that might not seem like much, it was in the opposite direction of what we expected, and the details behind the headline number were concerning. in particular, three - month - 3measures of core inflation remain elevated and seem to have lost their downward momentum. and goods inflation surprised us by accelerating in april, reversing course after months of deceleration. we still expect headline inflation to have eased in may and to be near 3 % later this summer, but this is largely due to lower energy prices and what we call base - year effects — the comparison of current price gains with the very large gains a year ago. to sum up, when we looked at the recent dynamics in core inflation combined with ongoing excess demand, we agreed the likelihood that total inflation could get stuck well above the 2 % target had increased. based on this accumulated evidence, we decided to raise the policy rate to slow demand and restore price stability. we ’ ll have more to say about all of this in our july forecast. we know this tightening cycle has not been easy for many canadians. but the alternative — not controlling inflation — would be far worse, particularly for people living on low or fixed incomes. when inflation is stable around the 2 % target, it removes the anxiety created by large swings in the cost of living. price stability means households and businesses can plan, budget and invest with confidence and allows our economy to work better. that is why the bank remains focused on taking the steps needed to restore inflation to 2 %. breaking down interest rate movements that wraps up my discussion of yesterday ’ s decision, which was very much a look at what we are considering in the near term. now let ’ s consider the forces influencing interest rates in the long term. to start, let ’ s look at the 25 years leading up to the pandemic, a period with a clear downward trend in long - term interest rates in canada ( chart 1 ). this downward path is unmistakable, whether we ’ re talking about mortgage rates, business loan rates or yields on government bonds. - 4chart 1 : long - term nominal interest rates fell steadily in canada over the 25 years before pandemic % quarterly data, 1995q1 to 2019q4 conventional mortgage rate business loan rate sources : canada mortgage and housing corporation via haver analytics and bank of canada 10 - year bond yield last observation : 2019q4 to better understand the forces that drove that trend, it will be helpful to distinguish between three different

the financial system as well as monetary policy. i will then go on to discuss the policy challenges for japan as well as the implications of japan ’ s experience for europe today. i. developments in japan ’ s economy during the lost decades as is well known, japan ’ s economy has been mired in stagnation since the 1990s. on the other hand, what is less well known, especially abroad, is that the challenges that japan ’ s economy has faced during this prolonged stagnation have differed over time. put simply, until the early 2000s, the main challenge consisted of dealing with the instability of the financial system and deleveraging in the banking sector brought about by the collapse of the asset bubble, and of resolving the so - called “ three excesses ” in the corporate sector, consisting of excess debt, excess capacity, and excess employment. however, these problems were essentially resolved by the early 2000s and a more serious challenge since the second half of the 2000s has been the decline in japan ’ s growth potential and inflation expectations. the decline in both since the 1990s has been brought to the fore by the large decline in aggregate demand as a result of the global financial crisis. these two major challenges appeared in succession and it is mainly for this reason that japan ’ s economic stagnation has been so prolonged. bis central bankers ’ speeches the collapse of the asset bubble, financial system instability, deleveraging, and the “ three excesses ” in the 1990s, japan ’ s banking sector was riddled with a mountain of nonperforming loans resulting from the collapse of the 1980s bubble in real estate and stock prices. at the same time, japan ’ s corporate sector was suffering from the “ three excesses ” just mentioned – excess debt, capacity, and employment – owing to the expansion of businesses driven by overly optimistic growth expectations. in 1997 through 1998, these problems led to the successive failure of major financial institutions, significantly impairing the functioning of financial intermediation and causing a sudden credit crunch ( chart 1 ). the economy contracted severely and the year - on - year rate of change in the consumer price index ( cpi ) fell into negative territory, marking the beginning of japan ’ s prolonged, though moderate, deflation ( chart 2 ). the bank of japan responded to this financial crisis in japan during the 1990s by acting extensively as lender of last resort. 1 moreover, since the safety net was underdeveloped at that time, the bank of japan