to prevent a deflationary spiral under the condition of the zero bound on the nominal interest rate. japan's economy resumed its recovery process after a pause in growth triggered by the it sector - related inventory stock adjustment. the bursting of the mini - bubble in the digital electronics sector was associated with the downward cyclical phase of the liquid crystal and silicon cycle initiated in spring 2004. subsequently, a non - it sector - related inventory stock adjustment due to the deceleration of exports, notably for china, curtailed industrial production activity and the growth rate. currently, the inventory stock adjustment process is almost over. in addition, domestic private final demand in the first half of 2005 was sufficiently strong to register growth above the potential growth rate ( about 1 percent ). on the lack of an upper limit, there is some similarity to the lack of a lower limit for the numerical definition of price stability below 2 percent during the initial stage of monetary operations by the european central bank. 1 / 5 price level indeterminacy under the zero bound on the nominal interest rate under the bank of japan's quantitative easing policy, not only the uncollateralized overnight call rate but also the rate of longer maturity of at least one year has virtually reached zero. it is well known that monetary policy aimed at fixing the market interest rate faces difficulties in controlling the money supply and the inflation rate. the difficulties are augmented under the zero interest rates, because the association between the money supply and the price level becomes much looser than normal. therefore, it is all the more important for the central bank to provide the price stability anchor to the market. 3 moreover, the zero bound on the nominal interest rate erodes the market mechanism in the financial market as well as market discipline, thereby distorting the allocation of funds on the market. in the past several months, we encountered a difficulty in achieving the bank reserve target due to undersubscription to our offers in open market operations, and allowed a temporary deviation from the lower limit of the reserve target in early june, end - july, and early august. the intention was to maintain the bank reserve target in the face of diminishing demand for excess reserves by banks. in other words, the measure was designed to solve the trade - off between strict implementation of the commitment and flexibility. it may be noted that the additional flotation of government bonds to frontload the rollover of existing government bonds concentrated in fiscal 2008 has made it more difficult to

implies that the monetary policy effect becomes more expansionary at the point close to the exit, the bank of japan's current policy is in line with the spirit inherent in the price level target policy. the role of fiscal policy let me conclude my remarks by referring to the role of fiscal policy to extricate japan from deflation. we observe that the government announced the fiscal policy target to achieve a primary budget deficit of zero in about ten years, and the automatic stabilizer effect dominated fiscal policy management after 2001 under the koizumi administration. the coordination between monetary and fiscal policy becomes more important, if the economy were to fall into deflationary equilibrium ( or the friedmanian equilibrium ), where the size of deflation rate is equal to the natural interest rate. on fiscal policy, we can identify the two different types ; namely, the ricardian and the non - ricardian. if the present value of government debt in the future becomes zero regardless of changes in the path of prices, it is classified as a ricardian policy. this implies that we should have some safety margin on the final numerical objective ( aside from the bias inherent in the price index ), given the likely negative macroeconomic shock to the lower natural interest rate of japan's economy over the future which is conducive to the zero bound on the nominal interest rate. this issue may be related to issues such as the discretion versus rule - based policymaking, or the risk management approach under uncertainty versus rule - based policymaking. it seems sensible to adopt the risk management approach under the knightian uncertainty ( greenspan [ 2004 ] ). chairman greenspan is critical of the " too inflexible " management of rule - based monetary policy. yet " activist " rule - based policymaking seems to possess sufficient flexibility in uncertain circumstances. for instance, the bayesian decision process under the risk management approach involves a learning process. learnability plays an important role in ruleoriented monetary policy to secure stability of the equilibrium. rule - based monetary policy has flexibility to implement a systematic revision of a contingent plan and prescribes the updating process in a " timeless manner, " while discretionary policy revises a contingency plan period by period. in any case, there may arise no conflict or inconsistency between the risk management approach and the provision of the price stability anchor to market participants. 4 / 5 as long as the fiscal rule aiming at reducing the primary budget deficit over the