the year - on - year rate of change in the cpi is 0 percent, that situation is in deflation to the extent of the bias. therefore, to overcome deflation, it is necessary to aim at a somewhat positive inflation rate. second, the idea of securing a “ buffer ” to reinforce monetary policy in responding to a price decline and economic deterioration. nominal interest rates cannot be lowered to below zero percent. since lowered to 0. 5 percent in 1995, the short - term rate in japan has been between 0 percent and 0. 5 percent for about 20 years ( chart 14 ). japan has been in a situation in which it has been difficult to stimulate economic activity by lowering nominal short - term interest rates even if prices decline or economic activity deteriorates. in fact, even in response to an extremely large adverse shock of the lehman crisis, the bank was only able to reduce about 0. 4 percent of the nominal short - term interest rate. in the future, when about 2 percent inflation will be achieved in a stable manner and nominal interest rates will be formed at a somewhat high level reflecting the inflation rate, room will increase for flexibly responding to a price decline and economic deterioration by reducing the short - term interest rate. for similar reasons, many countries have set an inflation target at about 2 percent, and 2 percent has become a global standard. concluding remarks as i have explained, the bank has been aiming at creating a state in which 2 percent inflation rate will be maintained in a stable manner. it might be difficult to imagine such a situation because deflation has continued for a protracted period. i would like to conclude my speech today by briefly touching on an image of the economy and society after overcoming deflation. a state in which 2 percent inflation will be maintained in a stable manner is, to put it briefly, a state that each economic entity will act based on a recognition that prices will rise by about 2 percent even when the economy is in a normal state. in other words, a state in which about 2 percent inflation has been factored in price - setting and wage - setting. such state has already been achieved in advanced economies such as in the united stated and europe, in which people ’ s medium - to long - term inflation expectations have been stable at about 2 percent. as about 2 percent inflation has been firmly embedded in the social system and practices, those economies have been able to avoid deflation of a continued decline in prices and wages even when there was temporary

##urchase ( gensaki or repo ) agreements. the only exception to this rule for market operations is when the bank makes outright purchases of government bonds. thus, the credits provided by the bank are secured by the creditworthiness of plural entities : not only by the creditworthiness of financial institutions to which the bank lends directly, but also by that of the government or the entities in the non - banking private sector, which are the issuers of the debt instruments. this approach is common among central banks. at the bank of japan, it is called “ the double - name principle. ” – 4 – where the collateral for the bank ’ s loans and the financial assets purchased in market operations are issued by such entities as private - sector firms, the bank assesses the eligibility of these assets according to its own criteria — — that is, its internal ratings — — and reviews it at least once a year. if a firm ’ s financial performance deteriorated, the financial debt of this firm would no longer be acceptable as collateral or as an instrument of market operations, even if it had once been deemed to be suitable for such purposes. of course, these measures alone are not enough. the double - name principle might reduce the probability of defaults, but taking a firm ’ s debt as collateral is not sufficient if the firm ’ s creditworthiness is bolstered by the support of the commercial bank to which the bank of japan is lending. nor is it desirable for the bank ’ s assets and collateral to be concentrated in the liabilities of firms in a particular industry. the bank pays careful attention not only to the soundness of individual assets but the entire portfolio, ensuring that its assets and collateral are not exposed to linkages of risk or excessive risk concentration. the second principle is to maintain neutrality with respect to resource allocation. if the bank held an excessive quantity of certain types of financial assets, price making and resource allocation in the market might be distorted. in view of its role in the economy, the bank should do its best to minimize such influences. the supply of funds by the bank of japan in the context of monetary policy management is aimed at influencing the overall level of market interest rates. furthermore, provision of funds for the purpose of maintaining an orderly financial system is aimed solely at containing systemic risk and preventing disruption of the entire financial system. the third principle is to maintain liquid assets. the assets of the bank must be such as can be liquidated at reasonable cost whenever