Bringing an end to deflation under the new monetary policy framework

With the end of quantitative easing in 2006, the Bank of Japan introduced a new monetary policy framework that includes an understanding of price stability as 0 to 2% inflation and raised interest rates from zero to 0.5%, although most measures of inflation have remained negative. Given remaining deflationary pressures, slower economic growth in 2007 and increased uncertainty about the outlook for growth, the central bank should not raise the short-term policy rate further until inflation is firmly positive and the risk of renewed deflation becomes negligible. In addition, the lower end of the inflation range should be increased to provide an adequate buffer against deflation.