two standpoints – whether the main scenario leads to the attainment of our objective and how other relevant risks should be evaluated. from the first perspective, we examine the prospects for economic activity and prices for one to two years ahead – this time, through fiscal 2008 – and assess whether the most likely outlook is for the economy to follow a path of sustained growth under price stability. through fiscal 2008, the economy, as i said earlier, is likely to continue its sustained expansion with a virtuous circle of production, income, and spending in place. 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. such developments can be regarded as in line with the " understanding of medium - to long - term price stability " that each member of the policy board has in mind. in sum, we judged that, through fiscal 2008, japan's economy is likely to realize sustainable growth under price stability. this outlook is based on the assumption that market participants and firms make decisions by factoring in future changes in monetary policy. thus, adjusting the level of the policy interest rate will become necessary for the economy and prices to continue to follow the projection. the pace of necessary adjustment, however, will depend on the degree of future improvements in the economy and price situation. we do not, therefore, have any predetermined schedule. the second perspective extends the time horizon and assesses the risks considered most relevant to the conduct of monetary policy. in this assessment, we take account of the cost incurred should risks materialize, even though the probability of this happening may be low. in this regard, both upside and downside risks need to be borne in mind. in terms of the upside risks, we need to be mindful of the stimulative effect of monetary policy being further amplified with the improved prospects for economic activity and prices. if, for instance, the expectation takes hold that interest rates will remain low for a long time regardless of developments in economic activity and prices, then firms and financial institutions may over - extend themselves based on such expectation, resulting in medium - to long - term risks of larger swings in the economy and inflation rate, and of misallocation of funds and resources. on the other hand, if the downside risks mentioned earlier should materialize, the improvement in the economic situation may stall. it is also possible that prices will

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