participants with their cautious investment attitude feel little incentive to lend in the money market, and as a result the market is shrinking. we firmly believe that the well functioning market is quite important in the efficient allocation of financial resources, and we do not in any way take such market shrinking lightly. this side effect, however, is unavoidable in my view. in implementing any policy measure, we need to weigh their effects and side effects against the economic situation. and, we judge that the positive impact of quantitative easing outweighs the side effect of shrinking money market, given the current japanese economic situation. second is how to maximize the precommitment policy effect under quantitative easing. during the period of zero interest rate policy from 1999 through 2000, the bank announced in its policy statement that it was committed to continuing with the policy until deflationary concerns were dispelled. compared with this rather descriptive announcement, the current commitment under quantitative easing is far more concrete and objective. the bank maintains that it continues with the existing policy until the published data of the core consumer price index show zero percent or above in a stable manner. the commitment reduces the freedom about the future course of monetary policy. because of such constraint, the policy impact tends to become more powerful. compared with the zero interest rate policy, medium - term interest rates under quantitative easing are lower and their volatility is smaller on average. in fighting against deflation under zero interest rates, we have found that the constraint of zero interest rates on monetary policy is an important issue for central bankers around the world. from our experience so far, it seems that the extent of policy constraint depends very much on the factors shaping the economic and financial situation. one factor, which influences the effectiveness of policy response under zero interest rates, relates to the banking system and the financial markets. both the banking system and the financial markets are the transmission mechanism of monetary policy. they need to be sound and efficient for the transmission mechanism to function effectively. in japan, at the moment the transmission mechanism is not functioning as is described in the standard textbook. the purchase of risk assets such as abs and corporate stocks is a policy measure to improve this mechanism. the banking system has not yet fully restored its soundness and stability, and the financial markets have not developed to the degree that they can smoothly provide " multiple avenues of financial intermediation. " the situation is quite different in the united states, where the banking system is sound and the capital markets are well developed

costs to consumers. moreover, unit labor costs ( labor costs per unit of output ), although currently still declining, are likely to stop falling as wages begin to show a gradual upward trend. with these understandings, the year - on - year rate of change in the cpi ( excluding fresh food ) is likely to be around 0 percent in the short run, but is expected gradually to rise in the longer run. however, the pace of increase is likely to be moderate, given that the sensitivity of prices to changes in the output gap is declining due to factors such as economic globalization and deregulation. the rate of increase is projected to be around 0 percent in fiscal 2007 and around 0. 5 percent in fiscal 2008. ii. developments in overseas economies i have so far outlined the most likely projection. however, any kind of projection is subject to upside and downside risks. the first risk concerns developments in overseas economies. the global economy has been expanding strongly, registering high growth of around 5 percent since 2004. it is the first time since the early 1970s that the global economy has registered such high growth over a period of this length : until 2003, the growth rate was around 3 to 4 percent. the high growth of the global economy is to a great extent attributable to the fact that emerging economies have taken off one after another and have been increasing their presence in the global economy. in the u. s. economy, the correction in the housing market is continuing, but business fixed investment and private consumption continue to be on a moderate increasing trend although the pace of increase is decelerating. if the housing correction does not spread to other areas of the economy and the economic slowdown is only moderate, the global economy is likely to continue to expand steadily with the slowing of u. s. economic growth being offset by high growth in emerging economies such as the brics. this was also the consensus view among delegates at the g - 7 and international monetary fund meetings in october. as you all know, global financial markets have been volatile since the summer due to the heightening of concern about the u. s. subprime mortgage problem. this recent volatility in global financial markets could be regarded as laxity in risk evaluation in the continued benign global economic and financial environment being reversed by market forces of selfcorrection. however, if the correction in the u. s. housing market intensifies or the effects of swings in financial markets become unexpectedly widespread, private consumption