expectations about ongoing deflation take hold? that is different. here is the scenario which i think people worry most about : not the kind of mild temporary deflation which is a symptom of a period of short - term economic weakness, but the kind of deflation which might itself be a cause of further economic weakness in future. the reason they get so concerned is the possibility that it may not be easy to escape from such a situation. to put this at its most stark, imagine an economy in which deflation is strongly expected to continue, at a rate which exceeds the natural real interest rate in the economy – that is the equilibrium return on real capital. in that situation, because nominal interest rates cannot fall below zero, the real interest rate set by the central bank cannot go below the natural or'neutral'rate. since conventional monetary policy works in an expansionary direction by lowering interest rates in the financial sector below the neutral rate, it follows that conventional monetary policy is rendered incapable of applying stimulus to an economy in this situation. the real interest rate is too high, which means that policy remains too contractionary, prolonging the deflationary pressure. there is a'deflation trap ', or what we learned about in undergraduate economics as a'liquidity trap '. some have argued that this is the right diagnosis of japan's situation. the question is : how likely is it that other countries will get into this sort of problem? my view is that it is less likely to occur in most of the other more dynamic economies of asia. these countries must have tremendous opportunities for profitable investment in future. on that assumption, the natural interest rate is almost certainly much higher than the present or likely future rate of deflation. so while deflation or very low inflation in these countries is probably a sign of temporarily weak demand, which is something that policymakers there presumably wish to address, it still does not seem all that likely that they will find themselves in a deflation trap of the kind sketched out above. what about the us? we have been told for years that returns to capital are high, associated with the stronger productivity growth. for most of the late 1990s, markets certainly behaved as though that was their expectation. if it were still thought that prospective returns are pretty good, then one would be unlikely to worry about getting into a deflation trap. it would take a pretty large, persistently expected deflation rate to spring such a trap. of course, if

favour of a retail payments system that provides users with a wide choice of options from a wide range of providers. each payments method has its strengths and weaknesses, and so users should be able to choose the most suitable payments method for each particular type of transaction. in some cases the pricing of the transaction enables them to do so in a manner which contributes to an efficient low - cost retail payments system, while in some other cases it does not. the best way of improving efficiency is usually to increase competition rather than to regulate, but i think i have shown that some parts of the retail payments system are constructed in such a way that competition increases costs and reduces efficiency. in those areas, regulation is required, and the reserve bank through the payments system board will continue with its task of improving efficiency, competition and safety of the retail payments system.