( chart 7 ). in the jargon, the output gap remains negative. on the other hand, while actual inflation has been declining, medium - to long - term inflation expectations in these economies appear to have remained more or less anchored at about 2 percent ( chart 8 ). given this economic and inflation situation, the challenge for monetary policy is how to stimulate the economy and lower the unemployment rate while keeping inflation expectations unchanged. by contrast, in japan, the unemployment rate has declined to 3. 5 percent, which is below the trough prior to the global financial crisis, and there is limited slack in the economy. on the other hand as i have explained, under 15 years of deflation, deflationary expectations became entrenched and medium - to long - term inflation expectations drifted down to a very low level. in such a situation, the policy challenge for us is how to raise inflation expectations. taking this challenge into account, qqe focuses on directly working on inflation expectations. meanwhile, switzerland has been facing a challenge that differs from that in the united states, the united kingdom, the euro area, and even japan. switzerland has seen a decline in inflation as a result of a decline in import prices due to the appreciation of the swiss franc. therefore, the swiss national bank ( snb ) set a ceiling for the swiss franc against the euro, stating that it would enforce the ceiling with unlimited interventions. the fact that the ratio of the snb ’ s balance sheet to nominal gdp is higher than that of the bank of japan ’ s reflects the increase in its holdings of foreign currency denominated assets under this policy. iii. achievements under one year of qqe developments in the past year more than one year has passed since the bank introduced qqe. during this time, qqe has produced its intended effects, with japan ’ s economy on track to achieving the 2 percent price stability target. under the bank ’ s large - scale purchases of government bonds, long - term interest rates have been stable at a low level and have recently been below 0. 6 percent ( chart 9 ). inflation expectations judged from break - even inflation rates calculated from the yield of inflation - indexed bonds and various surveys have been rising ( chart 10 ). as a result, real interest rates have declined, thereby stimulating private demand. against this backdrop, the virtuous cycle among production, income, and expenditure has kept the growth momentum intact and japan ’ s economy has continued

, it is likely that the growth potential of japan ’ s economy has recently been structurally weakening. the reasons for the weakening growth potential are complicated. broadly speaking, it seems that the system and the business practice which were formed in the past higher growth period as well as firms ’ behavioral principle could not sufficiently adapt to two large changes going on since the 1990s. the two changes in the business environment were the intensification of global competition and the domestic demographic vortex. the first change, global competition, accelerated in the 1990s. globalization enabled various and quick combinations of advanced economies ’ capital and technology and emerging economies ’ labor force, and opened the door to emerging economies to high growth. potential business opportunities expanded beyond borders, and, in that regard, globalization was a change that brought new growth opportunities for japanese firms and, eventually, japan ’ s economy. at the same time, globalization ushered in a “ mega competition ” era. japanese firms were strongly required to gain strength to promote differentiation from many overseas rivals and become among the first to tap potential demand. while it is a fact that japanese firms have been going in that direction, the speed has not necessarily fast enough, compared with the speed of changes in the business environment. the second change, the demographic vortex has also progressed markedly since the 1990s. the population of workers, namely, the working - age population, defined as the population between 15 and 65 years old, started to decline since the mid - 1990s and the pace of decline has been accelerating. bis central bankers ’ speeches such change in the demographic composition could induce a shortage of labor and becomes a factor in reducing growth potential from the supply side. at the same time, on the demand side, the change will prompt structural changes of the demand content because necessary goods and services will differ, according to each stage of life. mass consumption markets, including housing and consumer durables, will shrink, while demand for various goods and services that raise the quality of life, such as medical and nursing care services, will increase, at least potentially. if changes on the supply side cannot catch up with the substantial changes in the demand structure, potential needs will not lead to actual spending and remain untapped, while excess supply will continue in markets for existing goods and services and economic activity will be under downward pressure. in japan ’ s economy since the 1990s, it is likely that a supply and demand mismatch has chronically remained and continued to act as one of the reasons for inducing low economic growth. background