masaaki shirakawa : monetary policy challenges opening speech by mr masaaki shirakawa, governor of the bank of japan, at the 2008 international conference " frontiers in monetary theory and policy ", hosted by the institute for monetary and economic studies, bank of japan, tokyo, 28 may 2008. * * * good morning. it is my great honor to address the bank of japan conference, hosted by the institute for monetary and economic studies. on behalf of my colleagues at the bank of japan, i welcome all the distinguished guests from central banks, international organizations, and academia. the role of monetary policy when i took office as governor of the bank of japan about two months ago, i read again professor milton friedman's well - known presidential address, " the role of monetary policy, " given at the american economic association annual meeting in 1968, recalling my days as a student of friedman's last class at the university of chicago. in the address, he put the role of monetary policy this way. the first and most important lesson that history teaches about what monetary policy can do – and it is a lesson of the most profound importance – is that monetary policy can prevent money itself from being a major source of economic disturbance... there is therefore a positive and important task for the monetary authority – to suggest improvements in the [ monetary ] machine that will reduce the chances that it will get out of order, and to use its own powers so as to keep the machine in good working order... a second thing monetary policy can do is [ to ] provide a stable background for the economy... our economic system will work best when producers and consumers, employers and employees, can proceed with full confidence that the average level of prices will behave in a known way in the future – preferably that it will be highly stable. 1 what was intriguing here is that friedman used the term monetary policy in a much broader context than we define now. nowadays, the term monetary policy is used almost equivalent to " interest rate policy aiming at price stability. " monetary policy in this sense has been studied intensively and has been refined both in theory and in practice. yet in his presidential address, friedman pointed to the maintenance of well - functioning of financial markets and the system as the first role of monetary policy, and price stability as the second role. of course, not much would be gained here by going deeply into the precision of these definitions, but these words and the terms of professor friedman

bank of japan ’ s may report of recent economic and financial developments1 bank of japan communication, 21 / 5 / 98. the bank ’ s view2 japan ’ s economy remains stagnant with continued strong downward pressures on economic activities. with respect to final demand, public - sector investment seems to have bottomed out. however, growth in net exports has virtually peaked out as exports to other asian countries decline. business fixed investment has been on the decline. private consumption shows no sign of recovery although the deterioration has slowed. housing investment remains weak. against the background of weak final demand, inventories have accumulated further and industrial production continues to decline. as a result, not only corporate profits but also employment and income conditions have worsened significantly. the above indicates that production, income, and expenditure show negative interactions with one another. in these circumstances, the economic stimulus package was decided, and the fiscal 1998 supplementary budget bill was submitted to the diet. these measures are expected to boost demand through additional fiscal expenditure and special income tax - reduction and thereby alleviate the downward pressures on the economy. in order for the japanese economy to resume a self - sustained recovery, improvements in corporate and household confidence are vital. hence, the overall economic activity and the effects of the economic stimulus measures should be carefully monitored. with regard to prices, wholesale prices continue to fall, and the year - to - year increase in consumer prices ( excluding the effects of institutional changes such as the rise in the consumption tax rate ) has been declining close to zero. as for the future, the downward pressure on domestic prices, induced by the decline in import prices including overseas commodity prices, is weakening. also, the expansion in the output gap in the economy is expected to slow as the economic stimulus package is implemented. in the immediate future, however, prices are likely to weaken reflecting the present high inventory level and the relatively large output gap. in the financial markets, both long and short - term interest rates followed a declining trend with the releases of weak economic indicators. yields on long - term government bonds have recorded a historical low and stock prices remain soft. the yield differential between bonds issued by the private sector and those by the government, as well as the so - called “ japan premium ”, has remained at the relatively high level and shown no significant decrease, indicating the continuing cautious attitudes of market participants toward credit risk. with respect to monetary aggregates, the growth in m2 + cds, which had picked up from the end of 1997, slowed