continue monetary tightening, inflationary pressure has not been reduced as they maintain strong growth. therefore, there is a high degree of uncertainty about whether these economies will be able to make a soft landing by achieving price stability and economic growth at the same time. regarding risks to the price outlook, inflation could rise more than expected if international commodity prices increase further. there is also a possibility that the rate of inflation will deviate downward from the bank ’ s baseline scenario due, for example, to a decline in medium - to long - term inflation expectations. ii. conduct of monetary policy lastly, let me explain the bank ’ s conduct of monetary policy. in order for japan ’ s economy to overcome deflation and return to a sustainable growth path with price stability, the bank has continued to consistently make contributions as the central bank through the three - pronged approach of pursuing powerful monetary easing consisting of comprehensive monetary easing, ensuring financial market stability, and providing support to strengthen the foundations for economic growth. with regard to pursuing powerful monetary easing, the bank has encouraged the overnight call rate to remain at virtually zero, namely, around 0 to 0. 1 percent. moreover, the bank has committed itself to continue the virtually zero interest rate policy until it judges that price stability is in sight. in order to further enhance monetary easing despite the limited room left for a further decline in short - term interest rates, the bank has implemented measures to encourage a decline in longer - term market interest rates and a reduction in various risk premiums. specifically, the bank has established a new framework called the asset purchase program through which it conducts the fixed - rate funds - supplying operation against pooled collateral and purchases various financial assets. the assets to be purchased range from long - term government bonds and treasury discount bills to risk assets such as cp, corporate bonds, exchange - traded funds ( etfs ), and japan real estate investment trusts ( j - reits ). immediately after the earthquake, the bank increased the amount of its asset purchases, mainly of risk assets, with a view to preventing any deterioration in bis central bankers ’ speeches business sentiment or excessive increase in risk aversion from adversely affecting economic activity. as a result, the size of the asset purchase program increased to about 40 trillion yen from the initial size of about 35 trillion yen. in addition to such pursuit of powerful monetary easing, the bank has been implementing the fund - provisioning measure to support strengthening the foundations for economic growth. even before the earthquake, japan ’

masaaki shirakawa : semiannual report on currency and monetary control statement by mr masaaki shirakawa, governor of the bank of japan, concerning the bank ’ s semiannual report on currency and monetary control, before the committee on financial affairs, house of representatives, tokyo, 13 july 2011. * * * introduction the bank of japan submits to the diet its semiannual report on currency and monetary control in june and december. most recently, the bank submitted the report for the second half of fiscal 2010 on june 10, 2011. i am pleased to have this opportunity to talk about recent developments in japan ’ s economy and present an overall review of the bank ’ s conduct of monetary policy. i. economic and financial developments in japan i will first explain economic and financial developments in japan. japan ’ s economy faced strong downward pressure, mainly on the production side, due to the effects of the great east japan earthquake that occurred on march 11. the earthquake disaster caused damage to production facilities in a wide range of areas and consequent constraints on the supply of parts and materials led to supply - chain disruptions. moreover, serious damage to power generating facilities resulted in constraints on electric power supply. production declined sharply mainly due to these supply - side constraints and consequently exports fell. domestic private demand also suffered to a considerable degree, affected in part by a deterioration in business and household sentiment. four months after the earthquake, japan ’ s economic activity is picking up with a gradual easing of the supply - side constraints caused by the earthquake disaster. production has recently shown clear signs of picking up as the restoration of supply - chain disruptions has progressed steadily at a faster - than - expected pace. at least for this summer, the electric power shortages are apparently not constraining economic activity as significantly as initially concerned, due to a strengthening of supply capacity by electric power companies and firms and households ’ efforts to conserve electricity and level out demand. in response to the pick - up in production, exports have started to increase. domestic private demand has also begun to pick up, with some improvement in household and business sentiment. meanwhile, the june tankan ( short - term economic survey of enterprises in japan ), released by the bank at the beginning of this month, showed that business sentiment deteriorated compared with the march tankan, which appeared to have hardly reflected the effects of the disaster. as for the outlook, however, many firms, especially in the manufacturing sector, expected improvements.