kikuo iwata : japan ’ s economy and monetary policy speech by mr kikuo iwata, deputy governor of the bank of japan, at a meeting with business leaders, miyagi, 4 february 2015. * * * accompanying slides can be found at the end of the speech. introduction it is my pleasure to have the opportunity today to exchange views with administrative, financial, and business leaders in miyagi prefecture. i would like to take this opportunity to express my sincerest gratitude for your cooperation with the activities of the bank of japan ’ s sendai branch. it is almost four years since the great east japan earthquake, which caused immense damage to the tohoku region. i renew my deepest condolences to the victims of the earthquake and tsunami. in addition, i express my great respect to all of you who have made every effort to swiftly rebuild their businesses soon after the disaster and to reconstruct the cities thereafter. in visiting sendai this time, i have come with an expectation to confirm the current state of the disaster - stricken areas and to listen in person to the recent business sentiment and the situation of rebuilding in various fields as well as your thoughts on the bank ’ s policies and activities. today, before exchanging views with you, i will briefly explain the recent economic developments at home and abroad, and then touch on some notable points regarding monetary policy. following my speech, i would like to have your views on the actual situation of the local economy and your candid opinions about the bank of japan. i. the current situation of and outlook for japan ’ s economy a. the current situation of japan ’ s economy japan ’ s economy has continued to recover moderately as a trend. although the effects of the decline in demand after the consumption tax hike in april 2014 have still been seen in part, those effects have been waning on the whole. before going into the details about the current situation of japan ’ s economy, i will talk about the developments in overseas economies ( the left table in chart 1 ). the u. s. economy has continued to recover steadily, led by private demand. on the back of robust employment conditions, the household sector has increased consumption and housing investment. business sentiment and production have maintained the momentum for improvement, and business fixed investment has continued to recover. as for the european economy, some weakness in the momentum for recovery has recently been seen in part, due mainly to concern over geopolitical risk. the chinese

is vital for monetary policy to adopt a wide - ranging perspective that takes due account of the various factors influencing economic activity and prices. this is something we bear in mind in our efforts to ensure the appropriate conduct of monetary policy. iv. issues facing japan's financial system as the last topic of my speech today, i would like to touch upon the recent volatility in global financial markets and its implications for japan's financial system. as subprime mortgage problems have intensified and become more widespread in financial markets abroad, the impact on japanese financial institutions has been gradually increasing and is greater than originally expected. for instance, the decline in the market value of investment products has resulted in losses at some japanese financial institutions, and some financial institutions have posted losses from revaluation on unsold products arranged as part of their overseas securitization business. however, since japanese financial institutions'exposure to credit markets is relatively small, it seems that so far each financial institution or financial group is able to absorb losses incurred sufficiently within its earnings for the period or its buffer capital. we will keep our eyes on developments in u. s. and european financial markets, but it currently seems unlikely that this particular problem will pose any significant threat to the stability of japan's financial system. based on the assessment i have just made, let me now turn to current issues relating to risk management by market participants. first, market participants, including financial institutions, need to assess the risks pertaining to financial products more precisely. it cannot be denied that the current disruptions in financial markets are due partly to lax risk assessment by market participants caught out by the rapid expansion of markets for securitized products as well as the increased market penetration of complex financial products whose riskiness is difficult to assess. innovative new financial products, in particular, have only a limited amount of accumulated historical data, for example on price fluctuations, and they also have complex risk profiles and relatively low market liquidity. for this reason, market participants should seek to quantify risks as accurately as possible, subject to very strict stress testing, and should then conduct appropriate risk management accordingly. second, market participants should further involve themselves in enhancing market transparency. as seen in recent events, once a significant shock has occurred, the market as a whole tends to suffer anxiety and it can take some time for the proper functioning of financial markets to be restored. furthermore, market reaction seems to become larger where financial products traded incorporate more advanced financial technologies. from the viewpoint