is a positive movement in accordance with the progress of structural reforms such as the npl disposal and improvement of productivity in the economy, it can be expected that the monetary easing policy will support such movement and have powerful effects. it is extremely important to be tenacious in maintaining the current monetary easing conditions, so that they could support any positive movement in the economy when it appears. the second role is the provision of liquidity in a swift and timely manner. should there be uncertainty or concern in the financial markets for one reason or another, liquidity has to be provided in a swift and timely manner, so that such uncertainty or concern will not disrupt the markets. it is one of the central bank ’ s most important roles to maintain the stability of the financial markets and the financial system through liquidity provision. maintaining that stability is also important in making the effect of the monetary easing continuously permeate through the economy. now, what could monetary policy do, if economic conditions deteriorate further and the risk of a deflationary spiral is heightened as a result? the bank is aware of the argument that the bank should not only increase the outright purchase of long - term jgbs but also purchase any assets such as foreign - currency denominated assets, stocks and even the npls to prevent deflation. as i have already expressed my thoughts on this issue on a different occasion, i will reiterate the conclusion in the following three points. first, given that just increasing the amount of liquidity gives only limited stimulus to the economy, the major benefit of purchasing such assets is mainly to influence their prices. if, however, one expects to influence these assets through a change in the supply - demand balance and thereby produce the effect of monetary easing, the purchase must be done on a large scale. second, taxpayers may ultimately have to pay the price of possible loss resulting from this large - scale purchase and this will also affect the microeconomic resource allocation. and third, such a policy implies that a central bank would be conducting an activity which is close to entering the domain of fiscal policy. the basic rule in a democratic society is that fiscal policy using taxpayer ’ s money needs to be approved as part of a budget by a parliament composed of members elected by the people. i am not worrying about inflation when deflation is a concern, but claiming that such a policy of purchasing various assets should be discussed publicly in the context of governance in a democratic society. b. the role that the government

. instead, while restoring price stability remains critical, the central bank should do so at a pace that does not do undue harm to the economy. " in japan, we are experiencing a similar problem, although the direction is quite the opposite. japan's economy has been growing at a rate above its potential for some time. utilization of resources such as production capacity and labor has been increasing, and the estimates of the output gap are suggesting tighter supply and demand conditions. on the other hand, the response of prices to this situation has been very weak, leaving the current inflation rate near 0 percent. in a situation like this, the extent of the output gap needed to raise the inflation rate in a short period of time becomes not only very large but also subject to significant uncertainty. an abrupt widening of the output gap may bring about larger swings in the economy and risk the sustainability of the economic expansion. the alternative, safer route is to focus on securing sustained economic growth and minimizing swings, generating corresponding expectations of a moderate and gradual rise in the inflation rate. as you might expect, it is this latter approach that is behind the bank of japan's current gradual adjustments in the level of interest rates. historically, inflation dynamics have often exerted considerable influence on central banks'policy frameworks and their conduct of monetary policy. experience of high inflation up to the 1980s, for example, encouraged the development of monetary policy frameworks focusing on prices, such as " inflation targeting " regimes. since then, prices have tended to stabilize and the phillips curve has become flatter. such changes in inflation dynamics have made it necessary for central banks to look at the broader picture in their pursuit of price stability. to be more specific, with a flatter phillips curve, imbalances in the economy do not easily translate into movement in prices. on the contrary, it is possible that imbalances may make themselves felt on the real side of the economy or in asset prices before they are translated into instability in general prices. this has indeed induced central banks, including those that have adopted inflation targeting, to gradually shift their attention to achieving price stability in the longer run through flexibly responding to economic developments as well as prices. the framework for the conduct of monetary policy that the bank of japan adopted when it terminated the quantitative easing policy in march 2006 was constructed with these inflation dynamics in mind, and in full awareness that they may evolve further in the future. as i just mentioned, inflation dynamics may change in the