higher expectations of lenders ’ underwriting standards for consumer credit, and recalibrated the leverage ratio. with detailed contingency planning for the financial stability impacts of brexit, uk companies can be confident of continued access to finance in an uncertain world. reforms mean the uk financial system is working well. net lending to private companies is been growing following six years of contraction. corporate bond spreads are well below their long - run averages ( chart 13 ). and credit conditions among smes have been steadily improving. if the opportunities present themselves, uk corporates could readily draw on this finance as their balance sheets are in good health following a decade of de - levering to ratios amongst the lowest in advanced economies. turning now to monetary policy, the bank operates within an established framework, anchored in the inflation target ( chart 14 ). the mpc set out in advance of the referendum how it would apply that framework, emphasising that the effects of the process of leaving the eu on inflation would depend on its impact on demand, supply and the exchange rate. the committee has repeatedly stressed that, as a result, the implications for monetary policy would not be automatic. the mpc has also clearly set out its reaction function consistent with its remit. under the exceptional circumstances brexit entails ( with an inflation overshoot driven entirely by an exchange rate depreciation caused a large fundamental shock ), the committee is required by its remit to balance a period of abovetarget inflation with a period of weaker growth. as the primary objective of monetary policy remains inflation control, any overshoot of inflation above the target can only be temporary in nature and limited in scope. as such, the mpc has been clear that its tolerance for above - target inflation is limited. since the prospect of brexit emerged, financial markets, notably sterling, have marked down the uk ’ s economic prospects. monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the eu. but it can influence how this hit to incomes is distributed between job losses and price rises. and it can support households and businesses as they adjust to such profound change. see the statistical annex to the bank for international settlements 87th annual report, ibid. all speeches are available online at www. bankofengland. co. uk / speeches as spare capacity erodes, the trade - off that the mpc must balance lessens, and, all else equal, its tolerance for

necessary, will make adjustments without hesitation in order to achieve the price stability target. what i would like to emphasize here is our strong commitment to achieving the price stability target of 2 percent. if japan ’ s economy follows a path toward the 2 percent target as we have projected, we will steadily pursue the current qqe. if not, we will make adjustments so as to achieve the 2 percent. in closing, let me briefly touch on the growth potential of japan ’ s economy. the bank ’ s qqe policy aims at escaping from a protracted deflationary equilibrium and achieving an economy in which people act on the assumption of inflation of about 2 percent. what has been happening in japan ’ s economy for the past 15 years is that declines in product prices led to a decline in firms ’ sales, which led to a further decline in prices through compressed wages and stagnant consumption, resulting in a vicious cycle. in such a deflationary economy, it is only rational for individual firms or persons to maintain the status quo, or to prefer cash, and therefore they did not consider it worth the risk, relative to the potential rewards, to embark on new business ventures. what we are aiming at is to break through this “ coordination failure ” and revive people ’ s animal spirits. this will be an important element in raising growth expectations and the growth potential. however, there is another important element to consider. as mentioned earlier, given that slack in the economy has shrunk, as seen in the tightening of labor market conditions, it also has become clear that it is imperative to strengthen supply capacity in order for japan ’ s economy to grow in the medium to long term. growth in the aggregate supply capacity of japan ’ s economy has been declining due partly to a declining trend in population and aging, as well as the slowing accumulation of capital stock under deflation. these trends, however, did not manifest themselves in the form of labor shortages or supply capacity constraints because demand had been weak. yet, in the past year or so, with the increase in demand thanks to large - scale monetary easing, fiscal spending, and the rejuvenation of private - sector activities, the supply capacity constraints that were lurking below the surface have now become apparent. in my view, with the supply capacity constraints having surfaced, this will be a golden opportunity to resolve the medium - to long - term challenges facing japan ’ s economy. these challenges, of which the public is well aware, include