan fell by more than 10 percent and real gdp contracted by about 4 percent. there were a number of reasons why japan ’ s economy was hit particularly hard. one notable factor is that, since japanese products and technologies play an essential part in global supply chains, the decline in global final demand affected japanese firms especially severely. subsequently, in 2011, japan was hit by the great east japan earthquake, which caused widespread damage to people and facilities. the situation was further exacerbated by the sharp appreciation of the yen. in sum, japan ’ s economy was confronted with a series of adverse shock during these years. in the face of this adversity, firms made progress in improving their efficiency and profitability through a wide range of efforts such as reorganizing production and shifting operations overseas. having survived the hardship of the recent past, japanese firms improved their profitability considerably. under abe

##bable they might be - is that although at present there seem to be no signs of overinvestment, the stimulative effect of monetary policy on economic activity and prices may be amplified with corporate profitability high and prices on a positive trend. for instance, if the expectation takes hold that interest rates will remain low for a long time regardless of economic activity and prices, there is a risk in the medium to long term of larger economic swings, resulting in large fluctuations in the rate of inflation, channeled, for example, via financial behavior and investment activity. meanwhile, depending on future developments, the economic expansion and rising prices may stall. however, japan's economy seems more resilient to such shocks, since the financial system has regained stability and the economy has now cast off excesses in production capacity, employment, and debt. in fact, the economy recovered its momentum shortly after entering a soft patch due to adjustments in it - related industries in the summer of 2004. unlike in the past, the risk of the economy falling into a vicious circle of declining prices and deteriorating economic activity seems small, even if the economic expansion and rising prices stall. with regard to the future course of monetary policy, as a result of the assessment of economic activity and prices from the two perspectives, it seems appropriate to adjust the level of interest rates gradually in the light of developments in economic activity and prices, while maintaining the accommodative financial conditions ensuing from very low interest rates for some time. such an adjustment in the policy interest rate, in our view, will contribute to ensuring price stability and achieving sustainable economic growth in the medium to long term. should a large disturbance in the price and economic situation occur, a drastic policy change may become necessary, which would potentially carry the danger of causing large economic swings. in order to avoid this happening, it is important for the bank to take a forward - looking approach in its conduct of monetary policy. such forward - looking policy is not intended to stifle growth potential, but rather to steer the economy toward a sustained period of expansion. as i have emphasized repeatedly, the bank does not have a predetermined view regarding a future increase in the policy interest rate. the bank will adjust the level of interest rates gradually, carefully assessing economic activity and prices. conclusion under the new framework for the conduct of monetary policy, it is very important for the bank to carefully explain its assessment of the state of the economy and financial developments and its