rate to 0. 15 percent and the official discount rate to 0. 25 percent. lombard - type lending facility and the new role of the official discount rate among these policy measures, the lombard - type lending facility is new to japan. officially, it has a name of “ supplementary lending facility. ” under the existing framework of liquidity provision, the bank of japan selects its counter - parties and decides on the timing as well as amount of lending. in contrast, the lombard - type lending facility entitles financial institutions to borrow at the bank of japan ’ s discount window the amount that they want at any time they wish, as long as collateral is properly set against the borrowing and the borrower meets the conditions pre - specified with respect to eligibility of collateral and other technical aspects. from a viewpoint of financial institutions, this is a means of funding available any time. the most important function that this supplementary lending facility performs is to stabilize interest rates in the market. under usual circumstances, the overnight call rate fluctuates below the official discount rate because the former is the rate of which the bank of japan sets such a target level. when end - of - fiscal year pressures mount or a shock arises in the market, e. g., steep declines in stock prices or rumors of a large bankruptcy, interest rates tend to go up in the market. even in that case, overnight market rates will be kept below the official discount rate because financial institutions are able to borrow at the bank of japan ’ s discount window at their discretion. moreover, because financial institutions are freer from anxiety over funding capabilities, this will have a stabilizing effect on not only the overnight call rate but also other short - term interest rates across the board. this effect has been strengthened further by two reductions in the official discount rate amounting to 0. 25 percentage points in february 2001. now let me say a few words about the roles that the official discount rate plays. in the past, the bank ’ s decision as to the official discount rate was a basic tool of monetary policy. therefore, change in that rate had an announcement effect since it embodied change in the basic stance of monetary policy. in 1994, however, deregulation of interest rates was complete, and the institutional linkage between the official discount rate and bank deposit rates disappeared. in 1996, the bank of japan made it clear that the bank would no longer use the discount window lending, to which the official discount rate was applied, as a means

lackluster. all this suggests the significance of structural obstacles in japan ’ s economy, e. g., problems of the financial system, and on the flip side of the coin, corporate restructuring. resolution of these problems will prepare a foundation on which the effectiveness of monetary policy can be enhanced. i plan to come back to this issue before closing my remarks today in conjunction with a topic of non - performing assets. c. price stability and monetary policy allow me to turn to another topic : the relationship between price stability and monetary policy. i hear often that it is nothing but monetary policy that can prevent deflation as well as inflation. indeed, the bank of japan law stipulates that the bank ’ s purpose is the maintenance of price stability, and the bank in fact conducts monetary policy in accordance with that idea. in terms of practical implementation of monetary policy, however, the relationship between the objective of price stability and monetary policy is somewhat more complex. this complexity is mentioned in the report that the bank of japan published last year with respect to price stability. for one thing, the relationship differs, depending on the length of time you envision about price stability. for example, during a very long period, say ten or twenty years, excess supply of money in many cases corresponds to rises in prices while short supply does to price declines. this is quite natural in light of the fact that prices are the rate of exchange between goods / services and money. based on this long - term relationship between prices and money, price fluctuations are referred to as essentially monetary phenomenon and price stability is considered to be the objective of monetary policy. during a shorter period, say a few months or a few years, however, price fluctuations are influenced by not only money but also a variety of other variables. output gap of the whole economy, inflation expectation, international commodities prices, exchange rates are interrelated in a complex fashion. in such a complex world, it is no easy task to decide on how precisely monetary policy can control prices, and also on how far it should do. suppose an oil price shock gives rise to inflation pressures. if we are to contain them in a short period, it will take a very tight monetary policy. the upshot may be a steep decline in economic activity. this is inconsistent with sustainable price stability in the long run. conversely, at a time when prices decline on account of productivity gains based on rapid technological innovation, a forceful reduction in interest rates with a view to raising prices