). this means that the neutral policy rate, that is the level of the policy rate that neither stimulates nor slows down the economy, had fallen. 19 and this became significant now that the enormous economic downturn created a very substantial need for monetary policy stimulation. it became clear that the lower bound for the policy rate was not merely an interesting fact, but a real limit for monetary policy. in many countries, the policy rate was cut to close to zero ( see figure 5 ). estimates indicate, for instance, that the policy rate in the united states would actually need to have been cut to −4 per cent. 20 this gave rise to a discussion on which new monetary policy tools could be used to attain further stimulation. quantitative easing in the form of purchases of government bonds or other securities and forward guidance became two of the most known tools that were used to enable the central banks to meet their price stability objectives. a further lesson from the financial crisis was that the turbulence on the financial markets could entail the policy rate quite simply not having an impact on the interest rates charged to companies and households. in this context various forms of credit easing became appropriate. the riksbank cut its policy rate by 4. 5 percentage points to 0. 25 per cent between october 2008 and july 2009, at the same time as the forecast indicated that it would not be raised again until the middle of 2010. other measures taken by the riksbank included the fixed - rate loans, loans to the banks with longer maturities, which contributed both to raising the credibility of the interest rate forecast and to improving the impact of the policy rate on the interest rates charged to households and companies. however, unlike other central banks, the riksbank did not make any asset purchases. 21 as you know, the global financial crisis was followed by a debt crisis in europe. for the riksbank, the need for further general stimulation became relevant during the aftermath of the european debt crisis. during 2014 - 2015, inflation was so low that there was a risk that confidence in the inflation target would be undermined ( see figure 3 ). as i mentioned earlier, it is just as important to prevent inflation from falling too low as to prevent it rising too high if one is to retain price stability. when the ecb made its monetary policy even more expansionary in spring 2015, we extended our monetary policy measures by both cutting the repo rate below the previously assumed lower bound of zero, and purchasing government bonds (

ryuzo miyao : japan ’ s economy and monetary policy speech by mr ryuzo miyao, member of the policy board of the bank of japan, at the 2014 autumn annual meeting of the japan society of monetary economics, tokyo, 18 october 2014. * * * accompanying charts can be found at the end of the speech. introduction it is a great honor to be invited to the 2014 autumn annual meeting of the japan society of monetary economics. both the bank of japan and i have been deeply indebted to the society over the years. in the four and a half years since i took office as a policy board member of the bank – how time flies – the global economy has faced strong headwinds caused mainly by the sovereign debt crisis in europe, the fiscal cliff in the united states, and the great east japan earthquake in japan. central banks in advanced countries have adopted their own unconventional monetary policy, stepping further into uncharted territory. the bank of japan, for its part, introduced quantitative and qualitative monetary easing ( qqe ) in april 2013 and has been conducting further aggressive monetary easing. i am aware that there are various views and opinions in academia about the initiatives by the bank and other major central banks. discussions and research have been actively underway. as a central banker who came from academia, i too have been asking myself the following questions. first, economic recovery has been driven by consumption in japan for about the past two years. why consumption, and why now? what is the driving force behind this? can such recovery be sustained? second, contrary to what many people had expected, the rate of increase in the consumer price index ( cpi ) has been rising steadily since 2013. what is the driving force for that? firms increasingly have been passing on costs to sales prices, but why is this happening now? third, views are divided among those in academia with regard to the effects of the unconventional monetary policy, such as the purchases of japanese government bonds ( jgbs ). how should we respond to skeptical views about the policy effects, stating, for example, that ( 1 ) the policy by itself does not produce any effects in ordinary times, but it appears effective only because some market participants believe so ; and ( 2 ) such policy will only cause a temporary asset price bubble, and thus make the economy unstable? in finding my own answers to these questions, i realized that such answers critically depend on an assessment of the potential strength of the supply side