participants that wish to trade in cash instruments. after all, nobody has doubts on the usefulness of the stock market, even though the market itself does not perform any intermediation between savers and firms in need of capital. if there were only long - term buy - and - hold investors, market liquidity, or the supply of immediacy, would be constrained. the fact that stocks can easily change hands facilitates the capital - raising activities of firms. this is a difficult issue, but for policymakers, the fact that the “ first - best ” solution is elusive cannot be an excuse for not acting on potentially harmful activities. “ second - best ” or “ thirdbest ” solutions will have to be pursued. instead of focusing too heavily on the welfare effects of individual innovations, on which sensible people can disagree, we could consider incentive issues behind developments in the financial industry, especially purported innovations that while hft in equity markets has been intensely debated, that in foreign exchange markets has been little discussed. for recent discussions on the latter, see bank for international settlements, high - frequency trading in the foreign exchange market, 2011. bis central bankers ’ speeches are modality driven. very often, modality - driven innovations are the result of efforts to circumvent regulations, taxes, and accounting rules imposed on the financial industry. one of the lessons learned from the recent financial crisis is that such innovations tend to mask the build - up of excessive risk in the economy with dire consequences. v. concluding remarks as i said at the beginning, innovation is the key to growth. financial innovation can also promote growth, so long as it facilitates the activities of other economic agents. the invisible hand may bring into line the interests of the financial industry and the broader society, but the recent financial turmoil has shown that too often, improperly aligned incentives in the financial industry can stand in the way. in this regard, senior management of financial institutions, each time their traders and bankers come up with innovative proposals, should at least reflect on how the new products or services could add value to activities in the broader economy and facilitate intermediation, before giving the go - ahead. meanwhile, central banks must better understand the incentive structures in the financial industry, and ponder if their actions might be distorting incentives, giving rise to modalitydriven innovations that hardly benefit the society as a whole. doing so should allow us to avoid those policy decisions – for example, maintaining excessively loose monetary policy for

has so far been operating as anticipated. 10 - year government bond yields have been in the range of 0. 5 – 0. 6 percent in recent months. an average commercial bank lending rate on new loans has declined to a historic low level of around 0. 8 percent. at the same time, medium - to long - term inflation expectations gauged from the consensus forecasts have climbed to 1. 6 percent. thus real interest rates have clearly been negative up to long - term ones. in a nutshell, with qqe producing its intended effects, a virtuous cycle from income to spending has been operating steadily as a high level of confidence is maintained in both the household and corporate sectors. bis central bankers ’ speeches effects of the consumption tax hike in contrast to the view that i just mentioned, there has recently been concern that japan ’ s economic recovery might have been losing momentum, reflecting the recent weak economic indicators due partly to the effects of the consumption tax hike. in particular, the gdp statistics released last month showed that real gdp in the april - june quarter fell substantially at a rate of 7. 1 percent on an annualized quarter - on - quarter basis, garnering people ’ s attention. the substantial decline in the april - june quarter followed the front - loaded demand in the january - march quarter, in which real gdp had grown significantly at a rate of 6. 0 percent, and thus was expected in advance. excluding such fluctuation of the front - loaded increase and the subsequent decline in demand prior to and after the consumption tax hike, the annualized growth rate of real gdp in the january - june period this year over the julydecember period last year is 1. 0 percent. it is not necessarily a high growth rate, but exceeds japan ’ s potential growth rate, which is estimated to be around 0. 5 percent. as i will discuss in the following, since the virtuous cycle of economic recovery has been operating steadily, the growth rate of real gdp in the july - september quarter is expected to return to the clearly positive one. the virtuous cycle in both the household and corporate sectors next, let me explain the mechanism of economic recovery in both the household and corporate sectors. in the household sector, with qqe producing its intended effects, the output gap has improved substantially, and the economic slack has almost been absorbed. the labor market has been tight, and the unemployment rate was 3. 5 percent, declining to roughly the same