hiroshi nakaso : japan ’ s economy and monetary policy speech by mr hiroshi nakaso, deputy governor of the bank of japan, at a meeting with business leaders, shimane, 9 october 2013. * * * introduction it is my great pleasure to be given an opportunity today to exchange views with administrative, financial, and business leaders in shimane prefecture. i would like to take this opportunity to express my sincerest gratitude for your cooperation with the activities of the bank of japan ’ s matsue branch. on a personal note, my relationship with the san - in region goes back long years. my father was born in yonago, tottori, and i have visited his birthplace several times. the reason why i feel nostalgic, despite this being my first time in matsue, is that my roots are in this region. japan ’ s economy has long been in a state of deflation, since the financial crisis of the 1990s. for japan ’ s economy to escape this situation and restore its vitality, it is most important to first overcome deflation and change the mind - sets of economic entities such as firms and households so that they become more proactive. in this sense, the biggest immediate challenge facing japan ’ s economy is the overcoming of deflation at the earliest possible time, and i realize that the role the bank of japan has to play is crucial. based on this recognition, the bank introduced a new policy in april, called “ quantitative and qualitative monetary easing ” ( qqe ). today, before exchanging views with you, i would like to talk about economic developments at home and abroad. i will also elaborate on the thinking behind the qqe. lastly, i will talk about economic development in this region. i. recent developments and outlook for economic activity at home and abroad recent developments and outlook for japan ’ s economy first, i will focus on japan ’ s economy. a virtuous circle from income to spending has gradually been taking hold both in the household and business sectors. in the household sector, private consumption has been resilient. sales at department stores have remained firm and consumption of services such as outlays for travel and sales in the food service industry have held steady. with underlying active consumption by senior citizens, notably baby boomers, such resilience in private consumption seems to have been sustained mainly by wealth effects stemming from a rise in stock prices and an improvement in sentiment since the turn of

japan ’ s economic recovery in the past was that it started with an increase in exports and production, thereby centering on the manufacturing sector. however, unlike the pattern of past recoveries, the major feature of the recovery this time is that it is led by the nonmanufacturing sector against the backdrop of firmness in domestic demand such as private consumption and public investment. that might be because, while consumption by senior citizens and reconstruction - related spending have been underpinning domestic demand, there also have been effects of various stimulus policy measures under “ abenomics ” and improvement in household sentiment on the back of high expectations for the current economic policy management, as well as favorable developments in financial markets. indeed, while exports and production remain short of the pre - lehman crisis levels, tertiary industry activity index – an indicator of the state of economic activity in the nonmanufacturing sector – has come close to the pre - lehman crisis level. a pick - up in business fixed investment also has taken place mainly in the non - manufacturing sector, as i mentioned earlier. the non - manufacturing sector requires more human resources than the manufacturing sector. at present, improvement in employment and income, mainly in the non - manufacturing sector, is supporting private consumption in a virtuous cycle. the virtuous circle from income to spending has been gradually taking hold, and this has supported resilience in domestic demand. such development is expected to continue. recent developments and outlook for overseas economies in this recovery, the resilience in domestic demand has been pronounced. exports are picking up, although they remain lackluster so far. in considering the future of japan ’ s economy, it is important that overseas economies pick up while domestic demand is resilient, and that the economy move to a phase led by domestic demand and external demand as a pair of wheels. let me now turn to the recent developments in overseas economies. overseas economies as a whole are gradually heading toward a pick - up. looking at respective regions, the u. s. economy is on a moderate recovery trend owing to firm private demand in the face of the fiscal drag. as for the fiscal situation, government debt increased significantly, mainly due to large - scale fiscal spending after the lehman crisis. in response, there have been moves toward fiscal consolidation, and austerity measures – including an expiration of various tax reductions and a start to budget sequestration – have been taken since the turn of the year. in the