monetary easing effect is often called “ the commitment effect ” or “ the duration effect. ” third, the bank decided that it could increase its outright purchase of long - term japanese government bonds ( jgbs ) when the bank found it necessary to smoothly provide ample liquidity to the market, on the condition that the amount outstanding of long - term jgb holdings be within the amount outstanding of banknotes issued. in accordance with this framework, in august the bank increased the amount and frequency of jgb outright purchase from twice a month amounting to 400 billion yen to three times a month amounting to 600 billion yen. fourth, the bank has established the so - called lombard - type lending facility. by utilizing this scheme, financial institutions, under certain conditions, are now able to borrow funds from the bank at the official discount rate as long as they have eligible collateral. this measure has strengthened the monetary easing effect in the sense that financial institutions have been ensured access to ample liquidity and that money market interest rates have been stabilized. the official discount rate, which is applied to this lombard - type lending facility, has been lowered twice in 2001, in february and in september, and is currently at 0. 1 percent. b. the strong monetary easing effects in financial markets current monetary policy has achieved extremely easy conditions in the financial markets. in the money markets, short - term interest rates, including longer ones on term instruments, have declined to a lower level than in the zero - interest - rate period of 1999 - 2000. since the unit for transactions of the overnight call rate was changed from 0. 01 percent to 0. 001 percent in early september, the rate has declined to as low as 0. 001 percent to 0. 004 percent, a microscopic world indeed. in the bond markets, the interest rates on jgbs continued to move at levels close to the historical low although they did not decline below the level marked in march this year. furthermore, medium - term interest rates, such as that of jgbs with five years remaining to maturity, are moving at 0. 4 - 0. 5 percent, which is lower than the level in march. in the cp and corporate bond markets, credit spreads have narrowed with the decline in short - to medium - term interest rates and investors have become more willing to take risks. therefore, the demand for issuance of new securities in firms with relatively high credit ratings has increased and the amount outstanding of issuance of cp and corporate bonds has

that, although funds are abundant in the financial markets, they do not permeate outside those markets, that is, to the corporate and household sectors and money supply has not increased sufficiently. this has been both the cause and result of the stagnant growth in expenditures and the decline in prices. given that the mechanism to increase money is not working properly, i think it is not following logical steps or is ignoring reality to argue that increasing money could solve all the problems. as i mentioned, while various factors affect the movement of prices, the most fundamental factor determining price developments is the balance between aggregate demand and supply for goods and services. as the supply capacity changes only slowly, it is the movement of demand that mainly determines the short - term supply - demand balance. in fact, in the time - series data on the japanese economy, prices begin to rise only after the economic growth rate recovers and the output gap narrows. statistical analysis of the dynamic correlation between the economic growth rate and the rate of increase in prices shows that the correlation coefficient is the highest when the economic growth is one to two years ahead of a consumer price increase. on the other hand, the rate of increase in prices does not seem to lead the economic growth rate. in the above discussion, it is clear that in order to halt the continuous decline of prices, it is most important to promote a sustainable, not temporary, growth in aggregate demand. the implementation of monetary policy by the bank so far has been aimed at halting the decline in prices by providing ample liquidity to the markets to lower interest rates thereby stimulating aggregate demand. the current difficulty in the conduct of monetary policy is that it cannot stimulate aggregate demand even with all the measures employed. we need to face up to this fact. b. inflation targeting currently in japan, we often hear the argument calling for the adoption of inflation targeting. however, this argument is peculiar in the sense that it focuses on first raising prices using every measure. i believe we should devise ways to stimulate economic activity first because prices in nature are the result of economic activity. with this understanding of the environments surrounding price developments and monetary policy, the bank is currently reluctant to accept the recent argument for inflation targeting. more fundamentally, inflation targeting should be regarded not as a short - term policy tool but as a framework for improving the transparency of the conduct of monetary policy. as a possible tool for improving the transparency, the bank considers that inflation targeting is worth examining as one of the options in