of interest rates is weakened, firms can nonetheless take action in pursuit of higher productivity. likewise, even if the signaling effects are weakened, it is possible to make appropriate judgments on such factors as the future state of economic activity and prices and the government's fiscal condition, based on various information other than developments in long - term yields. finance only plays a behind - thescenes role in the economy, providing funds like a flow of blood - - firms, the government, and other economic entities are the economy's principle drivers. in a state without meaningful interest rates or no positive interest rates, however, the functions interest rates ought to fulfill have been weakened, and this should be fully recognized. c. toward the normalization of monetary policy i have said that the bank has taken its first step toward the normalization of monetary policy. so, what does the normalization look like? in my view, the ultimate goal is, with the price stability target of 2 percent, to return interest rates to a level where they can perform their functions - - that is, where raising or lowering interest rates can act to adjust demand and affect prices - - and at the same time to recover the hurdle rate function and signaling effects i mentioned earlier. although the bank has changed its monetary policy framework, the state without meaningful short - term interest rates i spoke about earlier has not changed, and long - term interest rates have not reached the point where they are entirely determined by market. consequently, even though the bank has taken its first step and the situation will be better than it has been, the kind of side effects i mentioned earlier seems to remain. i believe that it is crucial for the bank to steer future policy conduct in order to proceed deliberately but steadily with monetary policy normalization and thereby successfully unwind the unprecedented large - scale monetary easing, with the fundamental premise that the bank will do so in response to developments in economic activity and prices as well as financial conditions. thank you.

misalignments in real time are enormous. central banks need to be very cautious in forming their assessments and keep the caveats underlying their analyses always in mind. and the challenges faced by central banks in the face of sustained market movements are not exhausted by the identification problem that i just described. even in the rare cases in which the central bank can confidently claim to be facing an unusual and possibly destabilising asset price movement, the design of its reaction is all but automatic. it is often argued that a central bank in such circumstances should carefully tighten its monetary policy at an early stage in order to suppress the bubble process before it escalates to disproportionate dimensions. if a bubble exists, a somewhat tighter policy along the build - up phase - so the argument goes - may help to avoid that even larger imbalances may develop down the road. however, a bold opposite view has also found some supporters among economists. this alternative policy option would tend to suggest that, due to the rather long lags in the operation of monetary policy impulses, the central bank should consider loosening - rather than tightening - its policy in anticipation of the bubble collapse. this would cushion the negative effects of the expected economic downturn in a forward - looking manner. there is a very strong argument against this policy option because, when a bubble process emerges, it is then almost impossible for the central bank to predict the timing of the turnaround in asset prices. and if the central bank cannot be sure that the bubble will burst of its own accord, a loosening of policy will further strengthen the bubble process. but the dilemma - where not only the measure of misalignments, but also the sign of the monetary policy response to it is somewhat controversial - exemplifies the amplitude of the policy dilemma. if and when the bubble bursts, there is a dimension of strategic interaction that a prudent policymaker cannot ignore. this offers a rather strong argument in favour of symmetry in the central bank ’ s behaviour in boom and bust periods. if a central bank were to react in an asymmetric manner, namely only with looser policy at times of asset price busts but not with tighter policy when asset price bubbles emerge, the central bank may create through its own behaviour a moral hazard problem among market participants. it is crucial for a central bank to avoid this, since a perception that it insures investors against the risk of large losses could easily contribute to the formation of