effects of monetary easing. the inflation - overshooting commitment is to continue expanding the monetary base until the year - on - year rate of increase in the observed cpi exceeds 2 percent and stays above the target in a stable manner. through this commitment, the bank aims to strengthen the formation of inflation expectations. it implements the idea of a " makeup strategy, " in which central banks conduct monetary easing so that the inflation rate stays above the target for a sustained period of time to compensate for the observed inflation rate that continued to fall below the target. last summer, the federal reserve adopted this makeup strategy, which has been consistent with the bank's thinking on monetary policy. qqe with yield curve control has had positive effects in line with the intended mechanism ( chart 6 ). under yield curve control, nominal interest rates in japan have been kept at extremely low levels, even amid a rise in interest rates abroad. while inflation expectations have been higher than those prior to the introduction of qqe, real interest rates, which are calculated by subtracting inflation expectations from nominal interest rates, have been in negative territory. the low real interest rates have improved financial conditions, mainly through low funding costs as well as favorable financial and capital markets ( chart 7 ). issuance rates for cp and corporate bonds have been at extremely low levels, and lending rates have been at around historical low levels. in financial and capital markets, foreign exchange rates have been stable on the whole and stock prices have been on an uptrend. as a result, economic activity has improved ( chart 8 ). in 2017, the output gap turned clearly positive, which represents excess demand, and expanded thereafter. corporate profits have increased and the employment situation has improved, as seen in the unemployment rate declining to the range of 2. 0 - 2. 5 percent for the first time in about 30 years and the active job openings - to - applicants ratio in all prefectures being above one. under these circumstances, wages have increased moderately, as seen in the fact that base pay, which did not rise during the period of deflation, has increased for seven consecutive years, and underlying inflation has taken hold in positive territory. in addition, as a result of acute labor shortage, labor force participation of women and seniors has increased and firms have improved their labor productivity. with economic developments continuing to be favorable, positive moves toward addressing the medium - to long - term challenges facing japan's economy have been observed. that said, the situation

features of japan ’ s financial structure, contributed to absorbing shocks from the downturn in economic activity within banks ’ assets, and thus succeeded in diminishing their effects on the economy as long as the impacts of the shocks were limited. however, when significant shocks such as those accompanying asset price falls occurred, the concentration of the loss to the banking sector caused substantial damage to its capital base and risktaking capability. this, in turn, amplified the effects of the shocks through tightening of corporate financing conditions. this problem could be partially resolved if alternative financial markets substituting for bank lending were developed to a significant degree. the development of such markets would not only contribute to smooth corporate financing, it would also work as a discipline on banks ’ lending activities, for example, by encouraging banks to formulate lending rates which reflect credit risks more accurately. in addition, broadening the scope of economic entities that take credit risks attached to the corporate sector could enlarge the risk - taking capacity of banks. investors would be able to realize portfolios by utilizing a broader range of instruments with various combinations of risks and returns. a new financing channel of this kind is imperative to cope with the financing needs of the corporate sector, as the economy becomes mature. based on this thinking i have described, this april the bank started examining the policy option of temporary purchase of abss with underlying assets such as receivables and loans related to small to medium - sized firms. the bank decided the purchasing scheme at the monetary policy meeting on june 11, 2003, taking into account various comments from market participants. although it is an unconventional measure for a central bank to directly take on private - sector credit risk, we thought it necessary to promote smooth corporate financing by nurturing the abs market and to enhance the effectiveness of monetary easing, giving due consideration to the required functions of japan ’ s financial system in the future and the current weakness in the credit intermediary function of the banking system. at the same time, the bank will pay careful attention to avoid distortion of the abs market and to maintain the soundness of the bank ’ s balance sheet. iv. for the revitalizing of japan ’ s economy a. the need for efforts by a wide range of economic entities i would like to briefly discuss my thinking on the efforts necessary to revitalize japan ’ s economy. as i mentioned at the outset, the world economy is undergoing structural change and industrialization in emerging economies is advancing. in this situation, japan should foster