you can get more at the same price. what is the problem ( chart 2 )? decline in aggregate demand due to deferred spending at the outset, we need to acknowledge the difference between prices in general and those of individual goods and services. as for the former, there are indicators such as the cpi and the domestic corporate goods price index. price stability that the bank aims at is defined by the cpi. the cpi shows changes in the total amount of expenditure required to purchase the equivalent goods and services purchased by households at a given time, which is called the “ reference period ”. the cpi is calculated by giving a value of 100 for the reference period and comparing prices of the observation period with those of the reference period. inflation is defined as a situation bis central bankers ’ speeches in which the cpi persistently rises ; on the contrary, deflation is defined as a situation in which the cpi keeps falling. a price rise or fall of individual items such as vegetables and television sets does not constitute either inflation or deflation. keeping that in mind, let me now explain what the consequence of a persistent decline in general prices – rather than price declines in individual goods and services – will look like. to be sure, a decline in prices itself will have the effect of raising your real income. however, a persistent decline in prices means that the more you wait, the more goods and services you can get at the same price. in other words, it means that the value of cash and deposits increases just by holding them. thus, firms and households will hoard money as much as possible and defer actions that are associated with spending, such as consumption and investment. put in the jargon of economics, aggregate demand will decline. that is a problem. if aggregate demand declines and sales of goods and services decrease, firms will reduce production to a level consistent with the decline in sales. as corporate profits will decline and employee income will fall accordingly, people ’ s consumption and housing investment – as well as firms ’ business fixed investment – will further stagnate. namely, aggregate demand will further decline, and that will induce a further decline in price levels. thus, the economy will be trapped in a vicious cycle of price declines and recession ( chart 3 ). increase in effective debt burden in addition, as a decline in prices means that the value of money for goods and services will increase, for those who borrow money, the value of money that they will have to repay in the future will increase

of its asset purchases. an increase in quantity requires massively increasing the amount of money the bank directly supplies to the financial system – this is called “ the monetary base ” – at an annual pace of about 60 – 70 trillion yen. measures to increase the monetary base are mainly through the purchases of japanese government bonds ( jgbs ), and the bank will purchase jgbs so that their outstanding amount will increase at an annual pace of about 50 trillion yen. a change in quality requires purchasing assets with a higher risk profile. among the jgbs, the bank has started purchasing those with longer remaining maturities. in addition, it has increased the amounts of purchases in exchange - traded funds ( etfs ) and japan real estate investment trusts ( j - reits ) in order to reduce risk premiums on assets. bis central bankers ’ speeches when we decided to introduce the qqe last april, we used the expression “ a new phase of monetary easing both in terms of quantity and quality ”. the bank has been pursuing monetary easing in exactly that manner, at an unprecedented scale. b. working on expected real interest rates while the qqe consists of those two pillars, as far as its transmission channels are concerned, the most important factor of all in terms of having an effect on the economy is lowering expected real interest rates. the following explanations will become somewhat complicated, but please bear with me ( chart 7 ). expected real interest rates are obtained by subtracting the expected rates of inflation from the nominal interest rates actually observed in financial markets or over the counter. while nominal rates – that is, objective interest rates – are visible, expected real interest rates are those that people forecast subjectively, based on their respective price projections, and thus various rates exist on a person - by - person basis. viewed from the borrowers ’ side, real interest rates are equivalent to borrowers ’ subjective expectations regarding their real costs of borrowing, taking into account price changes, when they borrow money at a certain nominal interest rate. consequently, the lower the expected real interest rates of an economic entity, the more subdued the entity expects its real cost of borrowing to be. the qqe has the effect of reducing nominal interest rates and the effect of lifting each economic entity ’ s inflation expectations, and both will exert downward pressure on expected real interest rates, which are derived from subtracting the expected rates of inflation from the nominal rates ( chart 8 ). c. spillover effects on