to changes in demand. efficient resource allocation was not achieved. it is no wonder then that centrally planned economies collapsed around the world by the 1990's. institutions and their incentive mechanisms play a key role in determining economic performance. failure of incentive mechanisms in a market economy the market price is not the only source of incentives in a market economy. some incentive mechanisms, however, fail to induce efficient behavior. for example, incentives influenced the course taken by japanese banks in dealing with the problem of non - performing loans. until the late 1990's, the japanese regulatory and institutional environment did not motivate banks to take prompt actions that would have prevented their balance sheets from deteriorating further. for example, the latitude banks had in the disclosure of non - performing assets enabled banks to withhold information, perfectly legally, on the full extent of their problems. as a result, market discipline could only play a limited role. at the same time, measures available to regulators and supervisors were rather limited. a bigger stick would surely have helped the authorities to persuade banks to take more decisive actions. finally, in the late 1990's and early 2000's, various policy measures were introduced to better align the incentives of banks. they included the introduction of more precise standards for disclosure and prompt corrective actions by the fsa. the functions of the deposit insurance corporation were strengthened as well. the bank of japan encouraged japanese banks to make an appropriate evaluation of their loans by using discounted cash flow method. these measures finally generated proper incentives for japanese banks to put their houses in order. the recent removal of the blanket guarantee of deposits was a symbolic event in this regard. this example suggests that incentive mechanisms could affect the stability of the financial system. the central bank has a vested interest in the design of such incentive mechanisms. incentive mechanisms for a central bank central banks are not free from incentives created by their institutional settings. for example, in the past, governments in the industrialized economies tended to regard that there was a trade - off between high growth and moderate inflation. this created an environment where central banks would acquiesce inflation resulting from above - potential economic growth. the stagflation in the 1970's could be regarded as a consequence of such misguided institutional incentives. fortunately, we have learned from history. from the late 1980's onwards, there seems to be a growing recognition among governments in the industrialized economies that central banks should aim for price stability, which is a precondition for

will fail to significantly improve its labor productivity due to firms ’ passive stance toward fixed investment, thereby making wage increases unsustainable. as for firms ’ stance toward fixed investment, i would like to add that, although investment continues to be made mainly for replacement and maintenance, it is encouraging that their positive actions are being observed in investment to promote rationalization and labor saving, and in that for product upgrades ( chart 11 ). reflecting recent developments in the foreign exchange market, some firms have begun to review the balance between domestic and overseas production. firms ’ decision on production network strategies is not directly affected by short - term factors such as exchange rate movements, because it is based on a longer - term outlook. it is therefore unlikely that they will start shifting production back to bis central bankers ’ speeches japan immediately in response to the recent market developments. however, their decision may change as firms review the medium - to long - term outlook for the exchange rate, and as a result gain confidence that the yen will not appreciate to the extremely high levels seen in the past. ii. monetary policy for the immediate future a. expansion of quantitative and qualitative monetary easing ( qqe ) at the monetary policy meeting held on october 31, 2014, the policy board decided to expand qqe. as i cast a dissenting vote on this decision, i may be in a delicate position to talk about this policy change. i will therefore provide my views to the best possible extent. first of all, i judged that additional monetary easing was not necessary. this is because, in my view, the virtuous cycle of economic activity and prices is basically being maintained, as i have mentioned. for the time being, the year - on - year rate of increase in the core cpi will be in the range of around 1 percent to slightly below 1 percent, as the effects of a decline in energy prices outweigh the effects of the yen ’ s depreciation. this may suggest that the achievement of the 2 percent price stability target now seems to be somewhat far away. in my view, the bank ’ s decision of additional monetary easing aims at offering a kind of insurance against such downside risks to prices. to be sure, i consider that the underlying trend in prices is more important than monthly fluctuations in price indicators. in this regard, the declines in international commodity prices, such as the recent decline in crude oil prices, will surely exert downward pressure on the core cpi. on the other