Last week the Bank of Japan declared it had slayed deflation and was therefore moving towards a new approach to monetary policy. Based on what it has said so far, the bank intends to hold interest rates at zero and re-evaluate how it can achieve its mandate of delivering sound development of the economy through price stability.

But lost in the details of the BoJ?s ?Introduction of a New Framework for the Conduct of Monetary Policy? is a stunning assertion. The bank is now on record saying that ?in the case of Japan, the average rate of inflation over the last few decades is lower than major overseas economies. Japan has also experienced a prolonged period of low rates of inflation since the 1990s. Consequently, the rate of inflation at which households and firms perceive price stability seems to be low, and economic decisions may be guided by such a low inflation environment. The conduct of monetary policy must take account of such possibilities.?