in terms of the year - on - year rate of change in the consumer price index ( cpi ) at the earliest possible time, with a time horizon of about two years. second is introduction of a new phase of monetary easing both in terms of quantity and quality in order to clearly underpin such a commitment. the bank decided to change the main operating target for money market operations from the uncollateralized overnight call rate ( i. e., interest rates ) to the monetary base ( i. e., quantity ) and conduct money market operations so that the monetary base will increase at an annual bis central bankers ’ speeches pace of about 60 – 70 trillion yen. to this end, the bank will purchase japanese government bonds ( jgbs ) so that its holding of their amount outstanding on its balance sheet will increase at an annual pace of about 50 trillion yen. in terms of quality, in increasing the purchases of jgbs, those with all maturities including 40 - year bonds were made eligible for purchase, and the average remaining maturity of the bank ’ s jgb purchases was extended from slightly less than three years to about seven years. furthermore, the bank decided to purchase exchange - traded funds ( etfs ) and japan real estate investment trusts ( j - reits ) so that their amounts outstanding on the bank ’ s balance sheet will increase at an annual pace of about 1 trillion yen and about 30 billion yen, respectively. third is enhancement of the intelligibility of monetary policy. for instance, the bank ’ s purchases of jgbs had been conducted according to two types of operations : one under the asset purchase program introduced in october 2010 and the other for facilitating money market operations, often referred to as rinban operations. the bank decided to synthesize the two purchasing methods of jgbs and to express the target of jgb purchases as a net increase in its jgb holdings, instead of the total size of jgb purchases. we believe that these changes facilitate understanding of the bank ’ s intention with regard to monetary easing in a straightforward manner. the bank ’ s adoption of the monetary base as an indicator for quantitative easing also reflects our judgment that the monetary base will be the most appropriate indicator for conveying the bank ’ s aggressive stance on the monetary easing to the public. fourth is explicit indication of the bank ’ s thinking on the continuation of monetary easing. the bank will continue with the quantitative and qualitative monetary easing, “ aiming to achieve

on fiscal structural reforms. iii. low profitability of lending and challenges to enhancement of the functioning of financial intermediation as should be clear, the financial system does not face major problems in terms of stability and fundamental strength. nonetheless, i believe that the current financial institutions ’ financial intermediation cannot be described as full of vigor or dynamism. this is mainly because of the low profitability of lending. i will now discuss how the quantitative and qualitative monetary easing will affect the low profitability of lending and whether the problem of low profitability hinders the spread of the monetary easing effects. low profitability of lending and the background financial institutions ’ lending stance used to be restrained due to limited capital when they were suffering from the npl problem. at present, however, they are not under any restrictions in terms of financial strength with a sufficient amount of capital, and have taken an aggressive lending stance toward positive demand for funds. in fact, they have recently increased loans to large firms for mergers and acquisitions and acquisition of interest in natural resources, as well as real estate - related loans and overseas loans. nevertheless, such activity is still limited. loans to small and medium - sized firms have remained sluggish. although financial institutions have advanced their initiatives to facilitate financing in recent years, improvement in the quality of their loan assets has been slow. the profitability of lending and interest rate margins on loans have remained on a long - term downtrend because of intense competition among many lenders to attract limited positive demand for funds and borrower firms that are top rated ( chart 7 ). such a problem is basically a reflection of prolonged deflation, sluggish economic activity, and weak demand for funds. therefore, if the effects of the quantitative and qualitative monetary easing permeate through japan ’ s economy and stimulate positive economic activity, it is expected that loans will increase and the problem of low profitability and the bis central bankers ’ speeches issues related to the quality of loan assets will gradually be resolved. however, given the intense lending competition, it is unclear to what extent the supply and demand conditions should improve and demand for funds should increase for interest rate margins on loans to start improving. toward enhancing financial institutions ’ financial intermediation financial institutions are expected to actively elicit positive activity from firms and households, instead of passively waiting for such activity, and to work to enhance their capability for financial intermediation. this will raise the added value of their financial inter