. 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

the yen. domestic wholesale prices are declining mainly due to the decrease in prices of electrical machinery. consumer prices continue to be somewhat weak owing to the decline in prices of imported products and their substitutes. corporate service prices are falling slowly. as for the conditions surrounding price developments, the recent yen depreciation is exerting upward pressure on prices. however, with the ongoing adjustments, the balance between supply and demand in the domestic market is likely to exert downward pressure on prices. in addition, the declining trend of machinery prices caused by technological innovations, the decrease in prices of consumer goods arising from the streamlining of distribution channels, and the reduction in communications charges aided by deregulation will continue to restrain price developments. overall, prices are expected to be weak for the time being. moreover, given the high degree of uncertainty regarding future economic this report is based on data and information available at the time of the bank of japan monetary policy meeting held on april 12 and 13, 2001. the bank ’ s view of recent economic and financial developments, determined by the policy board at the monetary policy meeting held on april 12 and 13 as the basis for monetary policy decisions. developments, the possibility that weak demand will intensify downward pressures on prices warrants careful monitoring. in the financial market, the overnight call rate has declined reflecting the increase in the currentaccount balance at the bank of japan to around 5 trillion yen, following the decision at the monetary policy meeting held on march 19 to adopt new procedures for money market operations, and is currently moving around zero percent. interest rates on term instruments are declining further mainly due to the monetary easing by the bank. the japan premium remains negligible. yields on long - term government bonds increased to 1. 4 - 1. 5 percent. the yield spreads between private bonds ( bank debentures and corporate bonds ) and government bonds are mostly unchanged or expanding somewhat. stock prices are rising reflecting the above - mentioned monetary easing and expectations toward the progress in disposal of non - performing bank assets. in the foreign exchange market, the yen has depreciated and is currently being traded in the range of 123 - 126 yen to the u. s. dollar. with regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue - chip companies, while carefully evaluating the credit risks involved. there seem to be no significant changes in firms ’ perception on the lending attitude of financial institutions and the fundraising conditions of firms in the