, it becomes necessary to lower real interest rates sufficiently to support the economy effectively. therefore, it is important to aim at achieving the price stability target of 2 percent in order to secure sufficient room for a reduction in real interest rates by keeping the inflation rate stable at around 2 percent and anchoring inflation expectations at 2 percent. currently, the momentum toward achieving the price stability target is being maintained, and the year - on - year rate of change in the cpi is expected to increase toward 2 percent. nevertheless, this momentum is not yet sufficiently firm, and we are only halfway to achieving the price stability target. considering the current developments in economic activity and prices as well as financial conditions, i believe that it is important that the bank continue to steadily pursue powerful monetary easing under qqe with yield curve control. iv. challenges for japan's economy i would now like to express my thoughts regarding the current situation of japan's economy from a longer - term perspective. the bank aims to achieve price stability that is sustainable. i recognize that the inflation rate consistent with sustainable price stability will rise as efforts by a wide range of entities toward strengthening the competitiveness and growth potential of japan's economy make progress. based on this recognition, the bank sets the price stability target at 2 percent in terms of the year - on - year rate of change in the cpi - - a main price index. to strengthen the competitiveness and growth potential of the economy, a structural reform that will lead to an increase in productivity is necessary. in implementing such a reform, from the viewpoint of the management of firms, it is important to adjust supply to the trend in demand. in an economy with a declining population, as is the case in japan, demand is expected to decrease for many goods and services ; therefore, it will be important to adequately adjust supply capacity ; that is, employees and production capacity to meet such a decreasing trend. in japan, there is room for enhancing productivity relative to international standards. firms, regardless of whether they are in manufacturing or nonmanufacturing, are faced with an uneven distribution of employees and production capacity, as well as excessive inventories and discounts. it is necessary to adequately correct such uneven distribution and reduce excessiveness in all areas. in order to make progress with such a structural reform smoothly while easing the pain arising from the reform, a growth strategy that will foster new areas with growth potential is essential. that is, it is necessary to develop and provide goods and services that

monetary aggregates as one of the important information variables, yet it eschewed attaining the reference value of the monetary growth target ( bank of japan ( 1975 ) ). instead, from 1978 the bank of japan began to announce a quarterly forecast for money supply growth, yet the forecast was different from the “ intermediate target growth rate ” announced by the federal reserve or the m3 reference target rate by the ecb. 1 the forecast was close to the actual outcome, yet money supply reaccelerated and diverted from the trend nominal gdp growth after the mid - 1980s in the wake of financial deregulation and innovation. to conclude, the first episode reconfirms the lesson that the control of money supply ( which was restored under the flexible exchange rate system ) played an essential role in containing the rampant inflation prevailing in the early 1970s. neuman ( 2003 ) justified the reference value of m3 growth rate by the ecb based on the link from core money to core inflation. given the means of the range ( 4. 5 % ) consisting of the potential growth rate ( 2 - 2. 5 % ), normative rate of inflation ( less than 2 % ) and the trend decline of velocity ranging from 0. 5 % to 1 %, he detected the true normative rate of inflation to be equal to 1. 5 %. second episode : asset price bubbles and the real money gap let me turn to the second episode. lax monetary policy after the mid - 1980s was evidenced by the sustained deviation of actual real money stock from the equilibrium real money stock. given the positive “ real money gap ”, asset price bubbles emerged in the equity and real estate markets while general price stability was maintained ( chart 2 ). 2 once land prices started to move up, the augmented collateral value of land triggered the rapid expansion of bank credit through the “ financial accelerator mechanism ” or the “ credit cycle ” on the imperfect financial market. 3 on the other hand, price stability was reinforced by the yen appreciation after the plaza accord in 1985 in spite of the accelerating money supply. 4 plentiful market liquidity facilitated the active management of risk portfolios through relaxing the liquidity constraint and affected the willingness of investors to take more risks, leading to the reduction in risk and term premia. from the second episode, we can draw the lesson that a positive “ real money gap ” can cause the asset price bubbles through the “ financial accelerator mechanism ” and the reduction in risk and term premia, precisely because price stability