have developed a strategy to diversify their business may make use of mergers and acquisitions. due partly to strengthening corporate governance, firms may increasingly buy back their own stocks or increase their propensity to pay dividends, both of which would increase payouts to shareholders. an increasing number of firms will be taking a more positive attitude to business activity with funds they raise, taking advantage of an accommodative financial environment. on the employment front, an increasing number of firms may raise nominal wages and bonuses and recruit a larger number of new graduates in order to ensure that they have a sufficient number of skilled workers and to better attain a more balanced composition of workers. such movements should spread in the process of the economy taking a balanced growth path, and this is in turn expected to enhance economic growth, creating cyclical momentum. so far, i have focused on corporate behavior in relation to overall economic activity. i intend to pay close attention to how these developments in the corporate sector affect prices. looking at factors that push down prices, the price fall in japan in 2001 - 02 was, to a large extent, due to the weakness in demand. recently, however, downward pressure on prices stemming from weak demand has been abating, and that stemming from other factors is increasing. while the reduction in electricity and telephone charges against the background of deregulation is one of the factors, significant factors behind the fall in prices of final goods and services are higher productivity and, above all, firms'persistent stance of restraining labor costs. two notable characteristics of the recent japanese economy - that the economy is growing at a moderate pace and that consumer prices remain relatively unresponsive to the output gap - are both a reflection of firms'cautious behavior. therefore, close attention should be paid to whether firms'activities become more positive and whether their stance of restraining labor costs might change. as expected economic growth increases, views on prices are expected to change. in fact, deflationary expectations of households and firms have been subsiding steadily since they peaked in 2001, as evident in recent surveys that show an increase in the percentage of individuals and firms expecting a rise in prices. the fact that land prices in the tokyo metropolitan area are beginning to rise after the decline came to a halt may be a sign of an increase in expected economic growth. attention should also be paid to how price expectations and land prices will develop in the future. iv. monetary policy the bank currently implements a quantitative easing policy with the outstanding balance

the outright purchases of long - term interest - bearing japanese government bonds, the bank has decided that purchases will continue at the current amount and frequency for some time. with regard to the future course of monetary policy, the bank stated that it will adjust the level of interest rates gradually in the light of developments in economic activity and prices, while maintaining the accommodative financial conditions ensuing from very low interest rates for some time. iv. thinking behind the conduct of monetary policy it takes quite a while for the effects of a monetary policy change to filter through to the economy and prices. because of the long and variable lag length, the conduct of monetary policy needs to be forward looking, based on the outlook for the economy and prices over a sufficiently long term. the bank releases the outlook for economic activity and prices ( the outlook report ) semiannually, in which it describes its forecast for the economy and prices over a horizon of one and a half to two years. the bank's conduct of monetary policy is based on this forecast. it has become a common practice among central banks to conduct monetary policy based on published forecasts for economic activity and prices. the key point of a " forward - looking policy framework " is to conduct policy on the basis of a forecast of the most likely outlook for the economy and prices, as well as identification of the accompanying upside and downside risks, by conducting a careful analysis of incoming indicators and other relevant data. especially in cases where the implications of the available data are mixed, the accuracy of the the significance of the transfer of wealth to oil - producing countries can be approximated by the difference between the growth rate of the gdp deflator and that of the domestic demand deflator. based on this estimation, the transfer of wealth accounted for on average about 0. 7 percent of nominal gdp from 2004 through 2006. if this wealth were not transferred to oil - producing countries but instead spent in japanese markets, it could be expected to deliver a positive fillip to the growth of domestic demand. for details, see k. hamada and k. iwata, " national income, terms of trade and economic welfare, " economic journal, vol. 94, december 1984. forecast should be carefully examined in making policy decisions. coming to a decision through painstaking examination of the available economic data and other relevant information, therefore, is the basis of forward - looking monetary policy. arguments that treat the assessment of available data and the conduct of forward -