of japan, 1 which globally ranked first until 1992, gradually declined because japanese firms trailed behind in restructuring their business portfolios ( chart 3 ). corporate earnings deteriorated, due in part to the collapse of the bubble economy in early 1992 and the financial system crisis. these developments prompted large firms with high productivity to actively invest overseas and relocate their supply chains to china, southeast asia, and other countries and regions, in pursuit of lower costs and higher growth. on the other hand, in japan, large firms reformed their cost structures, by, for example, closing factories, downsizing, restraining investment, encouraging voluntary retirement, and cutting wages. the trends of cutting costs and restraining investment also spilled over to small firms, which faced dwindling orders as well as intensified price competition. as a result, despite an aging and declining population, the issue of labor shortages did not surface ( chart 4 ). employment was prioritized over wages, and firms made little headway with restructuring their business portfolios to strengthen their ability to create added value. under these circumstances, intensified price competition led to lower growth and profitability for domestic industries, and japan's economy fell into deflation in which it was difficult for wages and prices to rise. the ensuing three decades of an economy oriented toward contraction, characterized by a deflationary mindset and cost - cutting, gave rise to a persistent vicious cycle in which the output gap fell into negative territory. firms in japan grew more cautious in their wage - and price - setting behavior, falling behind in terms of business fixed investment and digitalization. thriftiness among households also seemed to take root. looking at trends in the trade balance, japan's terms of trade have deteriorated, due to lower exports of industrial products and higher imports of goods such as mineral fuels, and this has propelled a decline in firms'profitability ( chart 5 ). moreover, japan's wage levels, even those of large firms, is low compared to the group of seven ( g7 ) countries and major asian economies ( chart 6 ), and private consumption is lacking momentum. however, bold monetary easing and flexible fiscal policies have helped to bring about a situation where the economy is no longer in deflation. the imd world competitiveness booklet published by the international institute for management development ( imd ) shows that japan ranked first in international competitiveness until 1992, but is now ranked quite low, in 38th place. furthermore, the rise in global inflation and the yen's

haruhiko kuroda : japan ’ s economy and monetary policy speech by mr haruhiko kuroda, governor of the bank of japan, at a meeting with business leaders, nagoya, 25 november 2014. * * * introduction it is my great pleasure to have the opportunity today to exchange views with administrative, financial, and business leaders in the chubu region. i would like to take this opportunity to express my sincerest gratitude for your cooperation with the bank of japan ’ s nagoya branch. in april last year, the bank introduced the quantitative and qualitative monetary easing ( qqe ) to achieve the price stability target of 2 percent at the earliest possible time, with a time horizon of about 2 years. the introduction of the qqe aimed at changing the deflationary mindset, which has taken root amid prolonged deflation, and at converting the economy from being in a deflationary shrinking equilibrium to being in an expanding equilibrium through creating a situation where people base their behavior on the assumption that prices rise moderately. during the year and a half since then, conversion of the deflationary mindset has been progressing steadily. the economy has continued to see moderate recovery, and the year - on - year rate of change in the consumer price index ( cpi ) has moved from negative territory to around 1¼ percent. nevertheless, the rate of increase in the cpi has slowed somewhat of late due, for example, to somewhat weak developments in demand following the consumption tax hike and a substantial decline in crude oil prices, and there has been a risk that conversion of the deflationary mindset might be delayed. the bank ’ s expansion of the qqe at the end of last month aims to preempt the manifestation of this risk and to maintain the improving momentum of expectation formation. today, i would first like to review japan ’ s economic and price developments, and then touch on the thrust of the expansion of the qqe. i. developments in economic activity and prices to begin with, let me talk about developments in japan ’ s economic activity and prices. real economy some weakness in japan ’ s economy has remained, particularly on the production side, against the background of inventory adjustments brought by the effects of a decline in demand following the front - loaded increase prior to the consumption tax hike. the real gdp growth rate declined substantially in the april - june quarter and was minus 1. 6 percent in the july - september quarter on an annualized quarter - on -