. yields on 10 - year jgbs have been lowered to a record low level, and inflation expectations have been rising on the whole from a somewhat longer - term perspective. the decline in real interest rates has been stimulating private demand, and, as i explained earlier, has brought record profits of firms and a full - employment labor market condition. “ qqe with a negative interest rate ” introduced this time is a new policy framework in which a “ negative interest rate ” is added to the existing options of “ quantity ” and “ quality. ” so what does a “ negative interest rate ” mean in practice? if an interest rate is negative, you can receive interest when you borrow money and you have to pay interest when you lend money. in normal financial transactions, such a thing would never happen. when a central bank wants to lower interest rates through its monetary policy, it normally will increase the amount of money provided to the markets. as a result, a greater number of people want to lend or invest extra money. with the supply of money exceeding the demand for money, the interest rate, which is a charge for money lent, will decline. if a central bank continues to provide more money to the markets, to what extent will the interest rate be lowered? the lower limit, bis central bankers ’ speeches or floor, should be at the level where one cannot make more profits even if one can lend more money ; i. e., at zero percent. this is called the “ zero lower bound ” of a nominal interest rate. since central banks in major advanced economies started their unconventional monetary policies after the global financial crisis, they have been providing money to the markets in various ways, and the last constraint to be conquered was the “ zero lower bound ” of a nominal interest rate. however, in some european countries, as various policy options have been tried to address slowdown in economic activity and lower inflation, a negative interest rate was introduced, starting with the central bank in sweden, followed by those in denmark, switzerland, and the european central bank ( ecb ). how have these central banks overcome the “ zero lower bound ”? the starting point of the mechanism is a framework where an interest rate applied to deposits financial institutions hold at the central bank is set in negative territory. as financial institutions incur losses on cash they hold at the central bank, they will try to invest it in the markets even at a negative interest rate if they can reduce losses in comparison with holding it at

background of increases in redevelopment projects and steady demand for office space. these developments may also cause activity of both firms and financial institutions to accelerate. if greater assertiveness should be based on optimistic assumptions regarding future sales and profits, financing costs, foreign exchange rates, and asset prices, the result could well be a misallocation of resources in the long run as agents become over - extended in financial markets or pour funds and other resources into inefficient economic activities. such developments may push up economic growth in the short run, but lead to later downward adjustments and hamper the sustainability of economic growth. iv. sensitivity of prices to changes in the output gap these upside and downside risks to the outlook for economic activity may affect prices should they materialize, but there are also upside and downside risks unique to price developments that could cause prices to deviate from the projection. the sensitivity of prices to changes in the output gap has been declining in recent years. this tendency has been taken into account in our projection for prices mentioned earlier, but the degree of decline is uncertain and the sensitivity of prices may turn out to be lower than assumed in the projection. if factors strongly restraining wage growth remain despite prolonged economic expansion, downward pressure on prices from labor costs would persist. moreover, if the positive influence of the strength in the corporate sector feeds through into the household sector more slowly than expected due to sluggish wage growth, supply and demand conditions for consumer goods and services may not improve as much as the output gap suggests. in such a situation, prices may not be responsive to the improvement in the economic situation. on the other hand, if the economy continues to grow at a pace exceeding its potential through fiscal 2008, it is likely that the utilization of resources such as labor and production capacity will rise further and the output gap will show further tightening of supply and demand conditions. inflation expectations, which have been low and stable, may rise with higher resource utilization, particularly in labor, along with increased prices of crude oil and other international commodities. moreover, although firms are likely to continue to restrain labor costs, they may change their attitude with the aim of hiring or retaining skilled workers. these potential changes would exert upward pressure on prices. v. conduct of monetary policy next, i would like to elaborate on the future conduct of monetary policy, keeping in mind the projection for economic activity and prices and the possibility that they may deviate from the projection. the bank assesses the economic and price situation