the npl problem. at the same time, it is very important for the bank to improve its promotion of smooth corporate financing and its implementation of money market operations to strengthen the transmission mechanism of monetary easing, against the background of the banks'weak financial intermediary function, which is an important route for the transmission of the effects of monetary policy. in light of this, the bank has decided, as a temporary measure, to examine the possible purchase of asset - backed securities ( abss ), including asset - backed commercial paper, mainly backed by those assets related to small and medium - sized firms. abss are marketable securities into which pools of specific assets such as accounts receivable held by firms are converted. the abs market in japan is still in the process of development. however, nurturing the development of the abs market is expected to provide various merits in corporate finance, in particular enabling small and medium - sized firms to exploit an alternative route of raising funds to bank borrowing. the bank hopes that the transmission mechanism of monetary easing will be strengthened through the bank's support for the establishment and development of financial markets that will be able to provide new financing channels. the bank is currently working on a specific design for the abs purchasing scheme which would contribute to the development of the abs market, gathering opinions from market participants. financial markets are basically expected to be initiated by the private sector and to evolve autonomously. for this reason, the bank's outright purchases of private debts such as abss are unprecedented measures for a central bank. therefore, the bank will determine the specific design of the purchasing scheme, considering the following : to what extent the purchase will strengthen the transmission mechanism ; whether or not the purchase will distort market mechanisms ; and how to maintain the financial soundness of the bank and ensure its ability to conduct monetary policy in the future. iv. purchase of stocks held by commercial banks although the measure does not fall directly within the province of monetary policy, the bank started to purchase stocks held by private banks in november 2002, with a view to further reducing the market risk pertaining to these stocks. the total amount of stocks purchased as of april 10, 2003 was 1, 209. 0 billion yen. the purchasing of stocks is one of the actions taken by the bank aimed at the early restoration of the soundness of the financial system. such restoration of the soundness of the financial system is considered indispensable in strengthening the transmission mechanism of monetary policy. conclusion japan

rule as setting the policy rate so that the inflation forecast was at the midpoint of the target band at some specific horizon, say two years. it was also often argued that for reasons of enhancing credibility, there should be some form of “ penalty ” on the central bank if inflation moved outside the target band ; in effect, the edges of the band should be viewed as an “ electric fence ”, to be avoided if at all possible. previous discussions of the role of forecasts at the rba can be found in stevens g ( 1999 ), “ economic forecasting and its role in making monetary policy ”, rba bulletin, september, pp 1 – 9, and stevens g ( 2004 ), “ better than a coin toss? the thankless task of economic forecasting ”, rba bulletin, september, pp 6 – 13. excluding the effect of the gst and mortgage interest payments, the average inflation rate has been 2. 6 per cent. graph 1 this form of inflation targeting, however, never seemed particularly attractive to the rba. while we are committed to ensuring that inflation outcomes are consistent with the mediumterm target, we have not felt the need to set the cash rate so that our inflation forecast at a specific horizon was exactly 2½ per cent. nor have we felt that the edges of the target are like an electric fence. we have, from the outset, had a more flexible approach than this. since the current framework was adopted, our two - year - ahead inflation forecast has on occasions been below 2 per cent, and on other occasions it has been above 3 per cent. 3 and in terms of actual outcomes, year - ended cpi inflation has been outside the 2 to 3 per cent range a bit more often than it has been within the range. this more flexible approach has two advantages. the first is that, in the event that inflation turns out to be unexpectedly too high or too low, the central bank has some flexibility about the pace at which inflation is returned to the target range. provided the central bank ’ s commitment to medium - term price stability is credible, this flexibility can deliver better outcomes for the real economy. the second advantage is that this flexibility provides greater scope to take into account not just the central forecast, but also the medium - term risks around that forecast. let me try and make this a little more concrete by asking you to think about an economy that experiences a positive supply shock, say an improvement in productivity or lower world prices for