1 percent in the past two years. the extent of deflation in japan is much smaller than that during the great depression, which was well over minus 10 percent. in addition, japan is suffering from the burst of asset price bubbles in the late 1980s. asset prices fell dramatically. now, stock prices are one - third of the peak, and real estate prices are about a quarter of the peak during the bubble period. although stock prices are rising recently, real estate prices are still falling. asset price deflation, the decline in real estate prices in particular, is making a greater negative impact on the banking sector than the falling prices in goods and services. as japan is the only one among industrialized countries that suffers from the decline in both the general price level and asset prices, the bank of japan is the front runner in the fight against deflation among central banks around the world. under such circumstances, the bank has been, and will be innovative in the conduct of monetary policy. one unconventional policy measure is the purchase of risk assets, such as asset - backed securities and corporate stocks. the bank now purchases asset - backed securities, or abs for short, with corporate obligation as the underlying asset. we hope the abs market will grow with our purchase as a catalyst, and that it will help strengthen the weakened transmission mechanism of monetary policy. as businesses rely heavily on banks for their funding in japan, it is an important policy agenda to expand the channels of financial intermediation, such as the abs market, which are not vulnerable to banks'risk - taking capability. with a view to strengthening banks'intermediation function, the bank of japan purchases corporate stocks held by commercial banks. this is also an unconventional measure for a central bank. in japan, due to cross - shareholdings between banks and businesses, some large banks hold a substantial amount of corporate stocks. because of these holdings, banks are exposed to the impact of stock market volatility on their balance sheets, which may constrain their risk - taking capability. the sale of stocks to the bank of japan by commercial banks alleviates the potential negative impact on their financial position and enhances their risk - taking capability. in the course of taking these unconventional measures, we have learned a number of new things. among these, let me share with you two of them. first is the side effect of quantitative easing. within the quantitative easing framework, the market function is weakening in the money market. under zero interest rates, market

participants with their cautious investment attitude feel little incentive to lend in the money market, and as a result the market is shrinking. we firmly believe that the well functioning market is quite important in the efficient allocation of financial resources, and we do not in any way take such market shrinking lightly. this side effect, however, is unavoidable in my view. in implementing any policy measure, we need to weigh their effects and side effects against the economic situation. and, we judge that the positive impact of quantitative easing outweighs the side effect of shrinking money market, given the current japanese economic situation. second is how to maximize the precommitment policy effect under quantitative easing. during the period of zero interest rate policy from 1999 through 2000, the bank announced in its policy statement that it was committed to continuing with the policy until deflationary concerns were dispelled. compared with this rather descriptive announcement, the current commitment under quantitative easing is far more concrete and objective. the bank maintains that it continues with the existing policy until the published data of the core consumer price index show zero percent or above in a stable manner. the commitment reduces the freedom about the future course of monetary policy. because of such constraint, the policy impact tends to become more powerful. compared with the zero interest rate policy, medium - term interest rates under quantitative easing are lower and their volatility is smaller on average. in fighting against deflation under zero interest rates, we have found that the constraint of zero interest rates on monetary policy is an important issue for central bankers around the world. from our experience so far, it seems that the extent of policy constraint depends very much on the factors shaping the economic and financial situation. one factor, which influences the effectiveness of policy response under zero interest rates, relates to the banking system and the financial markets. both the banking system and the financial markets are the transmission mechanism of monetary policy. they need to be sound and efficient for the transmission mechanism to function effectively. in japan, at the moment the transmission mechanism is not functioning as is described in the standard textbook. the purchase of risk assets such as abs and corporate stocks is a policy measure to improve this mechanism. the banking system has not yet fully restored its soundness and stability, and the financial markets have not developed to the degree that they can smoothly provide " multiple avenues of financial intermediation. " the situation is quite different in the united states, where the banking system is sound and the capital markets are well developed