although crude oil prices have recently stopped rising, they remain at historically high levels. we need to continue closely monitoring their impact on economic activity and prices, including the effects of their past rises. in foreign exchange markets, attention has been paid to the downtrend of the u. s. dollar. concern about the u. s. twin deficits is often cited as a reason for the weaker dollar. the u. s. economy, however, continues to maintain high growth, and with inflation rates remaining low due to increased productivity, it is still providing golden opportunities for investors in increasingly global financial markets. confidence also remains high that fiscal and monetary policy will be directed toward securing sustainable economic growth. given this situation, the united states is not experiencing difficulty in financing its deficit. having said this, we need to carefully monitor foreign exchange rates and their impact on the economy since speculation may cause short - term volatility in foreign exchange and other financial markets. let me briefly comment on the recently released gdp statistics, which some see as confirming the weak economic recovery. the recent introduction of the chain index method for calculating the gdp deflator resulted in a downward adjustment of the real gdp growth rate from the figure calculated using the previous method. the problem with the previous method was that the base year was fixed, and this caused an increasing downward bias in the gdp deflator the further it moved away from the base year. the chain index method, which revises the weighting of various goods and services every year, has thus been introduced to reflect changes in the economic structure more appropriately. gdp statistics, which describe overall economic conditions, have their own properties and limitations like any other statistics. since our evaluation of the economy has incorporated these properties and limitations, the introduction of the new calculation method is not thought to affect our overall assessment of the economy. progress in structural adjustments supporting economic recovery the difference between this recovery and the two previous recovery phases since the bursting of the bubble is that, in both the corporate sector and the financial system, there has been progress in dealing with the structural factors affecting the japanese economy, and as a result, the private sector has become more proactive. companies have made steady progress in addressing the structural problems of their excess holdings of debt, labor, and capital, and at the same time have made efforts to formulate business models generating high value added. corporate profitability has therefore improved considerably. ratios of current profits to sales in fiscal 2004, for both manufacturing and non - manufacturing

mishkin also in relation to the ecb ’ s monetary policy framework. the first three principles that ( i ) inflation is fundamentally a monetary phenomenon, ( ii ) that price stability has important welfare benefits, including its contribution to sustained growth and reduced output volatility, and ( iii ) that there is no longterm trade - off between unemployment and inflation are widely accepted and clearly underpin and are reflected in the ecb ’ s mandate and primary policy objective. the first and third principles are also incorporated in the ecb ’ s analytical framework and they are overwhelmingly supported by the empirical evidence. these first three principles and the eighth principle about the importance of central bank commitment to a nominal anchor imply that price stability ( or an inflation target ) should be the primary, overriding objective of monetary policy. this can be considered as a separate or derived principle, which is integrated into the mandate of the ecb. the fourth principle concerning the crucial role of expectations in the determination of inflation dynamics and in the transmission of monetary policy is also universally recognised and constitutes one of the key advances in the analytical foundations of monetary policy. the role of inflation expectations as a main channel of the monetary policy transmission mechanism motivates the focus placed by central banks on the analysis and use of several indicators of inflation expectations and explains the importance attached in the anchoring of expectations to price stability also in the ecb ’ s communication policy. this is an area, however, where more progress is necessary, as i will discuss later on, in order to better measure, model and favourably influence the inflation expectations of the public at large. two other principles, ( i ) the importance of central bank independence in order to improve the effectiveness and efficiency of monetary policy and ( ii ) the need to ensure consistent implementation of monetary policy over time, are reflected in the institutional set - up of most central banks, including the ecb. political authorities, however, occasionally seem to ignore or forget the significance of central bank independence, which they themselves enshrined in the eu treaty, precisely on the basis of past experience and the worldwide evidence which clearly demonstrate its contribution to effective decision - making that preserves price stability and helps minimise output volatility. central bank independence is also crucial for ensuring that another principle – the commitment to a strong nominal anchor – is credible and thus effective in ensuring price stability. for the ecb, the unambiguous commitment to price stability is reflected in the quantification of its policy