a famous book, lombard street, a treatise on the best central bank practices, providing the first - ever systematic analysis of the roles of a central bank. in the book, he formulated what came to be called bagehot ’ s rule, namely that, to prevent disruption in the financial system in times of crisis, the central bank should act as a lender of last resort, providing unlimited funds at punitive rates. 2 the practical application of bagehot ’ s rule has been modified in line with changes in financial market structures, and in the recent global financial crisis, central banks – including the ecb and the bank of japan – aggressively provided funds to the markets as the lender of last resort, thereby preventing a collapse of the financial system. the establishment of the principle of the lender of last resort is of significant importance. the invention of monetary policy the third major innovation i would like to mention, although it may sound somewhat strange, is the “ invention of monetary policy. ” while i will touch later on the issue of how to define monetary policy, for the time being i will use the term in the conventional sense of “ policy that aims at actively influencing the inflation rate or the economic growth rate by controlling the level of short - term interest rates. ” under the gold standard, the quantity of money was constrained by gold holdings and thus the central bank could not influence the price level and economic activity in an active manner. in this sense, central banks had limited room to deploy monetary policy. in fact, monetary policy was not discussed in bagehot ’ s book. monetary policy worthy of the name started only with the transition to a fiat money system. nowadays, appropriate monetary policy conduct has become one of the key tools contributing to macroeconomic stability. the introduction of the concept of central bank independence finally, the fourth innovation has been the idea of central bank independence. while it is only relatively recently that central bank independence has become firmly established in countries around the world, interestingly, in europe active discussions on the enhancement of central bank independence already took place in the wake of world war i. for example, at the 1922 genoa international economic conference, which aimed at restructuring the international economic and financial system in the post - world war i period, in the resolution concerning currency there was a proposal that “ banks, and especially banks of issue, should be free from political pressure. ” 3 it goes without saying that, in subsequent decades, the german public and the bundesbank played

framework of this policy consists of two components ( chart 14 ). the first is an inflation - overshooting commitment. this is a strong commitment that the bank will continue expanding the monetary base until the year - on - year rate of increase in the actual cpi exceeds 2 percent and stays above that level in a stable manner. it is crucial that people actually experience inflation above 2 percent and thereby the perception takes hold among them that prices of goods and services tend to go up every year by around 2 percent. the second component is yield curve control. under yield curve control, the bank has been facilitating the formation of the yield curve that is considered most appropriate for achieving the price stability target of 2 percent at the earliest possible time, taking account of developments in japan ’ s economic activity and prices as well as financial conditions. specifically, the bank sets the short - term policy interest rate at minus 0. 1 percent and the target level of the 10 - year japanese government bond ( jgb ) yields at around 0 percent, conducting jgb purchases so as to achieve this target level. based on this yield curve, issuance rates for cp and corporate bonds have remained at extremely low levels. financial institutions ’ lending attitudes have been proactive, and lending rates have declined to around historical low levels. in these circumstances, the year - on - year rate of increase in the amount outstanding of bank lending has accelerated at a moderate pace to the range of 3. 0 - 3. 5 percent. meanwhile, firms ’ financial positions have improved for all firm sizes. these developments suggest that accommodative financial conditions brought about by yield curve control have been strongly supporting corporate activities in japan. as i have explained thus far, price developments in japan have been relatively weak compared with the improvement seen in economic activity, and there is still a long way to go to achieve the price stability target of 2 percent. we are well aware that the bank should take this point seriously. going forward, firms ’ stance is likely to gradually shift toward raising wages and prices with the steady improvement in the output gap. medium - to long - term inflation expectations are projected to rise steadily as further price rises come to be observed widely with some indicators of such expectations showing a rise. as such, the momentum toward achieving the price stability target of 2 percent is maintained firmly. therefore, in order to maintain these positive developments and achieve the price stability target of 2 percent at the earliest possible time, the bank will persistently pursue the current powerful monetary