hiroshi nakaso : japan ’ s economy and monetary policy speech by mr hiroshi nakaso, deputy governor of the bank of japan, at a meeting with business leaders, ehime, 9 march 2015. * * * accompanying charts can be found at the end of the speech. introduction it is my pleasure to have the opportunity today to exchange views with administrative, financial, and business leaders in ehime prefecture. i would like to take this opportunity to express my sincerest gratitude for your cooperation with the activities of the bank of japan ’ s matsuyama branch. the bank thinks that it is of overriding importance for japan ’ s economy to overcome protracted deflation and attain sustainable growth. to achieve this, the bank introduced quantitative and qualitative monetary easing ( qqe ) in april 2013 and expanded it in october 2014. under this policy, japan ’ s economy has been making steady progress toward achieving the price stability target of 2 percent. nevertheless, some have expressed doubts, arguing that it will be difficult to achieve 2 percent inflation in about 2 years, or that if inflation is generated artificially, this would undermine people ’ s standard of living. today, i would like to talk about recent economic developments in japan and then explain the bank ’ s monetary policy conduct and price developments. i hope this will also help to dispel the doubts i just mentioned. i. current situation of and outlook for economic activity at home and abroad to start with, let me talk about the current situation of japan ’ s economy. the decline in demand following the consumption tax hike has had somewhat prolonged effects on the economy, especially on sales of durable consumer goods such as automobiles and household electrical appliances reflecting the large extent of front - loading of purchases. however, japan ’ s economy has continued its recent moderate recovery trend, with a virtuous cycle from income to spending operating steadily in both the household and corporate sectors. i will discuss the current situation of and outlook for overseas economies and business operations, the household sector, and the corporate sector in order. overseas economies and japan ’ s exports first, overseas economies, led by advanced economies, have been recovering on the whole, although performance in some parts remains lackluster. with the decline in crude oil prices likely to exert a positive effect, overseas economies, led mainly by advanced economies, are expected to continue recovering moderately, and positive effects of the recovery are expected to gradually feed through to emerging economies and commodity - exporting economies. in

number of items that registered a price increase to that of items that registered a price decrease. the bank even analyzes developments in each cpi item component as necessary. in presenting the projections for prices, the bank uses the cpi ( excluding fresh food ) as an indicator that tends to represent the underlying trend in inflation adequately under normal circumstances. however, this index includes energy prices and thus will temporarily decline when, as currently the case, crude oil prices have been declining substantially, so that it becomes difficult to assess the underlying trend in inflation using only this index. therefore, in the january interim assessment, in addition to the forecasts for the cpi ( excluding fresh food ), the bank showed the estimated contribution of energy items to the index. future price developments and monetary policy based on what i have explained so far, let me talk about the outlook for prices. the year - onyear rate of increase in the cpi ( excluding fresh food ), after 0. 9 percent in fiscal 2014, in the january interim assessment of the outlook report is projected to be only 1. 0 percent in fiscal bis central bankers ’ speeches 2015 due to the effects of the substantial decline in crude oil prices to date ( chart 10 ). nevertheless, we are of the view that the underlying trend in inflation will rise steadily. specifically, the output gap, which determines the underlying trend in inflation, is likely to continue improving as japan ’ s economy continues to grow above potential as a trend. in addition, inflation expectations will also likely rise steadily. in fact, at the annual spring wage negotiations between management and labor this year, labor unions have requested larger wage increases than those of last year and firms ’ management has generally taken a positive stance toward such an increase. since work patterns have become more diverse, an increase in wages can take various forms such as an increase in base pay, bonuses, or various allowances, but whatever form it takes, the transformation of people ’ s deflationary mindset is likely to make further progress if total wages actually rise. in addition, on a yearon - year basis, the effect of the decline in crude oil prices falls away after a year. therefore, while the year - on - year rate of change in the cpi ( excluding fresh food ) is likely to be small in the first half of fiscal 2015 due to effects of the decline in crude oil prices to date, assuming that crude oil prices will rise moderately from their current level, it is expected to accelerate in the second half of fiscal