Let me dwell just briefly on some of the shorter-term connections between monetary policy and growth, including some that achieved a certain prominence with the new Policy Targets Agreement signed by Dr Michael Cullen and me on 16 December last year. Monetary policy responds to forecasts of emerging inflation pressures looking one to two years ahead (and not to the most recent actual CPI).
QQE does not rely on an increase in import prices due to depreciation of the yen. A key challenge in Japan is that, with deflation having taken hold since the second half of the 1990s, people’s inflation expectations have declined and deflationary expectations have become entrenched.