toshihiko fukui : towards a new path of growth for the japanese economy summary of a speech given by mr toshihiko fukui, governor of the bank of japan, at the kisaragi - kai meeting, tokyo, 11 november 2005. * * * introduction semiannually in april and october, the policy board of the bank of japan decides the text of the outlook for economic activity and prices, or the outlook report as we call it, and releases it. this report describes the bank's outlook for economic activity and prices which provides the basis for conducting monetary policy, and also explains the bank's thinking behind its conduct of monetary policy. today i would like to focus on the october 2005 outlook report, which was published two weeks ago. i. recent economic developments and the outlook for economic activity japan's economy continues to recover, having emerged from the temporary pause that began in the summer of 2004. the adjustments in production and inventory in it - related sectors, which triggered the temporary pause, appear to have run their course, and domestic private demand, such as business fixed investment and private consumption, has been stronger than expected. according to the cabinet office's reference dates of business cycles, the economy has been expanding since the beginning of 2002, that is to say, for almost four years now. although a v - shaped recovery is unlikely to ensue after the economy's recent emergence from its temporary pause, it is expected to achieve solid growth at a moderate and sustainable pace. the bank's projection for a period of one and a half years ahead, that is, through the end of fiscal 2006, is that the economy is likely to experience a sustained period of expansion at a pace slightly above its potential. the bank's main purpose in releasing the outlook report is to explain its thinking on the underlying mechanisms of economic activity and prices, and the policy board members'forecasts are also provided as reference figures. in the october outlook report, the policy board members forecast a real gdp growth rate for fiscal 2005 of slightly above 2. 0 percent and for fiscal 2006 of around 1. 52. 0 percent. if the economy performs as projected in the october outlook report, it will have been expanding at a pace above its potential for a very long period of time, since the actual growth rates for fiscal 2003 and 2004 have been around 2. 0 percent, exceeding the bank's estimate of a potential growth rate of around 1. 0 percent.

activity and prices as well as the state of the financial system since its introduction. with regard to the effects of ample liquidity provision by the bank, an effect of reducing very short - term interest rates to practically zero percent remains unchanged. however, as described earlier, with the progress in the disposal of npls, precautionary demand for liquidity has declined substantially, reflecting diminishing concerns over financial system stability. the effects of the policy commitment by the bank have also been changing. in principle, the expected duration of the quantitative easing policy based on the bank's commitment can either lengthen or shorten depending on market participants'expectations for prices. with more market participants recently expecting that the year - on - year rate of change in the cpi will be a positive figure in the near future, the duration of the policy as expected by market participants is shortening. as a result, the policy commitment is gradually losing its influence on the formation of longer - term interest rates. this is a natural consequence considering the characteristics of the commitment. as a result of the above changes, the stimulative effects of the quantitative easing policy on economic activity and prices are at present increasingly coinciding with the effects of short - term interest rates being at practically zero percent. as for a change of policy framework, the bank will judge whether the policy commitment has effectively been fulfilled, in other words, whether the year - on - year rate of change in the cpi is registering zero percent or higher on a sustainable basis, by monitoring economic activity and price developments. assuming that economic activity and price developments follow the projection described in the october outlook report, the possibility of a departure from the present monetary policy framework is likely to increase over the course of fiscal 2006. we cannot tell exactly when the bank will actually change the framework, since it depends on future economic and financial developments. in any case, the bank will appropriately determine the timing in view of these developments. such a change of framework would mean a reduction in the outstanding balance of current accounts at the bank toward a level in line with required reserves, and a shift in the main operating target for money market operations from the outstanding balance of current accounts to short - term interest rates. at present, the effects of the quantitative easing policy are increasingly coinciding with the effects of short - term interest rates being at practically zero percent. thus, a change of policy framework itself does not imply an abrupt change in terms of effects of policy. there will then