hiroshi nakaso : basic idea underlying “ quantitative and qualitative easing ” speech by mr hiroshi nakaso, deputy governor of the bank of japan, at the international conference, organised by the economic and social research institute, cabinet office, government of japan, tokyo, 31 may 2013. * * * introduction thank you for giving me an opportunity today to speak at the international conference organized by the economic and social research institute, the cabinet office, the government of japan. i. introduction of “ quantitative and qualitative monetary easing ” japan ’ s economy has been in a state of deflation for nearly 15 years. during the period, the economy has been trapped in a vicious cycle. amid the continued decline in prices, corporate profits and wages were squeezed. those induced business fixed investment, private consumption, and other economic activity to plunge. as a result, prices fell again. for japan ’ s economy to get out of the vicious cycle and recover sustainably, it is critical first to overcome deflation, thereby turning the behavior of economic entities, such as firms and households, positive. in that regard, the biggest challenge japan ’ s economy is faced with is to overcome deflation promptly. the bank of japan recognizes that its role is critical. with such recognition, the bank introduced quantitative and qualitative monetary easing at the monetary policy meeting held at the beginning of april. it aims to achieve the price stability target of 2 percent in terms of the year - on - year rate of change in consumer price index at the earliest possible time, with a time horizon of about two years. with a view to pursuing quantitative monetary easing, the main operating target for money market operations was changed to the monetary base. on that basis, the monetary base and the bank ’ s outstanding amount of jgb and etf holdings will be doubled in two years. the average remaining maturity of the bank ’ s jgb purchases has been extended more than twice as long. the policy clearly differentiates itself from the gradualism or incremental approach adopted in the past. besides, the bank is committed to continuing with quantitative and qualitative monetary easing, aiming to achieve the 2 percent price stability target, as long as it is necessary in maintaining that target in a stable manner. as quantitative and qualitative monetary easing requires a massive purchase of jgbs, we need to conduct purchases while monitoring the effects in the bond market. after quantitative and qualitative monetary easing was introduced and in the process of

/ / www. boj. or. jp / en / index. htm. a. negative productivity shocks a major factor behind the prolonged deflation in japan since the 1990s is the negative output gap, which has prevailed for a long time. one of the reasons often cited recently for this negative output gap is the slowdown in productivity growth – that is, negative productivity shocks. 4 i will now discuss these negative productivity shocks and their relation with the output gap, which is the cause of deflation. the reasons for japan ’ s slower growth trend from the 1990s, compared with those of the united states and europe, can be attributed to successive negative productivity shocks. the first shock is the rapid advance in population aging and decline. the second is the continuing it revolution and the intensification of global competition based on the increased supply capacity of emerging markets. it has been argued that against the background of these major structural changes, corporate governance in japan, being bound by past success, has shown insufficient adaptability and flexibility. 5 the third factor is that these negative productivity shocks coincided with the disposal of nonperforming loans following the burst of the real estate bubble. 6 to be more specific, following the burst of the real estate bubble of the late 1980s, manufactures were busy dealing with excesses in production capacity, employment, and debt, while financial institutions were unable to perform their credit intermediation function properly because they were preoccupied with the disposal of nonperforming loans. it is thought that these factors combined put downward pressure on labor input, capital input, and total factor productivity. 7 indeed, the pace of labor productivity growth in japan moderated from the 1990s onward. also, during this period, there was limited room for reducing interest rates and it therefore was impossible to ease monetary policy to the extent required for countering the decline in the potential growth rate. at the same time, growth expectations for the economy have also been weighed down by anxiety about the future stemming from the large fiscal deficit and problems regarding the pension system. the decline in growth expectations has pushed down people ’ s permanent income expectations, leading to general restraint in consumption and investment. since supply can be adjusted only relatively slowly, the demand and supply balance deteriorated, exerting downward pressure on prices. thus, the significant and prolonged downward pressure on prices in japan has been caused by the intermittent negative production shocks that occurred during the 1990s. given this environment, firms placed greater emphasis on profitability by further restraining wages against the