since the bank introduced the quantitative easing framework, in which current account balances are used as the main operating target. the bank has made a commitment, unprecedented in the history of central banks, to continue with the quantitative easing policy until the year - on - year rate of change in the cpi ( excluding fresh food, on a nationwide basis ) registers zero percent or higher on a sustainable basis. with this commitment, the bank has continued to provide ample liquidity. in the current situation where consumer prices have been less responsive to the economic recovery, the commitment has contributed to stabilizing expectations about future interest rates and thereby market interest rates, and this situation has allowed firms to continue to enjoy low funding costs. furthermore, as returns on investment increase with the recovery, returns net of funding costs are expected to rise gradually. thus, the positive effect of the commitment on the economy, acting via interest rates, will strengthen as corporate profits increase along with the economic recovery. with the upsurge of business initiatives in the private sector and the recovery on a more solid track, the economy will eventually achieve sustainable growth and overcome deflation. in the outlook report published in october, the median forecast of policy board members is for consumer prices to post a small year - on - year rise in fiscal 2005. however, the economy could deviate from the scenario set out in the outlook, either above it or below it, and future developments in prices may be influenced by movements in various factors, including crude oil prices, productivity, and labor costs. as things stand, it is uncertain whether or not an occasion will arise during fiscal 2005 requiring the present monetary policy framework to be changed. the conduct of monetary policy, more specifically the timing of the termination of the current monetary policy framework and the pace at which the bank will raise short - term interest rates to keep them consistent with actual economic conditions, depends on future developments in economic activity and prices. if higher productivity and other factors continue to a large extent to contain upward pressure on prices as the economy moves to a sustainable and balanced growth path, this will likely give the bank more latitude in conducting monetary policy. central banks should respond appropriately and flexibly to changes in economic and financial developments. as the effects of monetary policy are transmitted first of all via the financial markets, it is extremely important that the appropriate monetary policy be communicated to market participants in a lucid manner. on occasion, speculation of various kinds arises about the future conduct of monetary policy in financial markets. market expectations

on lending minus the interest rate on deposits ), which is one component of interest income, for the past 20 years, the margin has been five to six percent on average for u. s. banks, while it has remained at slightly below two percent for japanese financial institutions. the main reason behind such low interest rate margins of japanese financial institutions is attributable to the fact that many financial institutions have basically been consistently in the interest rate competition as they compete with each other in the relatively homogenous commercial banking business with an aim to obtain a long - term stable transaction relationship. in short, the difference in business model by financial institutions is hardly observed. according to the analysis of the lending market in japan, many financial institutions tend to enter the regions that have a large lending market, thereby intensifying competition. by contrast, in the u. s. market, there is no significant correlation between market size and market concentration, which suggests that certain segregation among financial institutions might be in place. while it is not clear why such a segregation was possible, it is clear that the segregation enabled financial institutions to avoid the needless interest rate competition. of course it is not the case that japanese financial institutions themselves have not been doing anything to cope with such low profitability. signs of expansion in the investment banking business, including m & a business, have also been continuing in japan. small business loans were once actively promoted. however, since credit costs increased significantly, many banks have recently been forced to downsize or withdraw from the small business loan operations. as for household asset management, the expansion of over - thecounter sales of mutual funds and insurance has been pursued. moreover, at the major banks, the efforts to bring consumer credit companies, credit card companies, and consumer finance companies under the banks ’ umbrella were temporarily intensified. however, the profits from those affiliated companies have been sluggish, partly due to the changes in the environment they are in. after all, the fruits of pursuing new businesses have not been sufficient so far, and, at present, the new businesses have not contributed in a significant way to improving the profitability of financial institutions. second, japanese financial institutions ’ profits are subject to the fluctuations in credit costs and stock prices. in particular, as operating profits from the core business have been remaining low, a significant increase in credit costs and losses on stocks might immediately bring periodical income into the red. in fact, eight times in the past 20 years, the sum