employee income is likely to continue, as it is expected that firms will continue to experience labor shortages and corporate profits will remain generally high. in this situation, private consumption is expected to follow a gradual uptrend. however, as prices of daily necessities such as food and gasoline have been rising recently, consumer sentiment appears to have deteriorated, and this may have adverse consequences to which attention will need to be paid. meanwhile, housing investment, which has been suffering significant declines as a result of procedural changes accompanying the enforcement of the revised building standard law, is nevertheless expected to recover gradually as the delays in the confirmation of building applications are resolved. in fact, the number of housing starts has already been showing signs of recovery. the pace of recovery, however, is still uncertain, since sales of condominiums, whose prices are rising, remain relatively weak. regarding prices, the domestic corporate goods price index ( cgpi ) has been rising mainly due to higher international commodity prices. the year - on - year rate of change in the consumer price index ( cpi, excluding fresh food ) posted a 0. 8 percent increase in december due mainly to rises in the prices of petroleum products and food products. this positive trend in the rate of change is expected to continue : in the short run, due to the effects of high prices of petroleum products and food products ; while in the longer run, because supply and demand conditions in the overall economy are expected to tighten as the moderate economic expansion continues. c. future conduct of monetary policy i would now like to explain the bank's thinking regarding the conduct of monetary policy based on the outlook for economic activity and prices and risk factors i have described. in conducting monetary policy, it is important not to be swayed too much by short - term developments but to make forward - looking projections of economic and price trends. as i noted earlier, the growth of japan's economy, for the time being, seems likely to decelerate while prices continue to rise, although, looking forward, the economy is likely to resume a moderate expansion under conditions of price stability. given this, our basic stance on the future conduct of monetary policy remains unchanged. we will continue to carefully assess the levels of uncertainty associated with the projected future paths of the economy and prices and to remain attentive to both upside and downside risks, thereby ensuring the appropriate conduct of monetary policy. ii. the japanese and world economies over the medium to long term : issues and strategic direction i

, especially in terms of their risk preferences and investment horizons. homogenous market participants tend to magnify mistakes, increasing the risks of market instability. diversity is preferable, but irresistible forces such as rules and regulations regarding capital, risk management, and disclosure could inadvertently homogenize the risk preferences and time horizons adopted by market participants. unfortunately, there are no good answers, and central banks must stand ready to fix any problems as they arise. lastly, while central banks should have deep respect for financial markets, for the reasons i have just explained, they should be willing to stand up to the market from time to time. in order to deliver sustainable economic growth under price stability, central banks must have a very long time horizon. this point is especially relevant for financial stability, because financial cycles tend to be quite long. as alan blinder had noted, central banks must avoid a situation where “ the market reacts, or rather overreacts, to perceptions about what the central bank might do, and the central bank looks to the markets for guidance about what it should do. ” 3 an example of how a central bank should conduct its policy in the face of market expectations is the bank of japan ’ s current commitment to ease monetary policy aggressively. that commitment is conditional on there being no significant risk to the sustainability of economic growth, including the accumulation of financial imbalances. the bank of japan will, in this context, conduct an assessment independent of what markets might be thinking, while taking full account of information derived from markets. turning to europe, the european central bank is committed to fixing the transmission mechanism of monetary policy in the euro area, showing that the bank may have a different view from the market on where the various sovereign spreads should be. concluding remarks today, i have offered my views on how overconfidence in extracting information from financial markets contributed to the formation of financial bubbles that brought about the crisis. the strong emphasis, by market participants as well as public authorities, on the deep wisdom of financial markets before the crisis has now brought about a public backlash against anything that even has a whiff of using finance or market forces to solve social issues. this is unfortunate because, if used wisely, the market is still the best arbiter of economic outcomes, finance is the art of the possible, and well - functioning markets will open new horizons. the lessons for central banks that i have just described apply largely to market participants as well. the financial industry should also read