the phillips curve – the slower responsiveness of prices to the improvement of the output gap – due to globalization and the progress in it ( chart 7 ). thus, the achievement of the price stability target becomes increasingly challenging. d. the need for a recovery in wages and yet, why has the japanese economy consistently failed to exit from deflation for more than a decade? during the early phase of deflation in the late 1990s, this was mainly due to the substantial fall in asset prices, the subsequent credit crunch caused by the financial crisis, and the preservation of excess supply caused by the delay of firms with poor productivity in exiting the market. however, since the japanese economy has already overcome problems in its financial system, deflation since the mid - 2000s has entered a new phase. stagnant wages have become the main factor behind deflation. prices of goods and services are affected by the cost of production. assuming that the cost of production consists of personnel expenses and material costs, many of the latter are determined through cross - border competition. therefore, their price fluctuations – excluding volatility due to developments in the foreign exchange markets – should equally affect the entire global economy, and thus material costs cannot be the main reason why japan is the see http : / / www. boj. or. jp / en / announcements / release _ 2000 / k001013a. htm /. see http : / / www. boj. or. jp / en / announcements / release _ 2006 / mpo0603a. htm /. see http : / / www. boj. or. jp / en / announcements / release _ 2012 / k120214b. pdf. bis central bankers ’ speeches only advanced economy suffering from deflation. the real cause is another factor affecting the cost of production, namely, wages. in fact, consumer prices and wages are closely correlated ( chart 8 ). about half of the components of the cpi are services in terms of weight, and prices of services are generally synchronized with wages in the services industry ( chart 8 ). this industry is labor intensive, and prices of services are easily affected by developments in wages. accordingly, in aiming at the 2 percent price stability target in terms of the year - on - year rate of change in the cpi, it is vital, above all, to seek a recovery in wages. however, the level of annual nominal compensation of employees in the “ national accounts ” dropped by more than

takehiro sato : recent developments in economic activity, prices and monetary policy speech by mr takehiro sato, member of the policy board of the bank of japan, at a meeting with business leaders, gunma. 6 february 2013. * i. * * introduction at the monetary policy meeting ( mpm ) held on january 21 and 22, 2013, the policy board of the bank of japan decided to take additional steps to provide monetary accommodation decisively. specifically, the bank decided to introduce ( 1 ) the “ price stability target ” set at 2 percent in terms of the year - on - year rate of change in the consumer price index ( cpi ) and ( 2 ) the “ open - ended asset purchasing method ” ( i. e., to purchase assets without setting any termination date ) under the asset purchase program. the bank also decided to release a joint statement with the government ( chart 1 ). as was already noted in the statement on monetary policy released on january 22, 2013, i voted against the 2 percent price stability target. however, since policy decisions are made by majority vote of the policy board members at the mpm, the aforementioned decisions at the january mpm were made accordingly. in my remarks today, i will reflect on the conduct of monetary policy in the future, taking note of the measures to achieve the 2 percent “ price stability target ” that has just been introduced. ii. recent conduct of monetary policy a. from the “ price stability goal in the medium to long term ” to the “ price stability target ” the “ price stability target ” – introduced by the bank as a numerical value – is set at 2 percent in terms of the year - on - year rate of change in the cpi. this target replaces the “ price stability goal in the medium to long term ” introduced by the bank in february 2012, which the bank had judged to be in a positive range of 2 percent or lower in terms of the year - on - year rate of change in the cpi and 1 percent for the time being. the major changes to the expressions regarding price stability from february 2012 are as follows. first, the bank deleted the phrase “ medium to long term ” ; and second, the bank changed its wording from “ goal ” to “ target ” the changes reflect a situation in which awareness of the importance of flexibility in the conduct of inflation - targeting policy has been increasing. more specifically, even inflation - targeting countries do not change their monetary policy stance mechanically in accordance with their target