december 5, 2019 bank of japan economic activity, prices, and monetary policy in japan speech at a meeting with business leaders in oita yutaka harada member of the policy board ( english translation based on the japanese original ) introduction thank you for giving me this opportunity to exchange views with you and for having taken the time to be here despite your busy schedules. it is indeed a great honor to be here today. please allow me to express my gratitude for your great cooperation with the business operations of the bank of japan, particularly of the oita branch. the bank has implemented quantitative and qualitative monetary easing - - or qqe for short - - since april 2013 and introduced various additional measures such as the negative interest rate policy, yield curve control, strengthening the framework for continuous monetary easing, and clarification of forward guidance for policy rates, all with the aim of achieving the inflation target of 2 percent. as a result of these measures, japan's economy has been improving. it is true that the economic expansion has not exactly been robust, reflecting such events as the consumption tax hike in fiscal 2014 from 5 percent to 8 percent, the latest hike in october 2019 from 8 percent to 10 percent, the slowdown in the global economy observed from mid - 2015 through early 2016 and from the second half of 2018 to the present, and the downtrend in the working - age population. nevertheless, the economy has managed to continue its expansion so far. today, i would like to explain monetary policy measures conducted by the bank and what they have achieved. first and foremost, the achievements are obvious. the unemployment rate has declined to its lowest level in nearly three decades and productivity has been increasing. the challenge lies elsewhere ; namely, in the fact that prices have not been rising. it is increasingly being argued that interest rates consequently have remained low, eroding banks'profitability. however, i believe that the deterioration in banks'profitability is caused by the structural problem that banks are accumulating more deposits than they can lend. banks therefore need to deal with this problem. moreover, if interest rates were raised, this would lead to a decrease in the demand for loans, a decline in prices, an appreciation of the yen, an economic downturn, an increase in bankruptcies ( raising banks'credit costs ), and so forth. therefore, raising interest rates would not solve the problem. considering that the current low interest rates are partly attributable to the def

instability. but such accumulation of liquidity on hand has peaked due to the effects of various policy measures aimed at restoring financial stability materializing, and more companies are striving to slash both external borrowings and cash on hand in order to improve balance sheet efficiency bearing in mind their market evaluation such as credit ratings. thus, it might be possible, for the time being, that the growth rate of monetary aggregates will further dip despite improving corporate profits and abating anxiety over the financial system. this paradoxical development regarding monetary aggregates is also one of the salient features of the current recovery phase in the sense that its root cause is associated with problems in japan's financial system. 2. challenges for the japanese economy structural problems and implications of a gradual recovery the three characteristics of the current economic recovery i just mentioned are closely linked to long - standing structural problems in japan's economy - - the disposal of non - performing loans created by the bursting of the bubble - - and the necessary response to economic and financial globalization and technological innovation. thus, with those structural challenges in mind, i would like to think about the future course of japan's economy. since this october, the bank of japan has started to release " outlook and risk assessment of the economy and prices. " this report, to be published twice a year, presents a baseline scenario of japan's economy for the coming one to two years as envisaged by the bank's policy board members, and also gives their assessment of various risk factors. in the first report published in october, the bank judges that " japan's economy will continue to trace a gradual recovery mainly led by private demand, " but " because of various structural adjustment pressures, including balance sheet problems and continuing restructuring at firms and financial institutions, expansion of the economy is unlikely to be vigorous. " two important messages from this are worth mentioning. first, japan's economy at present is in a preparatory stage for sustainable future growth. structural adjustment has a variety of implications. on a macroeconomic level, such adjustment includes further utilization of competitive mechanisms, deregulation and the review of existing regulations, and reform of the industrial structure. as for individual corporate management, on the other hand, adjustment means shareholder - focused corporate governance, employment adjustments, and personnel relocation, all of which calls for a re - examination of the social and economic system. this process is inevitably accompanied by pain. in addition, the persistent burden of non - performing loans on corporations