increase in demand will trigger more production. b. working on expectations : what does it mean? as i explained earlier, one of the bank ’ s challenges under the qqe is to change the way the public forms its view on inflation for the future. to work on the public ’ s expectations sounds somewhat ambiguous and may leave an impression with you that monetary policy is not entirely reliable. in fact, it is not only monetary policy but also other economic policies that influence the way people form their expectations. this is because human beings decide their current behavior by forming expectations for the future. as a result, it is very important to conduct policy by taking account of their expectations. likewise, concerning expectations about economic phenomena, it is important to understand that expectations can be self - fulfilling. a simple example is as follows. if many investors buy stocks of a company based on a belief that these stocks will go up, the actual price will rise. self - fulfilling expectations have a big impact on the actual economy. bis central bankers ’ speeches up until recently, many people shared the view that deflation or declining prices would continue, and based on such expectations they refrained from spending and investment. this may have aggravated the deflationary environment. put differently, deflationary expectations have generated actual deflation ; hence, the situation of persistent self - fulfilling deflation. in order to overcome deflation and achieve price stability in a stable manner, it is vital to change the public ’ s mindset from having “ deflationary expectations ” to adopting “ inflationary expectations. ” this is why the bank has been aggressively pursuing the qqe in order to shift their expectations. changing the public ’ s expectations as a main challenge on monetary policy is surely unprecedented in the history of central banking. it is for this reason that the bank is pursuing this policy with a strong determination to cultivate the frontier of monetary policy making. c. the qqe and increase in lending so far, i have explained that the main challenge of the qqe is to generate aggregate demand by reducing the expected real interest rates, which will lead to the overcoming of deflation. related to this, we sometimes hear people say that lending by financial institutions has not increased no matter how much money the bank provides by expanding the monetary base. they further point out that this may be a sign that monetary easing is not working. let me offer my thoughts on these views. faced with prolonged deflation, many firms including smes have

the first point for attention is the effects of the consumption tax hike. the front - loaded increase in demand prior to the consumption tax hike has already been observed to a considerable extent in durable consumer goods, mainly houses, passenger cars, and white goods. if the scale of the front - loaded increase in demand is greater than expected toward the end of fiscal 2013, the subsequent decline in april and beyond will be all the more substantial. it is inevitable that the consumption tax hike will have adverse effects on households ’ real income. nevertheless, while the economy as a whole will be underpinned by the government ’ s economic measures, an increase is likely in exports and business fixed investment – which have lacked momentum to date. therefore, even if the economy temporarily posts negative growth for the april – june quarter of 2014, the recovery trend itself is unlikely to dissipate. meanwhile, i consider it necessary to carefully assess the underlying trend of various indicators scheduled for release over the period through the first half of fiscal 2014, given that they are likely to show large fluctuations, both upward and downward, due to the consumption tax hike. b. risks for overseas economies and developments in exports the second point for attention is risks for overseas economies and developments in exports. overseas economies – mainly advanced economies – are starting to recover, but a high degree of uncertainty is likely to remain over the outlook for some emerging and commodityexporting economies with structural vulnerabilities such as fiscal and current account deficits. although the markets are currently calming down, it is necessary to monitor whether such risks in these economies will materialize and affect the global economy. exports are expected to offset a temporary fallback in demand that is likely to be observed from april 2014 following the consumption tax hike, and are expected to play their traditional role as the trigger of a virtuous economic cycle. however, they lack some momentum at the moment. as background to this lack of momentum, a number of issues have been raised for discussion concerning both cyclical and structural problems, such as the pace of the recovery in overseas economies and the shift of manufacturing firms ’ production sites to overseas. i am also monitoring whether exports, which have significant spillover effects on business fixed investment, will act as a driving force of japan ’ s economy as expected from fiscal 2014 onward. c. the employment and income situation the third point for attention is developments in the employment and income situation of households. with regard to the recent situation, supply and demand conditions in the