economy is faced with an imminent challenge of becoming serious about strengthening medium - to long - term growth potential while promoting fiscal structural reform. strengthen growth potential by a two - pronged strategy of external and domestic demand strengthening medium - to long - term growth potential is not an easy task. nevertheless, it should be achieved by all means while keeping in mind the following four. first, incorporate global demand as much as possible. to that end, it is vital for firms to, through exports, and further more through aggressive overseas expansion, accurately gauge local needs and tap the market. as for firms ’ overseas expansion, unless the pace of expansion is too fast, it would not necessarily be a factor in causing the hollowing out of domestic employment. if a cycle will be established that firms increase profits overseas, pass them on domestically, and invest in research and development of new products and services, more high value - added jobs will be generated in japan, thereby could contribute to strengthening foundations for economic growth. efforts to increase foreigners who stay in japan for the purpose of tourism and business and prepare an environment that attracts investment from overseas will also be an effective strategy in incorporating global demand and increasing domestic employment together. second, tap potential domestic demand. an aging society will have its own new potential needs, and there will be plenty of room for coping thoroughly with the diversified concept of values and life styles. there is much potential in the domestic market, let alone healthcare, including services for firms and households based on information technology. while i have earlier referred to concern over electric supply and demand, on the other hand, efforts to overcome such challenge, including saving energy and developing new alternative energies, could lead to a generation of new added - value. third, enhance the flexibility of the labor market. to lessen the likelihood of a labor shortage associated with aging being a binding factor for economic growth, it is necessary to promote employment of the elderly and women. preparing an environment that facilitates job transfers and the start of new businesses will lead to the effective use of human resources or the activation of metabolism in the entire economy. fostering global human resources will also be imperative. fourth, strengthen the function of financial and capital markets. for the development of new markets, it is critical to take risks. to support that, accepting risks by investors and financial institutions, namely, a provision of risk money is necessary. japan ’ s households have almost bis central bankers ’ speeches 1, 500 trillion yen of financial assets, and there are ample deposits

to be in the middle of deflation. what is frightening about deflation is that it induces a vicious circle called a deflationary spiral whereby price declines reduce corporate profits and wages which, in turn, leads to a slowdown in business activity and further price declines. these can be called “ pernicious price declines ”. in fact, there was a very high risk of japan ’ s economy falling into a deflationary spiral up until around the spring of 1999, but concern over such risk materializing has greatly subsided in the past year. both cpi and wpi have been almost level. corporate profits have been increasing and economic activity gradually picking up. though it is true that prices of a number of products have been declining, this is against the backdrop of various revolutionary changes including the so - called it revolution, that is, the progress of technological innovation in information and telecommunications, as well as the revolution in distribution networks represented by the emergence of so - called “ category killers ”. such phenomena cannot necessarily be regarded as pernicious price declines. nevertheless, the bank has been continuing its extremely accommodative policy symbolized by the zero interest rate policy. this is because, in our judgment, we might again face the risk of pernicious price declines until such time we can be confident that japan ’ s economy has achieved a recovery underpinned by private demand. as such, the bank of japan has been conducting monetary policy by paying due consideration not only to inflation but also to deflation. 2. problems with inflation policy two views of inflation targeting recently there have been various discussions on setting a specific numerical target to the inflation rate in order to achieve price stability, namely inflation targeting. at the outset, it should be noted that two different views have been discussed in japan under the title of inflation targeting. originally, inflation targeting is a policy framework to enhance the transparency regarding the conduct of monetary policy and to strengthen the credibility of the commitment to price stability. however, not a few advocate so - called inflation targeting in the same vein as inflation policy. thus, before discussing inflation targeting in its original concept, let me say a few words about the problems involved with inflation policy. inflation policy is not a well - defined concept. most typically, as professor krugman of mit advocates, it is a policy which aims at a somewhat high inflation rate of 4 to 5 % and mobilizes all possible measures to achieve this target. professor krugman appears to have asserted