lackluster. all this suggests the significance of structural obstacles in japan ’ s economy, e. g., problems of the financial system, and on the flip side of the coin, corporate restructuring. resolution of these problems will prepare a foundation on which the effectiveness of monetary policy can be enhanced. i plan to come back to this issue before closing my remarks today in conjunction with a topic of non - performing assets. c. price stability and monetary policy allow me to turn to another topic : the relationship between price stability and monetary policy. i hear often that it is nothing but monetary policy that can prevent deflation as well as inflation. indeed, the bank of japan law stipulates that the bank ’ s purpose is the maintenance of price stability, and the bank in fact conducts monetary policy in accordance with that idea. in terms of practical implementation of monetary policy, however, the relationship between the objective of price stability and monetary policy is somewhat more complex. this complexity is mentioned in the report that the bank of japan published last year with respect to price stability. for one thing, the relationship differs, depending on the length of time you envision about price stability. for example, during a very long period, say ten or twenty years, excess supply of money in many cases corresponds to rises in prices while short supply does to price declines. this is quite natural in light of the fact that prices are the rate of exchange between goods / services and money. based on this long - term relationship between prices and money, price fluctuations are referred to as essentially monetary phenomenon and price stability is considered to be the objective of monetary policy. during a shorter period, say a few months or a few years, however, price fluctuations are influenced by not only money but also a variety of other variables. output gap of the whole economy, inflation expectation, international commodities prices, exchange rates are interrelated in a complex fashion. in such a complex world, it is no easy task to decide on how precisely monetary policy can control prices, and also on how far it should do. suppose an oil price shock gives rise to inflation pressures. if we are to contain them in a short period, it will take a very tight monetary policy. the upshot may be a steep decline in economic activity. this is inconsistent with sustainable price stability in the long run. conversely, at a time when prices decline on account of productivity gains based on rapid technological innovation, a forceful reduction in interest rates with a view to raising prices

the first issue is inflation itself. there have been several conjectures about the apparent softness of inflation in canada and many other advanced economies. some have argued that globalization is restraining inflation. this could be due to increased imports from lower - cost countries, for example, or the effect of canadian companies participating in global supply chains. others point to the impact of digitalization on the economy. they suggest that digital technologies could lower barriers to entry in some sectors and lead to more competition. the rise of ecommerce may be changing price - setting behaviour. and digital technologies could promote innovation and higher productivity, which could create disinflationary pressure. the second issue is the degree of excess capacity in the economy. we note several signs that point to slack remaining in the labour market. for example, the participation rate of young workers is still below trend, and average hours worked are less than we would expect. with the economy now operating close to capacity, we expect to see investment by companies, together 1 / 2 bis central bankers'speeches with job creation by new and existing firms, and rising productivity. this should serve to raise the economy ’ s potential output, increasing the amount of non - inflationary growth that is possible. however, this process is highly uncertain and not at all mechanical, so we have built it into our projection in a conservative way. the third issue is the continued softness in wage growth. while employment growth has been strong in canada, wages have not kept pace. the slack in the labour market is certainly responsible, in part, for this effect, and there will be a lag between the time this slack is used up and when we see stronger wage growth. however, other factors, including globalization, may also be affecting wage dynamics. finally, the fourth issue is the elevated level of household debt and how that might affect the sensitivity of the economy to higher interest rates. bank staff have recalibrated our main economic model used for projections to capture key information about housing and debt. this work tells us that the economy is likely to respond to higher interest rates more than it did in the past. however, we will watch incoming economic data closely for evidence to support this idea. we will also look to see how the household sector is responding to the new rules about mortgage underwriting. we also outline several other risks in the mpr. taken together, these give us a balanced outlook for inflation. we have not incorporated into our projection the risk of a significant shift toward more