to decline through massive purchases of government bonds. qqe, however, has another element : to drastically change the deflationary mindset that had taken hold amid the prolonged deflation. in order to understand this point, it is necessary to correctly diagnose the problems ailing japan ’ s economy and identify appropriate remedies. japan ’ s economy had been suffering from deflation since the mid - 1990s, with the year - onyear rate of change in the consumer price index ( cpi ) being about zero or slightly negative. a key feature of deflation in japan was that it was mild but persistent : the average of the year - on - year rates of change in the cpi from fiscal 1998 to fiscal 2012 was only minus 0. 3 percent, but the deflationary situation lasted for a decade and a half ( chart 2 ). japan got mired in deflation due to a variety of factors, including balance sheet adjustments by firms and financial institutions following the bursting of the asset price bubble, the inflow of lowpriced goods from emerging economies, and the excessive appreciation of the yen. bis central bankers ’ speeches whatever the reasons may be, a key problem that arose is that, as prices continued to fall due to these factors for a prolonged period, a deflationary mindset took hold among the public – that is, the belief became entrenched that prices would not increase but continue to steadily decline. once this deflationary mindset had taken hold, people engaged in economic activity assuming that deflation would continue. as a result, the economy fell into a vicious cycle of a decline in prices, a decline in sales and profits, stagnant wages and consumption, and a further decline in prices. moreover, under deflation, the real value of cash and deposits increases with the decline in prices. therefore, hoarding cash and deposits becomes a relatively better investment strategy than actual investment, discouraging firms from taking risks and investing in business facilities and in research and development to launch new businesses. in this way, deflation in japan perpetuated itself in a self - fulfilling manner and the growth potential continued to decline. in order to overcome this situation, it is necessary to change the entrenched view that “ prices will not rise ” and achieve a state in which firms and households act based on the assumption that “ prices will rise moderately every year. ” in the economic jargon, people ’ s view on how prices will develop in the

oil prices. domestic wholesale prices are levelling off due to the progress in inventory adjustment as well as an increase in prices of some products closely related to international commodities, such as those of petroleum products. consumer prices continue to be unchanged. corporate service prices are still falling, although the pace of the decline is slowing. as regards the movements of overall prices in the future, they are likely to be flat, this report was written based on data and information available when the bank of japan monetary policy meeting was held on 13 october 1999. the bank ’ s view on recent economic and financial developments, determined by the policy board at the monetary policy meeting held on 13 october as the basis of monetary policy decisions. as the rise in crude oil prices to date will continue to be passed on to prices of other products for a while. however, substantial narrowing in the output gap led by a recovery in private demand is unlikely for the time being, and wages continue to decline. thus, downward pressure on prices is expected to remain. in the financial market, the overnight call rate has stayed at nearly zero, and financial institutions have been confident about the availability of overnight funds. as for interest rates on term instruments, short - term rates maturing before the year - end have been moving at a historically low level. meanwhile, rates maturing beyond the year - end are relatively high due to market participants ’ concern over the year 2000 problem. the japan premium has continued to be nearly zero for short - term transactions, but a small premium has been observed for transactions maturing beyond the year - end. yields on long - term government bonds declined from late august to the level of around 1. 6 percent. they rose somewhat thereafter and have recently been moving between 1. 7 and 1. 8 percent. the yield spread between government bonds and private bonds ( bank debentures and corporate bonds ) has been stable and noticeably smaller than before. stock prices fell below the 17, 000 yen level in late september against the background of the weak tone in u. s. stock prices and the rapid appreciation of the yen, but subsequently rebounded reacting to the recovery in u. s. stock prices and the restoration of stability in the foreign exchange market. the prices are presently moving around 18, 000 yen. in the foreign exchange market, the yen surged against the u. s. dollar and reached the 103 – 104 yen level in the middle of and late september, but then declined to the current level of 106 — 108 yen to