glenn stevens : medium - term economic prospects for australia address by mr glenn stevens, deputy governor of the reserve bank of australia, to 40th australiajapan joint business conference, sydney, 14 october 2002. * * * it was very kind of the australia japan business co - operation committee to invite me to speak to you today and it is a pleasure to accept the invitation. the fact that this is the 40th conference of its type attests to the longstanding relationship between the business communities in our two countries. this stretches back half a century to a time when far - sighted individuals saw that australia's enormous resource wealth and japan's growing industrial size were complementary. that marked the beginning of a long process, for australia, of our trade patterns altering from the predominance of the united kingdom and continental europe towards the fast - growing economies of the asia - pacific region, a process which has continued to the present. the relationship has matured in many respects. despite the setbacks of the asian financial crisis of five years ago, australia's trade is still dominated by flows to and from the east asian region. even with the almost intractable economic difficulties faced by japan over the past decade, it is still the largest single trading partner nation in merchandise for australia. while resource shipments are still very large, and farm produce retains an important place in australia's trade, flows of manufactures and services are more prominent these days. capital flows are also increasingly important, and those coming to australia from japan are large at present, as japanese retail investors seek higher yields by investing abroad. both countries have been, and remain, active at the official level in seeking to improve the economic and financial structures underpinning the region. so there is good reason to gather and discuss issues of mutual interest. the organisers of today's proceedings have invited me to think about the australian economy over the next three years or so. i don't intend to adopt a precise three - year horizon, but i am going to interpret the brief as a general invitation to talk about the medium term, rather than the very short term. this will hardly be a comprehensive and detailed forecast, but more an impressionistic sketch of a few themes. the current international scene inevitably, some of these themes have to be international ones, and given the current state of affairs i need to touch briefly on the conjuncture. at the time of our august statement on monetary policy, a gradual but modest pick - up in global

to increase thereafter, as the 2 / 4 japanese economy is likely to continue growing at above its potential rate, causing the gap between supply and demand to shrink further, and also the recent uptrend in wages is likely to exert upward pressures on prices. the bank's conduct of monetary policy based on the above assessment of economic activity and prices, i will explain the bank's thinking on the conduct of monetary policy. the bank has been implementing the quantitative easing policy to achieve sustainable economic growth under price stability. the framework consists of two key elements. first, the bank provides ample liquidity to the money market far in excess of required reserves. second, the bank is firmly committed to maintaining such ample provision of liquidity until the year - on - year rate of change in the core cpi registers zero percent or higher on a sustainable basis. this framework underpins expectations, based on inflation projections among market participants, that the quantitative easing policy will continue for some time. as a result, market interest rates remain steady at low levels, including those with relatively longer maturities. with regard to the first element, the bank's provision of ample liquidity greatly contributed to maintaining financial system stability and an accommodative corporate financing environment by responding to precautionary demand for liquidity of financial institutions when there were strong concerns about financial system stability. since then, concerns about financial system stability have largely subsided, as evidenced by the smooth implementation of the full removal of blanket deposit insurance in april 2005. as a result, the quantitative easing policy is effectively becoming closer to a maintenance of zero interest rates. in the current situation, the quantitative easing policy contributes to maintaining an accommodative financial environment by stabilizing market interest rates, thus allowing firms to continue to enjoy low funding costs. as for the conduct of monetary policy, the bank will continue to maintain the quantitative easing policy based on the commitment mentioned earlier since the core cpi is still registering a slight year - on - year decline. the bank formulated this commitment when it introduced the quantitative easing policy in march 2001. at the time, following the bursting of the global it bubble, and the resultant sharp fall in aggregate demand, the economy had fallen into recession and prices were declining. the bank decided to employ an unprecedented measure, linking its commitment in terms of policy duration to the observed cpi, to create further monetary easing effects even under zero interest rate conditions. thereafter in october 2003, the bank clarified its commitment to maintaining the quantitative