the us and also when concern about financial system stability heightened from the end of december last year to the end of march this year. since april this year, the economy has started to show positive signs, and liquidity demand in financial markets has gradually stabilized reflecting the abatement of concern about financial system stability. however, as mentioned earlier, the economic recovery is still in a nascent stage and there are also risks for the economic outlook. the bank should therefore continue strong monetary easing to support recent positive movements. as i mentioned earlier, it is extremely difficult to revitalize japan ’ s economy solely by monetary easing when it faces various structural problems. however, the bank ’ s strong monetary easing will continue to firmly underpin the recovery of the economy by stabilizing financial markets. furthermore, it is expected that the effects of the bank ’ s monetary easing measures will be fully felt when forwardlooking economic activity increases as structural reform progresses and efforts to strengthen the financial system bear fruit. iii. strengthening the financial intermediary function as japan ’ s economy is finally showing signs of recovery, whether the financial system can fulfill a growing need for funds in the course of the recovery is the key to ensuring a return to sustainable growth led by private demand. at the same time, it has been tackling the non - performing loan, or npl, problem, which is a negative legacy from the past. financial institutions should strive to promote the disposal of npls while reviewing unprofitable loans, a process which could be painful for many firms. however, there is basically no contradiction between fostering soundness of banking business and fortifying the financial intermediary function. i would like to outline three key tasks that need to be addressed in strengthening the financial intermediary function while improving financial system soundness. a. securing lending margins first, it is important for financial institutions to set lending rates in line with credit risk ( risk - based pricing ). at present, a large proportion of the loan assets of financial institutions are, in fact, unprofitable if default risk is taken into account. this is evidenced by the fact that npl disposals by financial institutions have exceeded their ‘ core ’ profits, in other words interest rate margins obtained from lending, in each of the eight years since 1994. the risk - based pricing of lending rates is to secure the lending margins of financial institutions. it is essential that financial institutions fortify their financial strength by striving to dispose

( 3 ) those in medium - to long - term inflation expectations. 1. developments in consumer prices to begin with, let me talk about developments in consumer prices. the year - on - year rate of change in the cpi for all items less fresh food has been about 0 percent recently. however, in the case where crude oil prices decline by about 50 percent in a short period, as they did for some months starting from last summer, the cpi excluding fresh food and energy ( hereafter, the cpi excluding energy ) becomes a more important indicator in assessing the underlying trend in inflation. to verify this point, i would like to break down the year - on - year rate of change in the cpi for all items less fresh food ( hereafter, the cpi including energy ) into two components : the contribution of energy items and the contribution of the cpi excluding energy ( chart 7 ). bis central bankers ’ speeches until the introduction of qqe, the year - on - year rate of change in the cpi including energy had mostly been hovering within slightly negative territory, with a positive contribution of energy items being offset by a negative contribution of the cpi excluding energy. this means that, if price developments had been assessed on the basis of the cpi excluding energy instead of the cpi including energy, they should have been judged as being deeper in deflation. by contrast, after the introduction of qqe, the negative contribution of the cpi excluding energy started to lessen. its contribution turned positive in early autumn 2013 and moved further into positive territory until around april 2014 when the consumption tax rate was raised. during the same period, with the positive contribution of energy items, the year - onyear rate of change in the cpi including energy – excluding the direct effects of the consumption tax hike – also continued to rise and reached 1. 5 percent in april 2014. in other words, annual cpi inflation had continued to rise steadily toward 2 percent from the introduction of qqe until around april 2014 when the consumption tax rate was raised. thereafter, until early 2015, partly due to the effects of the consumption tax hike, the positive contribution of the cpi excluding energy – and also excluding the direct effects of the consumption tax hike – shrank. moreover, since around the summer of 2014, a substantial decline in crude oil prices has become a factor that decreases the year - on - year rate of increase in the cpi. in light of these developments, the bank decided at the end of october 2014 to expand q