. 7 committee members, through their submissions to the summary of economic projections, had already indicated that their inflation objective was close to 2 percent as measured by the personal consumption expenditures deflator ; in january 2012 the committee formalized the inflation objective as a 2 percent “ longer run goal ” ( see http : / / www. federalreserve. gov / newsevents / press / monetary / 20120125c. htm ). bis central bankers ’ speeches another shortcoming was in our use of forward guidance with respect to the path of shortterm interest rates. although calendar - based guidance worked reasonably well in influencing expectations about the future path of short - term rates and thus the shape of the yield curve, it was clumsy in a number of respects. for example, if we moved the forward date guidance out in time, did this reflect a change in our reaction function, the amount of desired policy stimulus or greater pessimism about the outlook? of course, as we have learned, we have acted to rectify these shortcomings. for example, our asset purchases are now outcome based, tied to the goal of substantial improvement in the labor market outlook, and our forward guidance on short - term rates is tied to unemployment and inflation thresholds rather than to a calendar date. the japanese authorities have also capitalized on our joint experiences and actions. thus, we have witnessed a convergence in the monetary policy regimes of our two countries. today, the two regimes are quite similar in three important respects. both the fed and the bank of japan place considerable emphasis on an explicit inflation objective, commit the central bank to use all available tools to achieve its objectives, and use forward guidance on interest rates and large scale purchases of long duration assets as the main tools to achieve these objectives. although there are still some important distinctions in how policy is conducted, much of these relate more to differences in legal frameworks and the current starting point for economic activity and inflation rather than fundamental differences in philosophy. for example, the boj ’ s asset purchases are broader than the fed ’ s, extending to equity etfs ( exchange traded funds ) and reits. this option is not available to the federal reserve because the federal reserve act sets tighter limits as to the types of assets that the federal reserve can purchase. similarly, current circumstances in the two countries are different, with deflationary expectations still in the process of being dislodged in japan. the boj needs to push up inflation expectations

not just directly on household wealth, for example, but also through the impact of the asset price bust on the health of financial intermediaries and the supply of credit to households and businesses. over time, the japanese banking system came under mounting stress. this was a slowmotion crisis, as the assets were mainly loans that were not marked - to - market. accounting practices and regulatory forbearance allowed banks to delay charging off bad loans and recapitalizing at the cost of impairing the availability of credit to new potential borrowers. a full - blown banking crisis finally materialized in 1997. although some banks were recapitalized in 1999, the full regulatory response took several more years. the monetary and fiscal stimulus that was provided helped japan avoid a deep recession. but expectations about future nominal income growth for both households and businesses ground lower over time. with inflation expectations sinking, inflation - adjusted real interest rates rose, and japan became mired in deflation. while deflation is ultimately a monetary phenomenon, structural elements were also important. long - term demographic factors added to the deflationary pressures and structural rigidities, and credit supply problems constrained the reallocation of resources to growth sectors. these structural factors made it substantially more difficult to escape the deflation trap. the bank of japan was active during this period. from the late 1990s onwards, it pioneered an extremely broad array of innovative tools – many of which were later adopted, in amended form, by the fed and other major central banks. these included forward guidance on the future path of the policy rate, quantitative easing through purchases of government securities and private assets including asset - backed securities, equities and real estate investment trusts ( reits ), a more quantitative inflation objective, and funding for bank lending. actual overnight rates ; the bank of japan did not publish its rate target until 1998. see “ preventing deflation : lessons from japan ’ s experience in the 1990s, ” alan ahearn, joseph gagnon, jane haltmaier, and steve kamin et. al., international finance discussion papers, no 729, june 2002, board of governors of the federal reserve system. bis central bankers ’ speeches from my perspective, japan ’ s experience with forward guidance for the policy rate, asset purchases and a more formal inflation goal are particularly instructive, as this helped inform the later use of such tools in the united states. in early 1999, the bank of japan said it would maintain its zero