yoshihisa morimoto : economic activity and prices in japan and monetary policy speech by mr yoshihisa morimoto, member of the policy board of the bank of japan, at a meeting with business leaders, saitama, 9 december 2010. * i. * * the global economy economic activity in japan is closely linked to global economic developments. therefore, before discussing the japanese economy, i will first take a look at trends in the world economy. from around 2005, the world economy grew at a rapid pace of around 5 percent annually, with china and other emerging economies gaining in prominence. the failure of lehman brothers in september 2008, however, brought this growth to a sudden halt, and the world economy marked negative growth in 2009 due to the severe contraction in the first half of the year. causes of the sharp decline include the rapid deceleration in economic and financial activity due to the financial crisis triggered by the lehman shock, and the corrections to the various excesses that had built up in the world economy since the mid2000s. by “ excesses, ” i am referring to overborrowing by households, excess production capacity in the corporate sector, and the large amount of nonperforming loans held by financial institutions. measures to address the financial crisis implemented by governments and central banks around the world started to show effects from the second half of 2009. with the contraction in economic and financial activity having come to a halt, policy measures to stimulate demand provided a further boost. it should be noted, however, that the pace of economic growth has been slowing somewhat since summer 2010, as restocking of inventories that took place during the recovery phase came to an end and the effects of demand - boosting measures in the united states and other countries waned. the slowdown is also due in part to the unwinding of accommodative policies in emerging countries in order to keep economies from overheating. a. advanced economies let us look at advanced economies in more detail. the u. s. economy remains on a moderate uptrend. although the effects of fiscal stimulus measures have been waning, exports to emerging and commodity - exporting economies have continued to increase and private consumption and business fixed investment have been rising moderately. housing starts have remained at a depressed level after dropping sharply due to the expiry of tax credits for homebuyers, but are unlikely to fall further. as for the outlook, the u. s. economy

bank recognizes that japan ’ s economy is faced with the extremely important challenge of emerging from deflation and returning to a sustainable growth path with price stability. based on this recognition, the bank has been doing its utmost as the central bank, using a three - pronged approach consisting of ( 1 ) strong monetary easing, ( 2 ) ensuring stability in financial markets, and ( 3 ) providing support to strengthen the foundations for economic growth. today, i would like to explain the bank ’ s pursuit of strong easing through comprehensive monetary easing and the support for strengthening the foundations for economic growth to address the medium - to long - term issues faced by the japanese economy. a. pursuing strong monetary easing : the comprehensive monetary easing policy with regard to its pursuit of strong monetary easing, the bank has reduced its policy interest rate twice since the lehman shock and, by increasing longer - term funds provision to financial institutions through new funds - supplying operations, the bank has been influencing directly longer - term interest rates such as 3 - month and 6 - month rates. as a result, market interest rates have been stable at extremely low levels and firms ’ funding costs have been declining. however, at the monetary policy meeting held on october 4 and 5, 2010, it was judged that the economic growth rate was likely to be somewhat lower than the projection presented in the july 2010 interim assessment, reflecting the slowdown in the u. s. economy since summer 2010 and the effect of the appreciation of the yen on business sentiment. it was also agreed at the meeting that, in view of the downside risks to the economic outlook, it had become more likely that the return of japan ’ s economy to a sustainable growth path would be delayed compared to what had been projected earlier. in this context, what particularly caught my attention was the results of the september 2010 tankan ( short - term economic survey of enterprises in japan ) released by the bank. although i had anticipated that firms ’ view of future business conditions had deteriorated to some extent due partly to the decrease in demand following the expiry of government measures to boost demand, the extent to which it had deteriorated was larger than i had expected. the bank has repeatedly stated that it will continue to consistently make contributions as the central bank so that japan ’ s economy will overcome deflation and return to a sustainable growth path with price stability. therefore, the members of the policy board, myself included, thought that the time had come for the bank to express this stance more clearly, examine concrete