the rise in inflation expectations will also increase. iii. discussion points regarding the price stability target of 2 percent we at the bank believe that so far japan ’ s economy has been on a path suggesting that the 2 percent price stability target will be achieved as expected. however, given that prices have bis central bankers ’ speeches risen due to the consumption tax hike, we often hear the question from consumers why, on top of that, the bank is aiming at 2 percent inflation. in addition, with supply constraints such as labor shortages becoming more pronounced, some ask whether it is desirable to have inflation while growth remains low. let me respond to these questions. why aim at 2 percent? i said earlier that the year - on - year rate of change in the cpi ( excluding fresh food ) after excluding the direct effects of the consumption tax hike has been hovering at around 1¼ percent. however, the rate of change including the direct effects of the consumption tax hike was plus 3. 3 percent in june, which was as high as the rate of increase in december 1990. focusing on this point, some argue that it is not necessary to raise inflation further. however, it should be noted that the impact of the consumption tax hike on consumer prices is a “ one - off ” at the time of the hike, and the impact on the year - on - year rate of change in the cpi will disappear after one year. the bank is not aiming at achieving the price stability target of 2 percent temporarily. what the bank aims at is to achieve an economy in which inflation is about 2 percent on average year after year. in such an economy, people behave on the assumption that inflation is about 2 percent. this is the reason why the bank judges the trend in prices excluding the direct effects of the consumption tax hike. based on what i just mentioned, let me explain why we aim at 2 percent inflation. japan ’ s economy has been suffering from deflation for about 15 years, since fiscal 1998. that being said, the average annual rate of change in terms of the cpi during that period was around 0 percent – specifically, it was minus 0. 3 percent. however, since the change in the cpi is biased upward, it overstates actual inflation. therefore, a cpi growth rate of 0 percent means that the economy is actually experiencing deflation. in addition, since interest rate levels in a deflationary environment tend to be correspondingly low, interest rates are likely to face the zero lower bound when the

benign economic and financial conditions. this adjustment is therefore expected to require some time to work itself out, and during the process financial institutions will have to bear a certain amount of losses. still, there is a degree of uncertainty as to how the global economy will be influenced by future developments in global financial markets and conditions at financial institutions. if such disturbances to overseas economies and global financial markets should indeed materialize, japan's economy may be adversely influenced through, for example, changes in exports and imports, corporate profits, and financial market conditions. attention should continue to be paid to this potential risk. the second risk concerns possible larger swings in financial and economic activity under continuing accommodative financial conditions. in terms of their impact on japanese financial conditions, the adverse effects of subprime mortgage problems and the consequent volatility in global financial markets have so far been limited : the lending attitude of financial institutions has been positive ; and the issuing environment for cp and corporate bonds has continued to be favorable. meanwhile, with extremely accommodative financial conditions continuing, there is a risk of a misallocation of resources in the long run as agents become over - extended in financial markets or pour funds and other resources into inefficient economic activities. such behavior may push up economic growth and asset prices in the short run, but lead to later downward adjustments and hamper the sustainability of economic growth. iii. conduct of monetary policy i would now like to explain the bank's thinking regarding the conduct of monetary policy based on the above - mentioned assessment of economic activity and prices. as i have just said, japanese financial conditions have been extremely accommodative, and if japan's economy is to follow a path of sustainable growth under price stability, the level of interest rates is to be raised. we have no predetermined view regarding the timing or the pace of increase in interest rates, and will determine these in light of our assessment of the future path of the economy and prices and its likelihood, as well as a careful consideration of both upside and downside risks. our outlook suggests that japan's economy will realize sustainable growth under price stability. but still, we need to examine the likelihood of this scenario. we are also aware of the importance of examining risk factors that may influence the outlook, and in this respect we should not focus merely on immediate downside risks, but should be attentive to both upside and downside risks. it