was only 3 % at the peak of the bubble period when the economy was overheated. in the case of japan, prices have been extremely stable for nearly twenty years. thus, we have not been put in a situation where we have to set any inflation target to maintain price stability even if we have not solved such difficult problems as defining and measuring price stability. new price revolution the problem of defining and measuring price stability is whether we can set an appropriate numerical target for inflation based on a specific price index. in addition to this rather difficult problem, we need to consider the possibility that major industrial countries, including japan, are entering a “ new price revolution era ”. such development has been born of the rapid expansion of economic activity related to information and telecommunications, in other words the “ it revolution ”. this is characterized by extremely rapid technological innovation which induces price declines through the improvement in productivity and the development of new products. since the mid - 1990s the united states has witnessed stable and low inflation under extremely low unemployment, partly because economic expansion has been supported by the it revolution. this phenomenon contradicts past experience. in addition to this worldwide it revolution, japan has been experiencing dramatic changes in its distribution and service industries which can be seen as a revolution in distribution networks. the progress of technological innovation and the revolution in distribution networks raise two big questions when analyzing prices. the first is whether prices of new products and price developments under the new distribution networks are appropriately reflected in price indexes. this is the oft - discussed issue of biases in price indexes. in view of the large number of new products and distribution networks available, this issue might have become more serious than previously envisaged. the second question is how to assess the price declines due to such revolutionary changes. if the it and distribution network revolutions continue under the current situation of zero inflation, we cannot rule out the possibility that the economy could recover while the inflation rate is negative in terms of the existing price indexes, even though they may not sufficiently incorporate these revolutionary changes. and, in the case where cost reductions continue thanks to technological innovation, even if the inflation rate is statistically negative it would not be appropriate to judge the economy as being deflationary as long as it is recovering steadily. when the environment surrounding prices is likely experiencing dramatic changes, we have to carefully examine whether it is possible to set an appropriate target for inflation based on existing price indexes. desirable rate of inflation whether an optimal inflation rate should

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