and the fiscal authorities. what objective for japanese monetary policy? before setting off on a trip, one should know one's destination. in that spirit, a discussion of japanese monetary policy should begin with some discussion of the policy objective. i leave until later how the objective can be achieved. the bank of japan law, passed in 1998, sets price stability as a primary objective for the central bank. as with our own federal reserve act, price stability is not, however, precisely defined in the law. currently, the boj has promised that the zero - interest - rate policy will be maintained until deflation is brought to an end, a policy that might be deemed consistent with the price stability objective. two objections to this conclusion might be raised, however. first, the boj's statement seems to imply that the current level of policy stimulus might start to be withdrawn as soon as measured inflation returns to zero ; in particular, no explicit commitment has been made to maintain inflation at zero, much less at some positive rate, in the longer run. but the presence of measurement bias in japanese price indexes suggest that a measured inflation rate of at least one percent is likely required in order to achieve true price stability in the long run. moreover, inflation above zero will be needed if real interest rates in japan are to be negative for a period, as many observers think is necessary for full recovery. in short, it would be helpful if the zero - interest - rate policy were more explicit about what happens after the deflationary period ends. second, over the past five years, since the onset of the current deflationary episode - and, incidentally, since the passage of the new bank of japan law - the price level has trended down, registering a cumulative decline ( depending on the price index ) of between 4 and 9 percent. for example, over this period the gdp deflator has dropped nearly 9 percent, the private consumption deflator has fallen 51 / 2 percent, and wages and salaries are down 4 - 1 / 2 percent. one might argue that the legal objective of price stability should require not only a commitment to stabilize prices in the future but also a policy of actively reflating the economy, in order to restore the price level that prevailed prior to the prolonged period of deflation. as you may know, i have advocated explicit inflation targets, or at least a quantitative definition of price stability, for other leading central banks, including the federal reserve. a quantitative inflation

international economic and price developments. another cause may well be unconventional monetary policy measures, in particular the extensive qe programmes, which have caused bond and equity prices to rise simultaneously. ultimately, large - scale securities purchase programmes lead to lower interest rates and reduce the supply of risk - free assets. this, in turn, leads investors to rebalance their portfolios towards riskier asset classes such as equities – which, from a monetary policy transmission standpoint, is certainly desirable. 10 in the end, rising asset prices should stimulate consumption and investment, as well as consumer prices. a related issue is the degree to which higher equity prices in the current situation can be interpreted as a sign of an improving economic and profit outlook. it is intuitively obvious that corporate earnings and equity prices move in unison – at least in the longer term – and are therefore positively correlated. however, for some time now, we have observed a negative correlation – while both actual profits and expectations have declined, equity prices have risen to new record levels, as depicted by the yellow lines. chart 6 shows the us s & p 500 equity lower interest rates also lead to higher equity prices as they reduce the discount factor for future dividends. page 7 / 8 index ( blue line ) and the corporate earnings per share expected for the next 12 months ( red line ). on the basis of these observations, it is occasionally concluded that some financial market prices have become completely disconnected from the real economic environment and, as it were, react only to monetary policy. as a result, unexpectedly bad news from the economy is received as good news for the equity markets because investors interpret the unexpectedly weak economic data as an indicator of continued expansionary monetary policy. however, this phenomenon is only marginally more common today than it was before the financial crisis. you can see this in the following chart, which shows the deviations of new jobs in the us each month ( non - farm ) from the respective consensus expectations of market participants and the immediate reactions of the equity markets ( chart 7 ). the horizontal axis depicts the surprises in employment figures in thousand jobs, and the vertical axis the reaction of the equity market. the panel on the left shows the situation during the upswing from 2001 to 2007, and on the right, you can see the same picture for the upswing from 2009 to 2016. the top left quartile is key. it depicts the proportion of observations in which unexpectedly bad us labour market data coincide with positive equity market reactions.