Summary of a Speech Given by Toshiro Muto, Deputy Governor of the Bank of Japan, at the Keizai Club in Tokyo on December 2, 2005

December 29, 2005
Bank of Japan

Contents

1. Introduction
2. I. Why Is Price Stability Necessary?
   1. A. Central Banks and Price Stability
   2. B. Signaling Function of Relative Prices
   3. C. Effects of Price Changes on Income Distribution
   4. D. Problems Encountered When Prices Fall
3. II. Price Stability and the Sound Development of the National Economy
4. III. How Should Price Stability Be Measured?
   1. A. Use of the CPI
   2. B. Price Indicators besides the CPI
5. IV. The Quantitative Easing Policy and the Commitment Based on the CPI
6. V. Desirable Rate of Increase in the CPI
   1. A. Bias of Price Indexes
   2. B. Safety Margin for Deflation
7. VI. Price Stability and Enhanced Transparency in Monetary Policy
8. Closing Remarks

Introduction

Japan's economy continues to recover, having emerged from the temporary pause that began in the summer of 2004. According to the Cabinet Office's reference dates of business cycles, the economy has been in an expansionary phase since the beginning of 2002, for almost four years now. The economy is likely to continue to show moderate and sustainable growth in the future. As for prices, the year-on-year rate of decline in the consumer price index (CPI; excluding fresh food, on a nationwide basis) had widened to as much as around 1 percent in the past, but the October figure released last week was same as the previous year's level. The year-on-year changes in the CPI are likely to be slightly positive toward the end of 2005, and thereafter they are expected to remain positive with a continued economic recovery. In view of these developments in economic activity and prices, I would like to go back to the basics and talk about the following: why central banks pursue price stability; and how they work to achieve price stability.

I. Why Is Price Stability Necessary?

A. Central Banks and Price Stability

Price stability is the most important goal of monetary policy for central banks in advanced economies. In the Maastricht Treaty establishing the European Union, the primary objective of monetary policy of the European Central Bank (ECB) is stated as maintaining "price stability." In the United States, although the three objectives of the Federal Reserve's monetary policy are stipulated as promoting "maximum employment, stable prices, and moderate long-term interest rates" in the Federal Reserve Act, there seems to be a broad consensus that achieving the objective of "stable prices" will help attain the other two objectives. In Japan, it is clear that the Bank of Japan's monetary policy is also aimed at price stability-the Bank of Japan Law, which came into effect on April 1, 1998, states that monetary policy is "aimed at, through the pursuit of price stability, contributing to the sound development of the national economy."

B. Signaling Function of Relative Prices

Why do central banks pursue price stability? I would like to start by defining the term "prices." As consumers, we all purchase various goods and services. Firms also trade various types of goods and services with other firms. A composite of prices of individual goods and services is referred to as "prices" or "general prices," as opposed to individual prices. Stable general prices do not of course mean that all prices of individual goods and services are constant. With the mechanism of a market economy, prices of individual goods and services fluctuate reflecting their supply and demand conditions. As a result, the relative relationship between prices of individual goods and services will also alter and this is usually referred to as a change in "relative prices," as opposed to a change in "general prices."

"General prices" measures how much the price of a basket of goods and services rises. When general prices are flat, a change in "individual prices" is a change in "relative prices." It is this change in relative prices that enables consumers and firms to decide which goods and services to buy as well as judge which one is sold the most and where new business opportunities lie. It is consumers' and firms' decision making based on changes in relative prices that makes possible the efficient allocation of resources. This role performed by relative prices is called their signaling function. Once stability in general prices falls apart, this function of relative prices will be seriously damaged. This is because it becomes difficult to determine what is causing individual prices to move: whether it is fluctuations in "relative prices" reflecting supply and demand conditions of individual goods and services; or whether it is fluctuations in "general prices." Therefore, in order to allocate resources effectively and thus drive the economy to perform in such a way as to fulfill its potential to the maximum, via rational and timely decision making by consumers and firms, it is important for the signaling function of relative prices to operate fully. And stability in general prices, in other words "price stability," is indispensable as a prerequisite for the signaling function of relative prices to operate fully.

C. Effects of Price Changes on Income Distribution

With the continuing high rate of increase in prices after the first oil crisis, employees demanded large pay raises and firms proactively raised prices of goods and services in anticipation of a rise in the cost, both of which caused the increase in prices to accelerate further. As can be seen from this experience, a continued surge in prices not only increases uncertainty about future price developments and makes it difficult for people and firms to make rational decisions but also causes an unexpected income transfer. For example, the amount of credit/debt in an ordinary financial transaction such as lending/borrowing of funds is paid/repaid at the fixed nominal value. Therefore, an increase in prices will cause the lender to incur a loss by reducing the real value of the principal and the interest received, whereas it will benefit the borrower by reducing the real value of the debt. Such losses and gains also arise in other types of contracts to make payment in the fixed nominal value such as a wage contract. This does not occur in a contract which factors in a possible future rise in prices, such as one that allows payment or repayment to be adjusted in accordance with movements of prices. However, it is difficult in fact to make this type of contract for all financial transactions, and thus it is inevitable that the real value of credit/debt will change due to price movements, which will eventually cause a distortion in income distribution. If these effects of price movements become strong, they may impede smooth transactions in financial and other markets and damage people's faith in social justice, which will adversely affect efficiency of resource allocation and economic growth in the medium to long term.

D. Problems Encountered When Prices Fall

Large price movements, whether upward or downward, adversely affect the economy by hindering efficient allocation of resources and distorting income distribution. In addition to this, we have to bear in mind the following three problems that are inherent in the situation when prices fall. The first problem concerns the impact of an increase in the burden of debt. When prices fall and firms' sales and the income of households decrease, borrowers, whether firms or households, will face difficulty in repaying debt and this may cause bankruptcies. Although the price fall benefits lenders, namely financial institutions, by pushing up the real value of the principal and the interest received, it also involves a possible increase in nonperforming loans (NPLs) if borrowers cannot repay their debts. When financial institutions' risk-taking capacity deteriorates due to the accumulation of NPLs, this may adversely affect the overall economy. The second problem is the impact of an increase in the burden of labor costs. When firms' sales decrease due to the price fall, wages may not decrease to the same extent. In this case, labor costs will remain high and corporate profits will come under great downward pressure. The reason for this situation is downward rigidity in nominal wages. It is true that an employer confronts many difficulties when reducing wages. If wages are not reduced and corporate profits come under downward pressure, employment adjustments may become inevitable and spending such as business fixed investment which is necessary for growth may be restrained. And the third problem is the impact of a rise in real interest rates. When prices fall and expectations of a further fall become strong, real interest rates will rise to the same degree. Even when a central bank needs to reduce nominal interest rates to adjust the level of real interest rates in line with developments in economic activity and prices, it will be unable to do so if nominal interest rates are already at zero percent. Consequently, real interest rates will exceed the level that is appropriate considering the state of the economy and this may cause a contraction in economic activity.

In Japan, downward pressure on prices strengthened reflecting weakness in demand, due to the abrupt slowdown in overseas economies from around the end of 2000. Consequently, people had harbored strong concerns about the risk of a deflationary spiral, a situation where a vicious circle of falling prices and declining economic activity starts to work based on the mechanism I have just described. Although the term "deflation" is defined differently and thus the state of economic activity and prices the term indicates also differs depending on who defines it, there is general agreement that Japan's economy did not in fact fall into a deflationary spiral. However, the situation where short-term interest rates were practically at zero percent and the Bank could not reduce them further created a big challenge for the Bank in terms of monetary policy. The challenge was how to prevent a further slowdown in the economy and break out of the continued fall in prices.

II. Price Stability and the Sound Development of the National Economy

I have described the importance of "price stability" in terms of the following: the signaling function of relative prices; the effects of price changes on income distribution; and the problems encountered when prices fall. There may be a considerable time lag before the effects of monetary policy appear in economic activity and prices, and the importance of price stability means that prices should be stable not only now but also sustainably in the longer term. In other words, it is crucial that the credibility of future price stability be maintained without expectations for inflation or deflation.

The bubble era in the second half of the 1980s, which had a great effect on Japan's economy in the 1990s, was a phase of economic expansion that began in 1986 and in 1987-88 the real GDP growth rate recorded high levels of over 5 percent annually. The year-on-year rate of increase in the CPI at the time remained extremely stable at 0-1 percent, as there was strong downward pressure on consumer prices from supply-side factors such as the fall in import prices and the reduction in electricity charges. The rate of increase in the CPI then started to accelerate gradually, but it was not until 1990-91, four years after the phase of economic expansion began, that the rate of increase in the CPI reached a level of 3-4 percent. In retrospect, this was the last phase of the economic expansion which lasted through 1991. It is a widely known fact that during this bubble era prices of assets such as land surged and then plunged, resulting in a long slowdown in the economy thereafter.

This bitter experience of Japan's economy shows that though prices may be stable at a certain point in time, that stability does not always last forever. The experience during the bubble era shows that in a situation where supply-side factors such as a fall in import prices or a reduction in electricity charges are exerting downward pressure on prices, upward pressure from an economic expansion may be underestimated and the rate of increase in prices thereafter may accelerate faster than expected. On the other hand, even when prices are stable, there may be distortion in the economy in the form of, for example, large fluctuations in asset prices, and risks to the sound development of the economy in the future may be accumulating. It is not easy to accurately judge whether prices are stable or not at the very moment. However, a central bank has the responsibility to secure price stability, and it is essential that it always monitor price movements from the following points of view: whether price stability is not only confirmed at present but also likely to be sustainable in the future; and whether movements of prices are consistent with the sound development of the economy.

III. How Should Price Stability Be Measured?

A. Use of the CPI

I have talked about why price stability is so important. Price stability can be rephrased as a situation where various economic entities such as households and firms can make rational decisions on economic activities such as consumption and investment without being confused by changes in general prices. Two difficult questions arise in defining this situation: by what means should prices be measured; and what rate of increase in prices is desirable. I will first start with indexes used as measures of prices.

The most familiar index is the CPI. In fact, it is this index that I have in mind when talking about prices in this speech today. I will digress for a moment from the main topic to touch upon the background of the CPI, which has one of the longest histories of all economic statistics. The first CPI was compiled in 1675 in England. In the 19th century, the method of compiling the CPI was changed to something close to the present method, producing a composite of the price indexes of individual goods and services with weightings assigned according to their relative value in overall household spending. In Japan, following the first nationwide household survey conducted in 1926, a type of "cost of living index" started to be compiled by some institutions. The present CPI in Japan was compiled after World War II based on this. History tells us that the idea that prices should be closely in line with household and consumer perceptions has been widely accepted around the world.

As noted earlier, the Bank's monetary policy is "aimed at, through the pursuit of price stability, contributing to the sound development of the national economy" according to the Bank of Japan Law, and thus the state of price stability should be easily understandable to the public in order to meet the objective. Assuming that "the sound development of the national economy" eventually means improvement in the economic welfare of individual citizens, the benchmark index among various types of price indexes should cover prices of goods and services purchased by consumers. Many central banks, including those that adopt inflation targeting, which I will explain later, conduct monetary policy with the weight on price indexes that are directly linked to consumption expenditure, such as the CPI.

B. Price Indicators besides the CPI

Among price indexes released in Japan, there are the corporate goods price index (CGPI) and the corporate service price index (CSPI). The CGPI covers prices of goods traded between firms, including materials such as iron and steel, machinery, and equipment, and has the characteristic of being relatively sensitive to economic developments; the CSPI is a composite of prices of services transacted between firms, including advertisement, transportation, and communications, and attracts attention from overseas due to its uniqueness.

The GDP deflator is a quarterly price indicator based on value added, unlike the price indexes just described. In the short term, the direction of movement of the GDP deflator sometimes differs from that of the CPI, because the GDP deflator is calculated in a similar way to GDP, which is computed by subtracting imports from the sum of domestic demand and exports. For instance, in the current situation where import prices have been rising due to the surge in crude oil prices, prices as measured by the GDP deflator are pushed downward, whereas prices as represented by the CPI are pushed upward. The year-on-year rate of decline in the GDP deflator has accelerated considerably to 1.1 percent in the July-September quarter of 2005 from 0.4 percent in the October-December quarter of 2004. This acceleration of the decline in the GDP deflator is mainly composed of an increase from 0.5 to 0.9 percentage point in the negative contribution from the rise in the import deflator. In this regard, as the domestic demand deflator and the deflator of final consumption of households, which are components of the GDP deflator, are not directly affected by fluctuations of export or import prices, their movements may be more comprehensible than the GDP deflator. The GDP deflator covers goods and services purchased by not only households but also firms and the government, and thus its weight structure differs greatly from that of goods and services purchased by consumers. As the GDP deflator covers a large number of IT-related goods whose prices have plunged, it is more likely to decrease than the CPI. I will explain later why the rate of decline in prices of IT-related goods is so abrupt.

Though we often refer to the CPI, there are various types such as the overall CPI and the CPI excluding fresh food. At present, the CPI excluding fresh food is commonly used when assessing the price situation. This is because the underlying trend of price movements becomes clear when fresh food, whose prices sometimes fluctuate erratically due to temporary factors such as weather conditions, is excluded. A type of CPI that leaves out temporary fluctuations in, for example, fresh food prices is the "core" CPI. From a long-term perspective, both "the headline inflation rate," the rate of change in the overall CPI, and "the core inflation rate," the rate of change in the core CPI, show similar movements.

Movements of asset prices, although their characteristics differ from those of prices of general goods and services, should be monitored carefully because asset prices factor in important information such as future economic developments and because movements of asset prices may have a large impact on economic activity. It is important to not only discern upward or downward movements of asset prices but also assess what kind of expectations of people are reflected in the movements.

There are then various types of price indicators. The CPI is the basis for an accurate assessment of the price situation, but it is also important to refer to other indicators with an adequate understanding of their individual characteristics. In addition to this, it is necessary to make clear the mechanism of price movements.

IV. The Quantitative Easing Policy and the Commitment Based on the CPI

I explained earlier that in pursuing monetary policy, it is important to have a benchmark index such as the CPI that measures the change in prices of goods and services purchased by consumers. So I will now take a look at how this view applies to current monetary policy.

More than four and a half years have passed since the Bank adopted the policy of quantitative easing in March 2001. This policy, as you are aware, consists of two pillars. First, the Bank provides funds to the money market so that the outstanding balance of current accounts at the Bank substantially exceeds the amount that financial institutions are required to hold at the Bank under the reserve requirement system. And second, the Bank has made a commitment to continue such ample provision of funds until the year-on-year rate of change in the CPI (excluding fresh food, on a nationwide basis) registers zero percent or higher on a sustainable basis.

This type of policy is unprecedented in Japan and abroad. As I mentioned earlier, at the time the quantitative easing policy was adopted in the spring of 2001, the economy was experiencing a downturn; business was in a slump with falling prices and there was increasing concern over the stability of the financial system. Monetary policy was in a quandary with short-term interest rates practically at zero percent, making further cuts impossible. In this environment, where the stability of prices was threatened and customary monetary policy tools had virtually been exhausted, the quantitative easing policy was adopted as a measure to maximize the effect of monetary easing.

The Bank's commitment to continue the quantitative easing policy until the CPI remains stable at or above zero percent has given rise to a misunderstanding in some quarters that the Bank's target is to achieve a zero percent CPI growth rate. The Bank's thinking was that as a result of its making a commitment to continue the current monetary easing policy into the future, interest rates including longer-term rates would stabilize at a low level. To make such a policy as effective as possible, it was considered necessary to link the Bank's policy with a specific economic indicator and to make as clear as possible its commitment in terms of policy duration. As a result, the Bank has adopted "the year-on-year rate of change in the CPI of zero percent or higher" as the criterion providing the least permissible constraint on the flexibility in its monetary policy. The commitment expressed in terms of the CPI is meant as the criterion for the continuation of the unprecedented monetary easing policy with the current account balance at the Bank as the main operating target and not as any particular target level of inflation. The achievement of a change in "the CPI of zero percent or higher" is merely a transit point on the way to a better situation where the economy achieves sustainable growth with stable prices.

The Bank releases the Outlook for Economic Activity and Prices, or the Outlook Report as we call it, twice a year in April and October. The Outlook Report details the outlook for economic activity and prices, and on this basis the Bank's thinking about monetary policy conduct in the near future. As stated in the Outlook Report released at the end of October, the Bank expects the CPI (excluding fresh food, on a nationwide basis) to be slightly positive on a year-on-year basis by the end of 2005 and to remain positive thereafter. Some factors may exert downward pressure on the CPI, such as the slight softening in crude oil prices at present, the planned reduction in electricity charges, and the scheduled base-year revision for calculation of the CPI. At present, however, their impact remains unclear and the Bank thinks it unnecessary to change its view that the year-on-year rate of increase in the CPI will be on an upward trend. Assuming that this proves correct and given the likely economic recovery at a moderate and sustainable pace, the possibility of a departure from the present monetary policy framework is likely to increase over the course of fiscal 2006. Whatever the case, the Bank intends, for the time being, to continue the quantitative easing policy in line with the existing policy framework. On the premise of the outlook for economic activity and prices indicated in the October Outlook Report, if the conditions in the Bank's commitment to continue the policy are met and the policy framework is changed to one that sets short-term interest rates as the main operating target, it is likely that the Bank will have latitude in conducting monetary policy through the entire process.

V. Desirable Rate of Increase in the CPI

A. Bias of Price Indexes

As I have explained repeatedly, it is important to accept as a benchmark the index that covers prices of goods and services purchased by consumers. If so, what rate of increase in prices should be targeted from a medium to long-term perspective? Before going into this question, I would like to explain in some detail two key concepts, "the measurement error in price indexes" and "a safety margin for deflation."

The CPI is a composite of the price indexes of individual goods and services with weightings assigned according to their relative value in overall household spending. In the current environment, where technological innovation is swift and change in the economic structure rapid, it is necessary that each of the subindexes and weightings accurately reflect such changes. Let us, for example, consider a case where a new product takes the place of a previous product. In compiling a price index, the price of the new product will be adopted and that of the previous one dropped. If the two products differ in quality, it is necessary to eliminate the price differential due to the difference in quality. Let me take the example of the price index for personal computers (PCs). I mentioned earlier that prices of PCs and IT-related goods are falling rapidly. This is partly due to the actual fall in prices and partly to the improvement in product quality. Let us assume that a new PC is sold at 200,000 yen, the same price as an old PC, but with double the functions. The price of the new product will then be included in the index as 100,000 yen, half the actual selling price. The practice of adjusting price indexes downward by regarding an improvement in quality as a reduction in the price is used for many other goods and services. However, it is quite difficult to measure the quality of goods and services and too costly to strictly apply adjustment to each and every good and service. Furthermore, the spending behavior of households may change responding to the emergence of a new product, making it necessary to change the pattern of weighting for the subgroup indexes. It is not easy to assess and reflect such changes in a timely manner.

For these reasons, price indexes are subject to measurement error or bias. The size of the bias is changeable as it is affected by the pace of technological innovation, changes in the economic structure, and, additionally, improvements in the method of statistical compilation. At present, the weighting is revised every five years, and at the same time, measures are taken to improve the accuracy of the indexes. In the revision in 2000, PCs were at last included in the CPI after the so-called hedonic method of quality adjustment was applied. Furthermore, the goods and services covered in the CPI are reviewed at the intermediate time of the five-year period, resulting in the inclusion of PC printers and Internet connection charges in 2003. As a result of such efforts by the Statistics Bureau to improve accuracy, the statistical bias has decreased substantially. The extent to which the bias could affect the assessment of the price situation has decreased substantially.

B. Safety Margin for Deflation

Next, I will look at the concept of "a safety margin for deflation." Since deflation, once established, is liable to breed a deflationary spiral, monetary policy needs to be carried out with allowance for some price increase and with the rate of inflation targeted at slightly above zero percent. As I pointed out earlier, the bias of price indexes can no longer have a large effect on the assessment of the price situation, and so, if there is any need for a small but positive inflation rate in conducting monetary policy it will be mainly as a buffer against deflation.

An important point to note here is that the appropriate size of the margin varies according to the constraints on monetary policy at the time. Various factors such as the elasticity of nominal wages, the level of the potential growth rate, the state of the financial system, and the availability of fiscal policy will all come into play. Downward rigidity in nominal wages, with falling prices, tends to generate a deflationary spiral by squeezing corporate profits. However, Japan suffers less from such downward rigidity since bonuses and overtime payments are used to adjust nominal wages. From this viewpoint at least, the argument that there is no need for a large margin gains validity. Nevertheless, if the potential growth rate is low, a large margin will still be required, since monetary policy is less likely to have strong stimulative effects on the economy and prices and these are vulnerable to the shock that will cause prices to fall when it occurs.

Other than the constraints on monetary policy at the time as discussed earlier, there are a number of other important issues to be considered regarding the appropriate size of the margin as well as the rate of increase in prices that is aimed at by monetary policy based on the margin. One is that even when the target rate of increase in prices has been decided, there is scope for further discussion about whether the target should be pursued and met in the immediate future. The ECB defines price stability as a year-on-year increase of below 2 percent over the medium term, while the Bank of England (BOE) aims at an annual increase of 2 percent over the medium to long term. These targets are not far from the actual average rates of inflation over the past ten years, which are 1.9 percent for the euro area and 1.6 percent for the United Kingdom. In Japan, in comparison, changes in consumer prices over the past ten years were very subdued at an annual rate of minus 0.2 percent. Taking a look at a longer time span, since the 1980s the average growth rate of the CPI for Japan was 1.2 percent compared with 3.9 percent for the United States, 2.5 percent for Germany, and 4.7 percent on the basis of the retail price index for the United Kingdom. The figure for Japan still stands at a low 1.6 percent even excluding 2001 and the years after 2001, when prices fell remarkably. Given that the inflation rate in Japan has remained low over a long period in comparison with European countries and the United States, it is very likely that decision making by Japanese economic entities has been based on expectation of a low inflation rate. Under these circumstances, it is necessary to take fully into account the public's reaction to the setting of an inflation target sharply at variance with past experience, and also the possible effect on the economy, which is on its way to achieving sustained growth, of setting a price target to be met in the immediate future.

Although the bias of price indexes no longer distorts the assessment of the price situation to any significant extent, there are still issues that need further consideration concerning the desirable rate of inflation. These include the appropriate extent of inflation as a buffer against deflation, which is dependent on the constraints on monetary policy at the time, the existence of a certain degree of inertia in the direction of price movement, and the fact that Japan's economy is on the way to achieving a sustainable pace of growth.

VI. Price Stability and Enhanced Transparency in Monetary Policy

Lastly, I would like to touch upon inflation targeting, a monetary policy framework in which a central bank targets an explicit rate of increase in prices over the medium term. There was a time when inflation targeting was taken as a rigorous framework that required achievement of a short-term target for the inflation rate. In practice, however, most countries that have adopted this framework have secured flexibility in their management of monetary policy by setting a fairly long time frame and by making clear that the target is for the medium term. For example, the BOE releases the quarterly Inflation Report, setting out its present assessment and projections for inflation and GDP growth for the next three years prepared by the Monetary Policy Committee. The projected inflation is not always required to meet the 2 percent target. The BOE has made clear in its monetary policy framework that even when the price increase is out of line with the target, it will aim to ensure enough time for the inflation rate to move back to the 2 percent target to prevent the economy from becoming unstable. In 2004, the BOE raised the repo rate even though the inflation rate was 1-1.5 percent, substantially below the target. At the time, the BOE stressed that the surge in housing prices could influence consumer spending and the outlook for price increases. It appears to be common knowledge among central banks around the world that monetary policy aiming to bring price stability in the short term results in large fluctuations in economic activity, undermining price stability and sound economic development in the long run.

From this viewpoint, it is more beneficial to regard inflation targeting as one of the measures to ensure the transparency of monetary policy as a whole. Central banks that have adopted inflation targeting, such as the BOE, publish projections for the economy and prices, and it is through this framework to achieve transparency that they make public the rate of inflation their monetary policy is aiming for. Central banks that have not adopted inflation targeting in the strict sense, such as the ECB and the Federal Reserve, are also making various efforts to enhance transparency of monetary policy. It is important that central banks make quite clear their line of thought regarding the conduct of their monetary policy together with their assessment of the price situation and the economic developments behind them. If their intention is clearly explained, market participants will be in a better position to anticipate the policy measures likely to come from central banks given the particular economic environment. As a result, uncertainty about future monetary policy will diminish, opening the way for a smoother performance of the pricing function in financial markets and for more reliable expectations to be formed by economic entities coping with the changing environment of the economy and prices.

It is on the basis of this belief that we at the Bank of Japan try to explain and disseminate our view as far as possible through various means including publication of the Outlook Report, the minutes of the Monetary Policy Meetings, the Monthly Report of Recent Economic and Financial Developments, as well as press conferences, speeches, and the web site. The Bank releases information that is among the most comprehensive of the world's central banks. Regarding the issue of setting an inflation target, the Bank believes it important to first stand on a vantage point to take in the overall monetary environment and then consider what comprehensive policy framework will be most effective in passing on the Bank's intentions. In any case, the Bank's monetary policy aims at sustainable price stability in a long time frame, and to this end we will enhance the degree of policy transparency through an appropriate assessment of the economy and prices followed by its dissemination to the public.

Closing Remarks

In this speech, I have presented my thoughts regarding price stability. After more than ten years of adjustment following the bursting of the economic bubble, Japan's economy has reached a point where a new stage of development has come into view. The most pressing issue at hand is to ensure that Japan's economy progresses onto a path of sustainable growth in an environment of stable prices. This view is broadly shared by the government and the Bank. For our part, the Bank will endeavor, through its monetary policy, to support the development of the economy in order to achieve sustainable growth in an environment of stable prices.