considerably below 2 percent during the years of deflation – through monetary policy. looking at the situation in japan, the year - on - year rate of change in the cpi had been in negative territory or slightly above zero since the second half of the 1990s up until before the introduction of qqe. in other words, over the business cycle, it has been at around 0 percent on average. amid protracted deflation over this long period, medium - to long - term inflation expectations declined, and consequently, a sense that prices would not increase became entrenched. under these circumstances, firms ’ incentives to launch new initiatives through investing in business facilities and in research and development became reduced, because the holding of cash or deposits became a relatively better investment strategy. thus, japan ’ s economy was deprived of vitality and this generated a vicious cycle in which the low vitality made it more difficult to overcome deflation. in order to escape from such a situation, it has become necessary to pursue a policy that quickly and drastically changes firms ’ and households ’ mindset that prices will not increase. to that end, what was introduced as a bis central bankers ’ speeches prescription was qqe. this policy aims at creating an economic situation where prices increase at around 2 percent on average, as is the case with the united states and europe, by raising people ’ s medium - to long - term inflation expectations to around 2 percent and re - anchoring these expectations at that level. the mechanism of qqe is expected to be as follows : first, inflation expectations will be raised through a clear commitment and through a large - scale monetary easing to underpin the commitment ; second, concurrently, downward pressure will be put on nominal interest rates through massive purchases of government bonds, thereby decreasing real interest rates and stimulating private demand such as business fixed investment. namely, to start this mechanism, the bank aimed at first igniting inflation expectations. raising inflation expectations by changing people ’ s deflationary mindset is itself an aim of overcoming deflation, and at the same time the key to implementing the mechanism of qqe. considering the unique situation facing japan and the prescription for it, importance is attached to a “ time frame ” during which the target should be achieved, compared with the target for price stability in other countries. if the bank had simply stated that it would achieve 2 percent inflation at some point in the future and that it therefore expects firms and households to change their actions, would those entities,

toshiro muto : dynamism and diversity of asia - a central banker's view remarks by mr toshiro muto, deputy governor of the bank of japan, at " emerging opportunities in the global economy " the 29th annual joint meeting of japan - u. s. southeast association and southeast u. s. - japan association, tokyo, 17 october 2005. * i. * * introduction good morning, ladies and gentlemen. it is a great pleasure to join you at this special gathering. asia is undergoing tremendous changes. links between the countries in this region are getting closer. two big countries, china and india, are growing on a global platform. these changes are taking place not only in economic terms but also in the political and diplomatic arenas. against this background, changes in asian dynamics are beginning to reshape the contours of the us - asia relationship. with these things in mind, i will address four facets of today's asia : booming economies, rising regional cooperation, looming challenges, and evolving relations with the us. ii. booming economy following the economic crisis in 1997 - 98, the economies in south - east asia have made a strong recovery. indeed, countries in this region have exhibited impressive resilience in restoring their economic vitality. when the world economy slowed in the wake of the bursting of the it bubble in 2002 - 03, asia's solid growth helped avert the global recession. china's economic expansion is particularly remarkable as it has sustained an average growth of 8 - 9 percent per annum for the past decade. if you take a closer look at the current economic dynamism in asia, you will not fail to see a stark difference from the past economic booms. in the past, trade in this area was simple. industrial countries like japan and korea imported raw materials from their asian neighbors to export final products to the us and europe. in contrast, trade patterns within asia are now much richer on the basis of the sophisticated vertical division of production processes. countries are specializing in the optimal parts of the supply chain on the basis of their resource endowment and comparative advantage. this process is being propelled by foreign direct investment ( fdi ) coming from both within and outside the region. for example, japan exports intermediate and capital goods to china and other asian countries, and these countries assemble what they import from japan in order to make final products for the global markets. consequently, the proportion of intra - regional trade in asia has climbed to