necessary policy actions. after short - term interest rates in major economies including japan declined to virtually zero, the scope of the operational tools of monetary policy has expanded from a traditional way of “ raising and cutting interest rates ” to the area of unconventional policy tools such as the purchase of various financial assets. therefore, please forgive me if some parts of my speech inevitably become somewhat technical. i. “ the price stability goal in the medium to long term ” numerical expression of price stability i will begin with “ the price stability goal in the medium to long term. ” this is the inflation rate that the bank judges to be consistent with price stability sustainable in the medium to long term. the bank judges it to be “ in a positive range of 2 percent or lower in terms of the year - on - year rate of change in the cpi ” and, more specifically, has set “ a goal at 1 percent for the time being. ” bis central bankers ’ speeches the bank conducts monetary policy based on the principle of currency and monetary control as clearly stipulated in the bank of japan act ; namely, that the policy shall be aimed at “ achieving price stability, thereby contributing to the sound development of the national economy. ” in doing so, the price stability must be of the sort that is sustainable in the medium to long term. then, what kind of state does this “ price stability ” refer to? conceptually, we can express it as “ a state where economic agents such as households and firms may make decisions regarding economic activities without being concerned about the fluctuations in the general price level. ” in the conduct of monetary policy, price stability needs to be expressed in numerical terms. individual central banks express price stability in numerical terms within the context of each country ’ s situation and name the expression differently. examples of such numerical expressions include the bank of england ’ s “ target, ” “ definition of price stability ” adopted by the european central bank and the swiss national bank, and the u. s. federal reserve ’ s previously adopted “ longer - run projection, ” as well as the “ longer - run goal ” it introduced recently. “ understanding, ” “ goal, ” and “ target ” six years ago, in march 2006, the bank introduced its own framework under which it expressed price stability in numerical terms, named “ an understanding of medium - to long - term price stability. ” after undergoing a series of changes in expression, the bank ’ s recent “ understanding ” was “ a positive range of 2 percent or

such an argument needs to be properly fact - checked ( chart 5 ). let ’ s take the typical example of money stocks, which are cash and deposits held by firms and households. the marshallian k is the ratio of money stocks to nominal gdp that is used to measure the size of money stocks in relation to economic activity. in japan, the ratio had been about 1. 1 until the mid - 1990s, which means that money stocks and nominal gdp were almost same size. since then, the ratio has continued to rise against the background of prolonged monetary easing and is now about 1. 7 – in other words, the amount of money stocks is about 805 trillion yen while nominal gdp is about 467 trillion yen. this ratio of 1. 7 is the highest among major economies. conducting a similar exercise with the monetary base and the size of the central bank balance sheets results in the same conclusion that the ratio of japan is the highest among major economies. as i have stated, the bank has managed to maintain accommodative financial conditions despite the rising tensions in global financial markets against the background of the european debt problem. viewed in this way, it appears that the problem of japan ’ s economy is not a lack of money but rather a lack of business chances and growth opportunities to make the best use of money. ultimately, deflation is a decline in the general price level, and therefore must be caused by a deterioration in the supply and demand balance of the macro economy – i. e., a shortage of demand against supply. an output gap – an indicator for supply and demand balance estimated on the basis of certain assumptions – has continued to indicate a shortage of demand since 2000 with the exception of a very short time period. looking back at real gdp growth rates in japan from a relatively long viewpoint, the rates have gradually declined from 4. 4 percent in the 1980s, to 1. 5 percent in the 1990s, and to 0. 6 percent in the 2000s ( chart 6 ). there are several reasons for this decline. first, the negative legacy of the bubble bursting had continued to weigh on the economy since the beginning of the 1990s. to be more specific, while firms and financial institutions were tackling the challenge of balance - sheet repair, japan ’ s economy as a whole failed to adjust to a changing environment, such as increasing globalization and a rapid aging of the population. in particular, the effects of the population aging at a much greater speed in japan than in the rest