haruhiko kuroda : toward overcoming deflation speech by mr haruhiko kuroda, governor of the bank of japan, at the annual tokyo conference, hosted by the center on japanese economy and business ( cjeb ), columbia business school, tokyo, 15 may 2014. * * * accompanying charts can be found at the end of the speech. introduction it is my great honor to deliver a speech at this conference hosted by the center on japanese economy and business of columbia business school. the topic of this conference – “ restoring the japanese economy ” – is of considerable significance and i have no doubt that the proposals presented here will be of benefit to japan ’ s economy in the future. in my speech, i will talk about the bank of japan ’ s initiatives toward overcoming deflation and the outlook for economic activity and prices. in closing, i will touch on japan ’ s growth potential, which is a key issue for “ restoring the japanese economy ”. i. effects of quantitative and qualitative monetary easing and outlook for economic activity and prices in april last year, the bank introduced quantitative and qualitative monetary easing, dubbed qqe, aiming to achieve a price stability target of 2 percent at the earliest possible time, with a time horizon of about two years. about a year has passed since then and qqe has been having the intended effects. through a clear commitment to promptly achieving the price stability target and large - scale monetary easing, people ’ s inflation expectations have been rising on the whole. on the other hand, massive purchases of government bonds by the bank have kept 10 - year interest rates at a low level, which is currently about 0. 6 percent. as a result, real interest rates have been negative and have continued to decline, thereby stimulating economic activity. japan ’ s economy has continued to grow, led by domestic demand, and the year - on - year rate of change in the consumer price index ( cpi ) excluding fresh food has risen from minus 0. 5 percent in march last year to plus 1. 3 percent in march this year ( chart 1 ). going forward, it is likely that a virtuous cycle of economic activity will be maintained as domestic demand will continue to remain firm and exports are expected to increase, albeit moderately. therefore, japan ’ s economy is likely to continue growing at a pace above its potential as a trend, although it will be affected by fluctuations in demand associated with the two rounds of consumption tax hikes

. except for the period after the previous consumption tax hike in 1997 and the surge in global commodity prices around 2008, this is the first time since 1993 that the cpi has risen by more than 1. 0 percent yearon - year several months in a row. with firms and households experiencing these price increases, their inflation expectations are changing in an adaptive manner. in this situation, medium - to long - term inflation expectations are likely to follow an increasing trend and gradually converge to around 2 percent – the price stability target. these developments seem to have started to influence actual wage and price settings. as mentioned earlier, an increasing number of firms are raising base wages and some firms recently have changed from a strategy that puts first priority on low prices to one that aims at raising sales prices while increasing value - added. regarding the cpi for april, an issue of key interest has been whether firms have been able to pass on the consumption tax hike by raising sales prices in line with the tax hike, and the index for tokyo, which is released ahead of the nationwide index, suggests that this is indeed the case. bis central bankers ’ speeches the phillips curve let me summarize this price rise mechanism in terms of the phillips curve, which illustrates the relationship between the output gap and inflation. this relationship is shown in chart 8, with the red dots representing the four positions observed over the past year. while it is difficult to gauge the shape and position of the phillips curve on a real - time basis, we find that the red dots lie above the phillips curve based on observations for the past 18 years. thus, taking into account the aforementioned rises in various indicators of inflation expectations and changes in wage - and price - setting behavior, the chart suggests that two things appear to have happened : we seem to have moved upward along the phillips curve, reflecting a boost in inflation due to the improvement in the output gap, and the phillips curve appears to have shifted upward due to a rise in inflation expectations. it is likely that these developments will continue and the inflation rate will follow a path toward achieving the price stability target of 2 percent. iv. monetary policy management and the growth potential of japan ’ s economy as i have mentioned, qqe has been having the intended effects. therefore, i believe it is important to continue with qqe as long as it is necessary for maintaining the price stability target of 2 percent in a stable manner. on that basis, should the outlook change due to certain risk factors the bank, if