agents to lower their awareness of risks and to overestimate their future profitability. given these dangers, it has become more important for us to respond to risks that may bring about larger swings in economic activity and prices in the longer run, since central banks have a mission to conduct monetary policy to achieve price stability in the medium to long term. to be more specific, it is essential to carry out careful assessment of risks that may be relatively unlikely to materialize but, if they did, would have a large impact on the economy and prices, such as an asset price bubble. it is also essential to assess financial conditions and inflation expectations that may influence the economy and prices in the medium to long term. i think such awareness is shared by most central banks, but policy frameworks differ on how to incorporate this in the actual conduct of monetary policy. in the case of the bank of japan, the current monetary policy framework was introduced when the quantitative easing policy framework was terminated last year. under the new framework, ( 1 ) we examine the most likely outlook for economic activity and prices for one to two years ahead, and ( 2 ) we assess risks considered most relevant to the conduct of monetary policy from a longer - term perspective. the recent disruptions in global financial markets seem to show that under the continuing favorable conditions of healthy world growth and low inflation, financial imbalances can accumulate, which will be followed by corrections, posing a risk to economic stability. in more general terms, recent events could be regarded as a reminder of the importance of progress in which financial and economic activities remain in harmony. recent events have strengthened my belief that it is important for a central bank to assess various factors that may have negative consequences for the situation of the economy and prices in the medium to long term. iv. market stabilization and central bank activities central banks can also learn a lesson from the recent market disruptions from a rather different standpoint. it is a central bank's role to stabilize the market when it is under pressure. the recent market disruptions occurred when there were growing uncertainties about the location of risks due to the complexity of the international flow of funds under economic globalization. risks have been dispersed and re - accumulated in various markets through the medium of advanced financial products whose risks are not easy to evaluate. at the same time, given the wide range of financial players, including hedge funds and private equity funds, the identity of risk - taking parties and the scale of risks have become blurred, masking

the international division of labor and progress in financial innovation have fostered efficient allocation of resources, thereby contributing to world growth. world gdp growth is likely to register around 5 percent this year, close to what we have been observing since 2003. another feature of current world economic growth is a reduction in the amplitude of fluctuations in the rate of growth and inflation. this is the so - called " great moderation, " often cited by academics and economists. the stability in the world economy and prices became noticeable after the second oil crisis. the inflation rate, in particular, has decreased substantially since the year 2000 in terms of its average in both industrialized countries and emerging economies, and has also been less volatile. the current situation of the world economy, where low inflation coexists with high economic growth, seems favorable for central banks, which aim to achieve stability in prices and in economic activity. however, it is a regrettable truth that the job of central banks never gets easier, only more challenging. let me now discuss some phenomena that have brought new challenges into being. ii. changes in the relationship between output and prices the first phenomenon is that the conventional wisdom regarding the relationship between output and prices is becoming increasingly inapplicable. in technical economic terms, this phenomenon could be described as a " flattening of the phillips curve, " and there is uncertainty about how flat the curve has actually become, how long this situation will continue, and whether the relationship will eventually return to its previous state. this phenomenon has been observed in many industrialized countries, and i would like to outline the situation in japan as an example. after hitting bottom in 2002, the japanese economy entered the phase of recovery, supported by strong external demand due to the expansion of overseas economies. in recent years, the annual growth rate has been around 2 percent, slightly higher than the economy's potential growth rate, and resource utilization, namely in labor and production capacity, has been increasing. however, upward pressure on prices has yet to rise markedly. the year - onyear rate of change in the consumer price index ( cpi, excluding fresh food ) was negative from fiscal 1998 through fiscal 2004, and has since been around 0 percent. i think this situation, where prices do not rise despite the steady growth of the economy, is in part due to changes in the environment surrounding prices and wages amid the progress of globalization. products made in japan have been facing fierce competition from products imported from emerging economies. in the meantime, japanese