the past six months, the negative effects of the first two risks has proved to be evident. on the first risk, overseas economies have slowed down much faster than expected. consequently, exports and production continue to decline sharply and fixed investment started to decrease against the background of deterioration in corporate profits. such adjustment in the corporate sector is now affecting household income through softening employment and wages. consumption has held up relatively well but we are now seeing weaker indicators there. the negative impact of the second risk, i. e. weaker asset prices, is also becoming evident. in particular, a fall in stock prices has not only hurt the business and household sentiment but also weakened the capacity of financial institutions. under the circumstances, prices continue to decline. as often discussed, we cannot ignore the supply - side factors in explaining the current price decline in japan. as global competition intensifies, firms are increasingly utilizing low cost imports. supply - side factors also include rationalization of distribution system and the effects of deregulation. the price development this year, however, appears to be affected equally or even more by weak demand rather than the supply - side factors. 3. monetary easing measures since march against the background of such severe economic developments, the bank adopted in march strong monetary easing measures with firm determination to prevent a continuous price decline and to form a basis for a sustainable growth. in august, the bank took further easing steps based on the framework adopted in march. furthermore, after the terrorist attacks in september, the bank took every necessary measure in monetary operations in order to secure smooth fund settlement and financial market stability. the current monetary easing measures consist of four components. first, the main operating target for monetary operations was changed from the overnight call rate to the outstanding balance of current accounts held at the bank of japan. the new target was raised from about four trillion yen to five trillion yen in march and further to six trillion yen in august. as i will discuss a moment later, the bank did not simply raise the target regardless of demand. the bank decided the level of the target such as five trillion or six trillion based on a judgement that it was the maximum demand for the current account balance at the time. in september, the bank swiftly responded to a surge in demand for liquidity following the terrorist attacks. at the subsequent monetary policy meeting, the bank decided to provide ample liquidity aiming at above six trillion yen, without specifying the limit. in practice, the outstanding balance of the current accounts increased toward the

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