standard scenario. as the outlook report discussed such risks in detail, here i would just like to touch upon the following two issues. first is the global economic developments, especially in the us, which is expected to play a key role for japan ’ s recovery in the near future. ( needless to say, from the us point of view, japan ’ s economy might be regarded a risk factor. this is a clear evidence that we are living in a world of interdependence ). looking at the us developments in recent months, a large gap has been witnessed between macroeconomic data showing signs of recovery and the soft stock market. if we look at global financial and capital markets, the effective exchange rate of the us dollar reached its peak in january and has been depreciating significantly since then. such foreign exchange rate movements reflect recent changes in global capital flows such as a decline in direct investment into the united states in favor of the euro zone. these developments warrant careful monitoring as they could have a global impact. second is the vulnerability of japan ’ s economy to exogenous shocks and stresses. since the 1990s, the economy experienced sharp downturns triggered, for example, by concern over the financial system, withdrawal of fiscal support, and the global economic slowdown. we should always be prepared for such exogenous shocks but, given the present condition of the financial system, we should be especially aware that japan ’ s economy is currently vulnerable to major shocks. 3. monetary policy by the bank of japan against the economic and financial background that i have just described, the bank took a series of easing measures in february and march last year, stepping into an unprecedented policy area in the history of central banking. among the several pillars of this new monetary easing framework, the most important is the change in the target of money market operations. the target was changed from the overnight call money rate, that is the interest rate for the shortest term, to the outstanding balance of current accounts held at the bank of japan which represents the quantity of liquidity. this change was introduced to explore the possibility of further monetary easing even after short - term interest rates, the starting point of the transmission mechanism of monetary policy, had effectively fallen to zero. this framework is often called ‘ quantitative easing. ’ let me share with you some facts and figures to show why these are unprecedented monetary easing measures in the history of central banking. first of all, the call money rate declined to very close to zero at

that, theoretically, in the face of the zero interest rate constraint, there is a role for fiscal policy in increasing demand. the outstanding balance of government debt has reached nearly 140 % in terms of gdp. but, if fiscal funds obtained from the issuance of new debt are used effectively to boost aggregate demand, the associated growth of income and production would lower the level of government debt in terms of gdp. to the contrary, if used in an inefficient way, fiscal spending funded by debt would restrain longterm growth prospects. it is difficult to judge a priori which scenario is more likely to happen, because, in the end, it all depends on which policy the public will support. i have so far discussed demand - side policy. what about structural reform, which has been actively talked about? ‘ structural reform ’ means different things to different people. a very general definition could be to regard it as supply - side policy to improve productivity. improving productivity is always crucial because the long - term growth path depends on productivity growth. to that end, resources such as labor, land, and capital - have to be reallocated in the most efficient way to adapt to a changing economic environment. it is a quite orthodox policy indeed. the reallocation of resources is required at various levels such as inside a corporation, among corporations within the same industry, among various industries, and among various regions. in the end, the non - performing loan problem in our country is the reflection of such inefficient firms and industries. efforts to improve productivity are important. however, if demand is not created to meet an increase in supply capacity, the output gap will widen further. in addition, there is a risk that, before seeing an increase in supply capacity, a deflationary impact may emerge as competition, inevitably induces firms to exit from the market. on the other hand, however, if policy efforts to promote future growth are seen to be promising, it could lead to an increase in the current demand partly through a rise in stock prices. taking the example of business investment, it is the key for improving productivity and, at the same time, is in itself a demand. therefore, it is quite important to promote competition and improve the domestic environment for such investment. given that the ultimate goal of such investment is to fulfill private consumption demand, it is equally necessary to remove public concern over the future so that consumption can increase. these things are easy to say but difficult