Ensuring a Definitive end to Deflation and Sustaining the Soundness of the Banking Sector

With the end of quantitative easing, the Bank of Japan has introduced a new monetary policy framework that includes an understanding of price stability as 0 to 2% inflation. Given remaining deflationary pressures, the Bank should be cautious in raising short-term interest rates and should increase the lower bound of the inflation zone to reduce the risk of deflation in the future. It is also important to avoid a rapid run-up in long-term interest rates in order to help sustain the economic expansion. Maintaining the soundness of the banking sector is also essential. While the major banks have achieved significant progress, the regional banks have lagged behind. Scaling back the role of public financial institutions would be beneficial for the entire banking sector. In addition, following through on the privatisation of Japan Post is essential to shift the flow of funds from the public to the private sector.