march 6, 2017 bank of japan economic and financial developments and monetary policy in japan speech at a seminar hosted by the embassy of japan in switzerland ( zurich ) takako masai member of the policy board introduction it is a great honor to have the opportunity today to be invited to this seminar hosted by the embassy of japan in switzerland, and to exchange views with such a distinguished gathering of people representing the economic and financial communities in switzerland. today, i will first touch on economic and financial developments in japan. after that, i would like to explain the bank of japan's monetary policy and then share my views on the challenges and future for the economy. i. economic and financial developments in japan i will start by presenting my overview of the current economic and financial situation in japan, in order to provide a broad picture. then, i will give a summary of the latest outlook for economic activity and prices, or the outlook report, published in january 2017. the outlook report presents the bank's assessment of the current situation and the outlook for economic activity and prices, and is published quarterly. a. my overview of economic and financial developments 1. household sector favorable employment situation and household sentiment the current situation for japan's economy is characterized by tight labor market conditions. the average unemployment rate for 2016 declined to 3. 1 percent, a level close to so - called full employment. the active job openings - to - applicants ratio for 2016 rose to about 1. 4 times on average, which is the highest level in 25 years. it has risen, for example, not only in metropolitan areas but also in all other regions ( chart 1 ). i believe that such a favorable employment situation undoubtedly has supported household sentiment. individuals can feel great confidence when they do not need to be concerned about whether their wages will be cut, even if corporate performance underperforms to some extent, or whether they can find another job. this sense of reassurance is crucial in japan, where the mobility in the labor market is said to be relatively lower than in other countries. such improvement in household sentiment can be seen, for instance, in the remarkable improvement in the nippon research institute ( nri ) consumer sentiment index, which measures the outlook among consumers for financial conditions over the next one year from now. looking back at 2016, japan's economy continually faced several destabilizing factors, such as the turbulence in global financial markets from early in the year and situations at home - - namely, the kumamoto

strong determination. inflation expectations are formed through the following two mechanisms : ( 1 ) an adaptive formation mechanism, in which the formation is influenced by the course of the past inflation rate, and ( 2 ) a forward - looking formation mechanism, in which the formation is based on the idea that the observed inflation rate will, in due course, meet the price stability target set by the central bank. on this point, the mechanism of formation of inflation expectations in japan tends to be adaptive, and considerably more so than in other countries ( chart 7 ). the bank has attempted to make expectation formation more forward - looking through qqe. in reality, however, before the forward - looking expectation formation fully took hold, the observed inflation rate declined, due mainly to the fall in crude oil prices. as a result, people's inflation expectations also declined in an adaptive manner. therefore, i consider that, in order to achieve the price stability target of 2 percent, it is absolutely necessary to raise inflation expectations and promote a shift in expectation formation toward a more forward - looking direction. the inflation - overshooting commitment is a means to this end. although the momentum toward achieving the 2 percent price stability target has been maintained, it continues to lack firmness. the bank will make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target. iii. reinforcement of the virtuous cycle as i mentioned earlier, the challenge facing japan's economy is to further reinforce the virtuous cycle from income to spending in both the household and corporate sectors. let me reiterate that consumption has not increased as much in the household sector, considering the tight labor market conditions and the increase in employee income. several factors have been pointed out as the cause of such sluggishness in private consumption ; for example, ( 1 ) temporary factors such as the effects of a decline in stock prices and the effects of irregular weather, and ( 2 ) pressure from stock adjustments of durable goods. in addition, my impression is that a vague uneasiness among people about the future cannot be ignored. this uneasiness has a great impact on private consumption in japan, where the population is aging rapidly and consumption by elderly households whose heads are aged 60 years and older is estimated to account for about half of total consumption. turning to a related but different subject now, i would like to introduce a survey result,