discussing the effects on an economy of a case in which interest rates are increasing in a desirable way. for example, in case of fiscal consolidation, if the assumed interest rate level rises, it will increase the interest burden in public finance. on the other hand, an increase in revenue can be expected from a rise in economic growth. thus, it is important to discuss fiscal consolidation by taking account of these two effects. third, desirable strengthening of growth potential cannot be achieved by monetary policy alone. to begin with, it is understood that strengthening of an economy ’ s growth potential will be promoted primarily by structural reform efforts in the private sector and the government ’ s growth strategy to support such efforts. having said that, monetary policy might have medium - to long - term effects on the economy, in addition to an effect of containing shortterm and cyclical swings in economic activity. in an ideal case, monetary easing might contribute to strengthening productivity and growth potential by promoting quality business fixed investment as well as r & d investment. in an undesirable case, there is a risk that monetary easing will amplify swings in the economy in the medium to long term by encouraging excessive risk taking and excessive business fixed investment, or that undisciplined monetary easing will induce the erosion of confidence in the currency with an unexpected timing and induce a surge in interest rates. therefore, it is important to recognize that potential effects of monetary policy could have both positive and negative effects on medium - to long - term economic growth. in relation to strengthening the medium - to long - term growth potential, the bank has been conducting the fund - provisioning measure to support strengthening the foundations for economic growth since june 2010. with this measure, the bank supplies long - term funds – with an initial duration of one year and a maximum duration of four years – at a low interest rate of 0. 1 percent to qualifying financial institutions. the measure has already reached the initial total amount of 3 trillion yen and has been playing the role of a catalyst. in addition, in june 2011 the bank decided to introduce a new line of credit of 500 billion yen. through this, the bank provides long - term funds, with an initial duration of two years and a maximum duration of four years, at a low interest rate of 0. 1 percent to financial institutions that undertake equity investments and asset - based lending. the bank expects that the new measure will further enhance financial institutions ’ efforts to strengthen the foundations for economic growth through the use

ryuzo miyao : economic activity and prices in japan and monetary policy speech by mr ryuzo miyao, member of the policy board of the bank of japan, at a meeting with business leaders, hakodate, 14 september 2011. * * * introduction thank you for giving me this opportunity to exchange views with people representing southern hokkaido, particularly the area around hakodate. and i would like to express my gratitude to everyone for your cooperation in the various business operations of the bank of japan ’ s hakodate branch. japan ’ s economy temporarily suffered a steep decline after the great east japan earthquake occurred on march 11. i am aware that the hakodate area was no exception and was likewise affected by the disaster. nevertheless, the efforts of all parties concerned to work toward economic recovery are paying off in a number of ways. the challenge will continue for the time being, and the bank will do its utmost to support the efforts being made. today, i will present an overview of economic activity and prices in japan, which is in the process of recovery, followed by remarks on monetary policy. in my conclusion, i will touch on the economy of southern hokkaido, particularly the area around hakodate. i. economic activity and prices in japan a. overview japan ’ s economic activity has been picking up steadily while the supply - side constraints caused by the disaster have been mostly resolved and, in particular, production and exports have recently been on an increasing trend. on the demand side, business fixed investment, housing investment, and public investment are expected to increase, on the way to restoring capital stock. private consumption is picking up as household sentiment has improved. japan ’ s economy is expected to return to a moderate recovery path as production activity increases with the resolution of supply - side constraints. while the current solid recovery, mainly in production, is welcome if it continues this autumn onward, there are also some concerns. these include a slowdown in overseas economies, prolonged appreciation of the yen, a rise in electricity costs, and possible protraction of deflationary expectations. in the following, i will give an overview of overseas economies and then japan ’ s economy, which is in the process of recovery, and discuss points to note in the current and future situations. b. overseas economies let me first talk about the u. s. economy. although the economy is recovering, the pace is slowing remarkably. since the lehman shock, the united states has been suffering balancesheet adjustments