result, firms ’ profit expectations overall seem to have declined, preventing their endeavors to promote drastic technological innovation. i believe it will also be necessary to reconsider what factors are needed to be effective in further encouraging firms ’ attempts to achieve technological innovations. as a factor that will support firms ’ efforts toward technological innovations, i believe that finance plays one of the crucial roles. the basic function of finance is to search for businesses and projects with prospects, and allocate funds to them. for firms, who are the borrowers, the hurdle in embarking on a new business will be less difficult as they can gain funds from financial institutions and financial markets. at the same time, it is important for the financial side to encourage firms ’ efforts in improving profitability, by setting lending standards that correspond to projects with low profitability. there are many small firms with high technological skills in japan. surveys on firms show that the smaller the size of business, the more firms that answer that their financial positions are weak. if their technological skills are not fully used due to financial constraints, it will cause a significant loss for the overall economy, too. therefore, i hope that financial institutions will make careful assessments and facilitate the smooth provision of funds to businesses and projects with prospects. of course, the authorities also play important roles. during the process in which firms promote technological innovation, not all the cases will lead to success. moreover, if a sector grows by introducing new technologies, behind that might be a sector that has been left behind from the wave of technological innovation. for the economy as a whole, it is necessary that, through such a process, human resources and funds are transferred smoothly to more growing areas. however, it is not always true that a person who worked in a different area until yesterday can easily adapt to a new environment today. in that regard, i believe that the policy authorities should work to enhance economic metabolism through the smooth transfer of human and management resources, and to prepare a safety net to alleviate potential friction associated with such transfers. iv. the role of the bank of japan i have explained the challenges confronting japan ’ s economy. those challenges should be tackled steadily by private firms and the authorities from their respective standpoints. of course, the bank should also play an important role in that context. for the immediate challenge of overcoming deflation, the bank considers the following two approaches as important and is steadily carrying them out. the first is to aim at removing the fundamental cause of deflation.

yutaka yamaguchi : thinking behind current monetary policy speech by mr yutaka yamaguchi, deputy governor of the bank of japan, at the japan national press club, tokyo, on 4 august 2000. * * * i am honored to be invited today to the japan national press club. i once heard a joke that a central banker can deliver a speech to members of this esteemed club, who are well known for their barrage of sharp questions, only when the economy is performing satisfactorily and he is confident enough to answer any questions. i am here today, not because this is the case, but because i think it is a good opportunity to elaborate on our thinking behind current monetary policy and ask for your comments. the main purpose of my remarks today is to present an overview of the zero interest rate policy by reviewing various discussions at past monetary policy meetings with respect to the termination of the zero interest rate policy. i. economic developments after the zero interest rate policy was adopted let me begin by briefly explaining what the zero interest rate policy is. it was in february 1999 that the bank of japan effected the zero interest rate policy. at the time, japan ’ s economy was on the verge of falling into a deflationary spiral which was a vicious circle combining price declines and economic recession. in response, the bank of japan decided to guide the short - term interest rate, specifically the uncollateralized overnight call rate, down to virtually zero by flexibly providing ample funds to the money market. then, in april 1999, the bank decided to continue the zero interest rate policy until such time it could be ascertained deflationary concern had been dispelled. chart 1 shows the development of market interest rates since april 1999. to the best of my knowledge, i cannot think of any precedents in financial history, either at home or abroad, where a central bank has guided short - term interest rates down to virtually zero and maintained that level for a long period. short - term interest rates are the key variable in the transmission mechanism of monetary policy and a central bank influences them by controlling reserves in the money market, thereby affecting various aspects of the overall economy. thus, guiding short - term interest rates down to virtually zero means that the central bank has used its traditional policy tool to the maximum extent possible. a variety of economic indicators suggest that japan ’ s economy is on a recovery path, albeit moderate. chart 2 compares recent economic conditions with those in february