. " 11 this refers to the possibility that if the central bank lowers interest rates too far, the banking sector's capital constraint tightens through the decline in net interest margins, impairing financial institutions'intermediation function, so that the effects of monetary easing on the economy reverses and becomes contractionary. in japan's case, financial institutions have a solid capital base and credit costs have fallen sharply, so that at present their financial intermediation function is not impaired. however, because the impact of the low interest rate environment on financial institutions'soundness is cumulative, the bank will continue to pay attention to this risk as well. trying to determine the optimal shape of the yield curve gives rise to various theoretical and practical issues. this requires using the full range of functions of a central bank, which can broadly monitor not only the economic and price situation, but also the situation in financial institutions and financial markets. taking also various kinds of qualitative information into account, the bank of japan will continue to pursue the shape of the yield curve that is deemed most appropriate in order to maintain the momentum toward the 2 percent price stability target. conclusion as we are almost running out of time, i would like to conclude my speech. since its introduction in 2013, qqe has been called a " new phase of monetary easing " as it is more powerful than any previous policies. if the term " new phase " is used, however, in the sense that the bank embarked on the monetary easing measures imprudently and recklessly without any consideration for theory, i would like to emphasize that that is not the case. markus k. brunnermeier and yann koby, " the reversal interest rate : an effective lower bound on monetary policy, " mimeo ( 2017 ). needless to say, theory and practice are not opposites but complements that enhance each other. the famous expression " nothing is as practical as a good theory " applies to the theory and practice of monetary policy as well. 12 central banks, as policy authorities, need to put monetary policies into practice, but at the same time, these policies always have to be firmly supported by theory, since the effects and outcomes have a large impact on the economy and society. for example, the inflation - overshooting commitment is more powerful than any previous forward guidance and is unprecedented ; yet, at the same time it is firmly grounded in economic theories regarding inflation expectation formation developed in recent years. on

japan law : to contribute " to the sound development of the national economy " " through the pursuit of price stability. " twentieth century swedish economist knut wicksell developed the theory that when the actual market rate of interest exceeds the natural rate of interest ( the rate at which the supply and demand for real capital are in equilibrium ) deflation accelerates, while inflation accelerates when the opposite occurs. two game theorists who were awarded the 2005 nobel prize in economic sciences emphasized the possibility that common knowledge could generate consensus building. this is because common knowledge, by becoming a focal point for people's interest, has the potential to alter their behavior. for more details, see k. iwata and m. fukao ( 1995 ), " keizai seido no kokusaiteki chosei ( international adjustment of economic systems ), " nihon keizai shimbun, inc. ; t. schelling ( 1960 ), " the strategy of conflicts, " harvard university press ; and r. aumann ( 1976 ), " agreeing to disagree, " annals of statistics, 4. the key point here is that by stabilizing inflation expectations in the medium to long run, flexibility in conducting monetary policy in the short run has been increased, and this in turn has made it easier to achieve the objective of sustainable growth under price stability. the " understanding of medium - to long - term price stability " is different from the bank of england's inflation target or the european central bank's quantitative definition of price stability, and is an important first step toward the optimal monetary policy for realizing the principle stipulated in article 2 of the bank of japan law. the policy interest rate a€ “ the basis for producing forecasts in the most recent outlook report, the economic forecasts of policy board members were made taking account of market participants'expectations of future policy rates, which were deduced from market interest rates. 4 under the quantitative easing policy, it was natural to base forecasts on the assumption that the policy interest rate would be constant until at least the year - on - year rate of change in the core cpi registered zero percent or higher on a sustainable basis. under the current framework, however, this assumption would be rather unnatural. prices of assets, such as stocks and land, incorporate expected future movements in interest rates. therefore, the assumption of constant interest rates would generate a forecast based on asset prices that differ from those currently observed. it goes without saying that ignoring