. there may also be a state in which the economy is overheating but the inflation rate is low. the bubble period in the second half of the 1980s is a typical example. the rate of change in the cpi remained below 1 percent for three years starting from 1986, but nobody refers to that period as one in which japan was in a state of deflation ( chart 15 ). in short, what is necessary is to check economic activity, prices, and the financial environment in a balanced manner from the perspective of realizing sustainable growth. reality of inflation expectations the second issue regarding the overcoming of deflation concerns inflation expectations. counter to the view that economic growth is necessary to overcome deflation, we hear the argument that the priority should be to lift inflation expectations in order to improve the economy, and that this is exactly what a central bank should do. the mechanism underlying this argument is that lifting inflation expectations in the private sector will lead to a decline in the real interest rate, which is derived by subtracting the inflation expectation rate from the nominal rate, which will in turn stimulate the economy. nonetheless, in an environment where neither prices nor wages have risen for a number of years, it is not realistic to believe that the general public ’ s inflation expectations will go up all of a sudden, or that we can manage to lift these expectations somehow. we can think of a situation where inflation expectations alone go up – for example, when the economy is hit by oil shocks – but this is not exactly the same as the overcoming of deflation that we seek. according to the opinion survey that i have just mentioned, the fact that most of the respondents viewed the price rise as “ rather unfavorable ” suggests that there is a possibility of wide acceptance in the public realm that it is normal for prices not to rise, or that price rises cannot be tolerated. in fact, looking at detailed consumer price data for the last 15 years or so, in the united states, those items for which prices pick up at the rate of 2. 5 – 3. 0 percent have the largest weight, whereas in japan, those items for which prices pick up at the rate of 0 – 0. 5 percent have the largest weight ( chart 16 ). on the whole, the cpi is slightly less than 0 percent, but this is due in part to the fact that, compared to the united states, there are a few items – such as televisions and personal computers – for which, for bis central

tarisa watanagase : what determines the future of the thai economy? speech by dr tarisa watanagase, governor of the bank of thailand, at the british chamber of commerce luncheon talk, bangkok, 17 september 2008. * * * chairman bain, ladies and gentlemen, i would like to thank chairman bain for inviting me once again to join this gathering of distinguished members and guests of the british chamber of commerce. i look forward to our annual get - together in this warm and friendly atmosphere and especially welcome the opportunity to update and exchange views on the thai economy and its outlook. my talk today will cover three parts. first, i would like to focus on recent developments and prospects of the thai economy in the near term. in the second part, i will share with you my perspectives on the important factors that i believe will determine the future of the thai economy. to close, i will touch on the preparations that we should be making for the future of the thai economy, focusing particularly on the central bank ’ s role in achieving price stability to support long - term growth. ladies and gentlemen, notwithstanding news headlines, most of us are aware that the overall economic atmosphere continues to be business - as - usual. nevertheless, the current tension and ongoing uncertainty on the thai political scene has posed worries for some investors on the prospects of the thai economy for the rest of 2008 and 2009. confidence has already weakened somewhat on both consumer and business ends. evidently, the business sentiment index or bsi, surveyed by the bank of thailand, which has lingered below the 50 benchmark, slid further in the past few months. in addition, tourism has been adversely impacted by travel warnings as the thai political developments made global news. this latest dent on confidence has added to the list of challenges facing the economy since the end of last year, including inflationary pressure from volatile oil and commodity prices, tightening domestic monetary policy, as well as potentially more downside risks to global economic growth in light of recent us economic developments. the headline and core inflation in july rose at decade - high rates of 9. 2 and 3. 7 percent from a year ago, respectively. the rising inflation largely stemmed from soaring oil prices. at their worst, oil prices set new records almost on a daily basis, led by a combination of growing demand for fuel of emerging markets, geopolitics of the oil - exporting countries, and the depreciation of the us dollars. even though, in august,