haruhiko kuroda : quantitative and qualitative monetary easing and the financial system – toward realisation of a vigorous financial system speech by mr haruhiko kuroda, governor of the bank of japan, at the 2013 spring annual meeting of the japan society of monetary economics, tokyo, 26 may 2013. * * * introduction it is a great honor to be invited to the 2013 spring annual meeting of the japan society of monetary economics. the bank of japan ’ s mission is to ensure price stability and financial system stability. to ensure price stability, the bank introduced the “ quantitative and qualitative monetary easing ” at the monetary policy meeting held on april 3 and 4, 2013. this was decided based on the bank ’ s strong determination to do whatever is necessary to overcome the deflation that has persisted for the past 15 years. in terms of ensuring financial system stability, no major problems are observed at present in the financial system. however, financial institutions face the challenge of the continued decline in their profitability in their lending operations, which is the main source of their profits. over the years, the situation has remained the same, in that the amount of credit risk borne by financial institutions – a barometer of financial intermediation via lending – has decreased and the amount of interest rate risk associated with bondholdings has accumulated. the bank expects its quantitative and qualitative monetary easing to effect a major change in the current situation of the financial system. the transmission channels assumed in this policy – such as influence on the yield curve and risk premia as well as portfolio rebalancing – will work through the financial system. i believe that more vigorous financial intermediation will be necessary if the policy effect permeates through japan ’ s economy and thereby increases positive economic activity. the process to overcome deflation is also the process for the financial system to recover its vigor. today, bearing these points in mind, i will talk about the relationship between the quantitative and qualitative monetary easing and the financial system, and the thinking on the bank ’ s conduct of prudential policy. i. quantitative and qualitative monetary easing and the outlook for economic activity and prices key features of the quantitative and qualitative monetary easing i will first briefly explain the quantitative and qualitative monetary easing. this policy has the following features ( charts 1 and 2 ). first is a strong and clear commitment. the bank clearly announced that it would achieve the price stability target of 2 percent

the continuing impact of our past monetary policy tightening on consumer prices should help this process. while market - based indicators of inflation compensation have largely reversed the declines observed in the autumn, most measures of longer - term inflation expectations continue to stand at around 2 per cent. risk assessment the risks to economic growth remain tilted to the downside. greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy. lower confidence could prevent consumption and investment from recovering as fast as expected. this could be amplified by geopolitical risks, such as russia's unjustified war against ukraine and the tragic conflict in the middle east, which 2 / 4 bis - central bankers'speeches could disrupt energy supplies and further weigh on global trade. growth could also be lower if the lagged effects of monetary policy tightening last longer than expected. it could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster. inflation could turn out higher if wages or profits increase by more than expected. upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade. moreover, extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected. by contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand by more than expected, or if the economic environment in the rest of the world worsens unexpectedly. greater friction in global trade would make the euro area inflation outlook more uncertain. financial and monetary conditions market interest rates in the euro area have risen since our december meeting, partly mirroring higher rates in global financial markets. while financing conditions remain tight, our interest rate cuts are gradually making it less expensive for firms and households to borrow. the average interest rate on new loans to firms declined to 4. 5 per cent in november, while the cost of issuing market - based debt remained at 3. 6 per cent. the average rate on new mortgages edged down to 3. 5 per cent. growth in bank lending to firms rose to 1. 5 per cent in december, up from 1. 0 per cent in november, amid a strong monthly flow. growth in debt securities issued by firms moderated to 3. 2 per cent in annual terms. mortgage lending continued to rise gradually but remained muted overall,