toshiro muto : battle against deflation speech by mr toshiro muto, deputy governor of the bank of japan, at japan society, new york, 26 september 2003. * * * thank you, mr. wheeler. good afternoon, ladies and gentlemen. it is a great honor to be here and address japan society. today i focus on the bank of japan's on - going battle against deflation. japan's core consumer price index, which is the consumer price index excluding volatile food, has been going down for the past five years, and the bank of japan has been fighting against this deflation. the bank of japan adopted the so - called " zero interest rate policy " in february 1999. after reducing the short - term policy interest rate from 6 percent in 1990 to 0. 5 percent in 1995, the bank decided to push it down to virtually zero by providing ample liquidity in the market. this policy was unprecedented in the history of central banking. in the 20th century, the lowest official discount rate was 0. 5 percent in the united states between 1942 and 1946, and also in switzerland in 1999. in march 2001, the bank adopted the " quantitative easing " framework. in spite of extremely low interest rates, " japan's economy had failed to return to a sustainable growth path, and was faced again with the threat of deterioration. " in its monetary operations, the bank shifted the operating target from the short - term policy interest rate to the outstanding balance of current accounts at the bank. so far, from our experience over the last two and a half years, quantitative easing has been effective in stabilizing the financial markets. it has worked to avert a credit crunch, and facilitate corporate funding. through these channels, it has been supporting economic activity. the quantitative easing framework has three key pillars. the first pillar is that the bank of japan is providing the current account balances of financial institutions with ample liquidity. in fact, the amount of these current account balances is more than five times the required reserves. the base money, which is the sum of these current account balances and banknotes in circulation, has increased more than 60 percent in the past two and a half years. reflecting such an increase, the balance sheet of the bank of japan has expanded significantly. the size of the bank's balance sheet relative to gdp had been stable around 10 percent for the past 50 years, but now it is close to 30 percent. naturally

some more significant changes in light of developments and lessons learned in recent years. and most importantly, it positions us for success in achieving our maximum employment and price stability goals in the future. 1 see board of governors of the federal reserve system, statement on longer - run goals and monetary policy strategy, as amended effective august 27, 2020. 2 longer - run forecasts of interest rates can be found in blue chip financial forecasts ( wolters kluwer ). for the decline these forecasts over this period, see the june 2012 and june 2020 issues. 3 see john c. williams, three questions on r - star, frbsf economic letter, 2017 – 05 ( february 21, 2017 ), for a discussion of the decline in the natural rate of interest. estimates of the natural rate for the united states, canada, the united kingdom, and the euro area are available at federal reserve bank of new york, measuring the natural rate of interest. 4 jerome h. powell, new economic challenges and the fed ’ s monetary policy review, speech at “ navigating the decade ahead : implications for monetary policy, ” an economic policy symposium sponsored by the federal reserve bank of kansas city, jackson hole, wyoming ( via webcast ) ( august 27, 2020 ). 5 richard h. clarida, the federal reserve ’ s new monetary policy framework : a robust evolution, speech at the peterson institute for international economics, washington, d. c. ( via webcast ) ( august 31, 2020 ). 2 / 2 bis central bankers'speeches