toshihiko fukui : new framework for the conduct of monetary policy - toward achieving sustainable economic growth with price stability summary of a speech by mr toshihiko fukui, governor of the bank of japan, to the japan chamber of commerce and industry, tokyo, 16 march 2006. * * * introduction at the monetary policy meeting ( mpm ) held on march 8 and 9, 2006, the bank of japan decided to terminate the quantitative easing policy, which had been maintained during the five years since march 2001. the bank shifted the operating target of money market operations from the outstanding balance of current accounts at the bank to a short - term interest rate, namely, the uncollateralized overnight call rate. it also introduced a new framework for the monetary policy conduct, including clarification of its thinking on price stability. today, i will focus on the background to the termination of the quantitative easing policy by looking back on economic and financial developments during the past few years, and explain the bank's future monetary policy conduct. i. embarking on a sustainable growth path japan's economy continues to recover steadily. the current economic expansion started in january 2002 and has lasted for more than four years, according to the cabinet office's reference dates of business cycles. the recent recovery is well balanced in terms of the balance between domestic and external demand, and also between the corporate and household sectors. although the recovery is not accelerating, the foundation for economic growth is solid, and its resistance to various external shocks has been increasing. the present phase of the recovery is the third since the bursting of the economic bubble. unlike the previous two phases, this time we may reasonably expect the current expansionary phase to last longer and to be more sustainable. japan's economy has, at last, succeeded in emerging from its prolonged adjustment phase, which continued for more than a decade, and has embarked on a sustainable growth path with price stability. several factors support this view. in addition to external factors, such as the continuing expansion of overseas economies, on the domestic side structural reforms have made significant progress in both the business and financial sectors. moreover, the positive effects of the recovery are spreading to the household sector. i will now discuss these contributing factors and then go into some detail regarding the sustainability of the current economic recovery. a. progress in structural reforms the most important factor contributing to the achievement of sustained economic recovery has been the elimination of the burdens, or adjustment pressures, in the corporate

the outlook deemed most likely by the bank follows a path of sustainable growth under price stability. it should be added that, in order to implement the appropriate policy for achieving sustainable growth and price stability, it is not sufficient merely to assess the economic and price situation according to the first perspective. needless to say, any forecast entails uncertainty. it is for this reason that the bank's outlook report contains detailed descriptions with regard to upward and downward risks affecting the scenario deemed most likely by the bank. among risk factors, there are those that will have a significant impact on economic activity and prices should they materialize, even though the likelihood of materialization is low. such risks include that of falling into a deflationary spiral, or conversely, the risk of sparking inflation or generating an asset price bubble. in conducting monetary policy, the bank needs to do its utmost to prevent the materialization of such potential risks. the economic projection described in the outlook report covers a period of about one and a half to two years. there could, however, be risk factors that might affect economic activity and price development in the medium to long term, beyond the outlook report's projection period. experience inside and outside japan shows that wide swings in asset prices and significant changes in the financial environment, including those affecting the intermediation function of financial institutions, may impact on economic activity and price development with a considerable lag. in addition, when the public's longer - term expectations of inflation change, this can have a significant impact on the existing relationship between economic activity and prices. the second perspective, therefore, involves examining, over a longer horizon, the various risks that are most relevant to conducting monetary policy aimed at realizing sustainable growth under price stability. major central banks seem to share the opinion that to conduct monetary policy putting too much emphasis on achieving price stability in the short term results in large swings in economic activity, and this in turn impedes long - term price stability and the sound development of the economy. c. conduct of monetary policy for the immediate future lastly, as the third element of the new framework for the conduct of monetary policy, the bank will outline its current view on monetary policy in light of its deliberations from the two perspectives i have described, and disclose it periodically, as a rule in the outlook report. on the current occasion, the bank decided to release the results of its deliberations ahead of the release of the april outlook report, to coincide with the timing of the