immediately ignite an improvement in the economy. presumably, in the process of reform, we cannot deny that there might be ‘ pains ’ such as increased bankruptcies and heightened unemployment in the short run. however, at the same time, it is not appropriate to single out and emphasize only the short - term deflationary impact on the economy from among the various macroeconomic effects of structural reform. in short, as long as protracted stagnation of japan ’ s economy is rooted in structural problems, we are now at a stage where it is not so productive to discuss in general terms whether structural reform is deflationary or not. what is important is, based on specific structural reform measures which will be presented in the future, to make a well - balanced assessment with respect to the economic consequences of such measures. 3. relationship between structural reform and monetary policy i have explained the roles of monetary policy and structural policy, but what is the relationship between these roles? some would say that pains stemming from the adverse impact on the economy as structural reform progresses should be mitigated by further monetary easing, or emphasize that in the process of pursuing structural reform it is mainly the role of monetary policy to ensure economic stability. bearing these views in mind i will now explain how i see the relationship between monetary policy and structural reform. at the start i would like to say that the monetary easing policy currently being pursued by the bank will, because of effects i have previously explained in detail, also give considerable support to structural reform. first, the current monetary policy framework was determined by taking into account a scenario that the economy might substantially deteriorate, including a short - term deflationary impact stemming from structural reform. in the process of discussion to reach the monetary easing decision in march, because of cyclical adjustment in it - related areas worldwide coinciding with japan ’ s structural adjustment, i could not help but forecast that the economy would worsen considerably in the future. based on this recognition, i felt strongly, from the viewpoint of forward - looking policy making, that it was necessary to make moves ahead of the foreseeable economic developments and to vote for decisive monetary easing. second, even if deflationary pressure intensifies in the short run as a result of structural reform, current monetary policy has an automatic adjustment function such that the easing effects strengthen through the policy duration effect. third, in the process of structural reform, liquidity concerns might increase in financial markets when non - performing loans

- july 1998 reflecting growing anticipation for permanent tax cut. however, they have declined since then as a wait - and - see posture has prevailed among market participants with the growing attention to the concrete measures of the new administration ’ s economic policies. meanwhile, euro - yen interest rates and the japan premium indicate strong market concerns regarding credit risks of financial institutions and liquidity risks at end - september 1998, the end of the first half of fiscal 1998. with respect to monetary aggregates, growth in m2 + cds has been slowing, reflecting the sluggish private bank lending. these developments basically reflect the further decline in the credit demand of private firms with the worsening of overall economic activities, along with the continued cautious lending stance of private banks. the bank ’ s view on recent economic and financial developments, determined by the policy board at the monetary policy meeting held on august 11, as the basis of monetary policy decisions. the rise in medical service charges due to the medical insurance system reform of september 1997. meanwhile, some firms, especially small and medium - sized firms, have been facing difficult financing conditions in terms of both funds availability and fund - raising costs. this influence on the overall economy continues to warrant careful monitoring.