the other, real interest rates will be lowered, thereby generating the effect of powerfully stimulating economic activity. as the real economy improves due to such stimulus, the actual inflation rate will rise, which will lead to a further rise in inflation expectations : such a virtuous cycle can be expected to operate. is such a mechanism actually at work? so far, the qqe has been steadily exerting its intended effects. surveys on various economic entities and break - even inflation rates have suggested a rise in inflation expectations on the whole. as for nominal interest rates, in contrast with other advanced economies in which long - term interest rates have been rising in tandem with economic recovery, japan ’ s long - term interest rates have been hovering in a stable manner at an extremely low level of around 0. 6 percent. under such financial conditions, japan ’ s economy has continued to recover moderately in association with a virtuous cycle among production, income, and spending. on the price front, the year - on - year rate of change in the cpi excluding fresh food was negative when the qqe was introduced but has since improved, registering a positive figure of around 1¼ percent in the latest data. one year has passed since the introduction of the qqe, and we have reached the midpoint of “ about two years ” that we specified. so far, japan ’ s economy has been following the path toward achieving the 2 percent price stability target as expected, and we have become increasingly confident that the anticipated transmission mechanism of the qqe is actually working. in japan, two rounds of consumption tax hikes are scheduled. based on the experience of the economy going into recession when consumption tax was raised last time, in 1997, there are some concerns that the same might happen again. however, looking at the economic conditions of that time, the economic growth rate plunged immediately after the tax hike but subsequently showed signs of recovery. the economy seemed to have instead been affected substantially by a series of failures of japanese major financial institutions and by the asian currency crisis that took place just when the economy showed nascent recovery. by contrast, at present, japan ’ s financial system has been maintaining stability and emerging economies have become more resilient against negative shocks. the current conditions are quite different from those in 1997. taking these differences into account, the bank believes that, even assuming two consumption tax hikes, the virtuous cycle in the economy will not be interrupted and japan ’ s economy will

markets for such instruments as corporate bonds and cp. on the other hand, credit demand of private firms continues to lack momentum as corporate demand for external funds is subdued, since firms ’ cash flow is at a high level. moreover, firms continue to reduce their debts as part of their balance - sheet restructuring measures. as a result, credit demand in the private sector has continued to be basically stagnant. in view of this, the underlying tone of private banks ’ lending remains sluggish. the amount outstanding of corporate bonds issued continues to be above the previous year ’ s level but the growth rate is slowing somewhat. meanwhile, the amount outstanding of cp issued remains at a high level. recently, the growth rate of money stock ( m2 + cds ) is increasing reflecting the inflow from postal savings. funding costs for firms continue to decline as both short - and long - term prime lending rates were lowered, reflecting the decrease in market interest rates. in this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy. for the time being, attention should be paid to the effects of the additional monetary easing measures taken by the bank, while careful monitoring is still required for the effects of stock price developments on the behavior of financial institutions and the fund - raising conditions of firms.