haruhiko kuroda : the bank's semiannual report on currency and monetary control statement by mr haruhiko kuroda, governor of the bank of japan, before the committee on financial affairs, house of councillors, tokyo, 22 november 2016. * * * introduction the bank of japan submits to the diet its semiannual report on currency and monetary control in june and december. i am pleased to have this opportunity today to talk about developments in japan ’ s economy and present an overall review of the bank ’ s conduct of monetary policy. i. economic and financial developments in japan at the monetary policy meeting ( mpm ) held on november 1, the bank released the outlook for economic activity and prices ( outlook report ), which presents its projections for japan ’ s economic activity and prices through fiscal 2018. based on this, i will first explain economic and financial developments in japan. japan ’ s economy has continued its moderate recovery trend, although exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies. with regard to the outlook, it is likely to continue growing at a pace above its potential through the projection period — that is, through fiscal 2018 — with a virtuous cycle from income to spending being maintained in both the corporate and household sectors, on the back of highly accommodative financial conditions and the effects of the government ’ s large - scale stimulus measures, as well as the recovery in overseas economies. on the price front, the year - on - year rate of change in the consumer price index ( cpi, all items less fresh food ) has been slightly negative due to the effects of the decline in energy prices. as for the outlook, it is likely to be slightly negative or about 0 percent for the time being, and as the aggregate supply and demand balance ( the output gap ) improves and medium - to long - term inflation expectations rise, it is expected to increase toward 2 percent — the price stability target — in the second half of the projection period. the timing of the year - on - year rate of change in the cpi reaching around 2 percent will likely be at the end of the projection period — that is, around fiscal 2018. thus, the momentum toward achieving the price stability target of 2 percent seems to be maintained. however, it is somewhat weaker than the previous outlook made in the july outlook report, and thus developments in prices warrant careful attention going forward. ii. conduct of monetary

, as they have been actively supporting their client firms with various measures taken by the bank and the government to support financing. nevertheless, financial institutions themselves are also facing a severe situation. according to the international monetary fund ( imf ), in 2018 the proportion of global systematically important banks that had a return on equity ( roe ) below 4 percent was less than 10 percent, but this is projected to increase to around 50 percent by the end of 2020. 2 furthermore, the imf points out that, if the impact of covid - 19 persists, many banks in advanced economies may fail to generate profits above their cost of equity ( coe ) in 2025. if roe does not exceed coe, financial institutions'profitability will gradually decline. this may be attributed to three factors : a narrowing of loan spreads ; a decrease in investment income ; and an increase in credit costs. i will now explain the situation surrounding these three factors in japan. let me first touch on the narrowing of loan spreads. japan has been confronted with both limited demand for new loans, due to a decline in population and the number of firms across regions, and with prolonged low interest rates. in this situation, financial institutions'average contract interest rates on new loans and discounts have reached extremely low levels, owing in part to intensified competition among institutions. as a result, there has been a narrowing of net profit margins - - calculated by deducting overhead cost ratios from the interest rates. imf, global financial stability report, april 2020. for example, the average net profit margin for regional banks - - specifically, member banks of the regional banks association of japan - - was around minus 2 basis points for fiscal 2019 ( chart 9 ). 3 when considering the net profits of financial institutions, it is also necessary to deduct credit cost ratios - - the amount set aside for potential loan losses ( chart 10 ). in this situation, if lending rates decline further from the current level, financial institutions will not be able to generate profits unless they procure funds at negative interest rates. it is difficult, however, for deposit rates - - which account for the majority of financial institutions'funding costs - - to fall into negative territory. for this reason, we may be approaching a situation in which, even if market interest rates decline, lending rates do not fall, or the provision of loans does not increase. in addition, the amount of effectively interest - free loans expected to be provided to small and medium - sized firms