Future Conduct of Monetary Policy At present, price developments are relatively weak, and the inflation rate is fairly distant from the 2 percent price stability target. The Bank should face this fact with sincerity. Nevertheless, as I discussed earlier, Japan’s economy has been improving solidly and the process toward price increases has been evolving steadily.
When long-term economic growth potential is increasing and people’s views on prices are changing, the real interest rate level that is considered to be neutral to economic activity — the natural rate of interest — will rise and the observed real interest rates will decrease. This, in turn, is expected to further enhance the effects of monetary easing.