domestic factors, namely, the slow improvement in the balance of inventories and shipments for electronic parts, particularly those related to cellular phones. global demand for it - related goods has so far been on an upward trend due partly to the rapid growth in emerging - market economies, such as the brics, and thus inventory adjustments should basically come to an end in or after the middle of 2007. however, if expected global demand is revised significantly downward in response to, for instance, a deceleration in the global economy, there is a possibility that adjustment pressures on inventories may intensify, since the pace of increase in global supply tends to be rapid in the it - related sector. the third risk concerns possible larger swings in financial and economic activity based on optimistic assumptions regarding, for example, financial conditions. japan's current economic circumstances, with the financial positions of both firms and financial institutions improving and real interest rates remaining very low, are such as potentially to encourage assertive financial and economic activity. as for foreign exchange rates, the real effective exchange rate is at the lowest level since the 1985 plaza accord, and the upward trend in land prices in major cities has become increasingly distinct as seen in the fact that commercial land prices in tokyo and osaka in march's land price publication showed a double - digit increase from the previous year. these developments in foreign exchange rates and asset prices may also cause activity of both firms and financial institutions to accelerate. should greater assertiveness be based on optimistic assumptions regarding future profitability, such as too rosy expectations for the growth rate, 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 behavior may push up economic growth and asset prices in the short run, but it can lead to later downward adjustments and hamper the sustainability of economic growth. vi. upside and downside risks to the outlook for prices these upside and downside risks to the outlook for economic activity may affect prices if they should materialize, but there are also upside and downside risks unique to price developments that could cause prices to deviate from the projection. in the april outlook report, two risks are noted : uncertainty concerning the sensitivity of prices to changes in the output gap, and developments in the prices of crude oil and other commodities. the sensitivity of prices to changes in the output gap

frictions " associated with the resumption of economic activity following the pandemic. thereafter, however, with further upward pressure on wages, for which developments had been generally consistent with the 2 percent inflation, they became vigilant against the risk of a wage - price spiral and thus significantly raised their policy interest rates. on the other hand, as i emphasized earlier in this speech, japan had remained in a situation where wages and prices did not move. in order to turn the situation around and achieve sustainable and stable inflation accompanied by wage increases, the bank of japan has patiently continued with monetary easing. that said, if the virtuous cycle between wages and prices intensifies and the likelihood of achieving the price stability target of 2 percent in a sustainable and stable manner rises sufficiently, the bank will likely consider changing its monetary policy. given the uncertainties surrounding economies and financial markets at home and abroad, the timing of a policy change is yet to be decided. the bank will carefully examine economic developments as well as firms'wage - and price - setting behavior, and thereby decide on future monetary policy in an appropriate manner. iii. the future : price stability, firms, and the economy moderate inflation and room for policy responses so far, i have looked back on the past and talked about recent changes in the wage and price situation in japan. now, i will turn the clock forward to the future. by " future, " i'm referring to a state in which the virtuous cycle between wages and prices will have been achieved. i would like to consider what this cycle would mean to firms and japan's economy as a whole. in standard economics, the most obvious benefit of a slightly positive inflation rate is larger room for monetary policy responses to an economic downturn. the primary transmission channel of monetary easing is lowering interest rates to stimulate economic activity. when inflation continues to be 0, nominal interest rates accordingly are low and there is little room for reducing them further. in contrast, in a state in which the inflation rate continues to be positive, nominal interest rates are higher, providing room to substantially lower interest rates if necessary. it is considered that conducting monetary policy effectively reduces the risk of the economy deteriorating significantly or reverting to deflation. this view is widely accepted around the world, and i believe that greater economic stability as a result of securing room for monetary policy responses will have a significant positive effect on firms as they formulate their business plans. effects on resource allocation and