that the actual rate of inflation does affect the medium - to long - term expected rates of inflation. if, through this summer, the upward momentum of the cpi weakens due to a fall - off of the effects of the weak yen and to a slack in supply and demand conditions resulting from the decline in demand following the consumption tax hike, due attention should continue to be paid to how this will affect inflation expectations, even during the process of the economy returning to a moderate recovery path from the summer. as i have explained, the bank expects the inflation rate to increase gradually in a situation where economic activity will improve in a balanced and sustainable manner, accompanied by improvement in corporate profits and subsequent increases in employment, wages, and business fixed investment. recently, while domestic demand remains firm, the output gap in japan appears to have reached the past long - term average of about zero, reflecting factors such as a low birth rate and aging population working in the direction of reducing potential labor supply. in other words, supply - side issues have surfaced. therefore, reinforcing supply capacity has become an important challenge with respect to raising japan ’ s economic growth in the medium to long term and achieving sustainable growth. to this end, it is essential to steadily carry out measures to enhance productivity and thereby raise the growth potential of the economy, such as by providing job opportunities for women and the elderly to secure a sufficient labor force, encouraging firms ’ active investment, and also implementing regulatory and institutional reforms. at the same time, it also is essential to continue creating demand to match the increased supply capacity. the government is accelerating implementation of its japan revitalization strategy, which is designed to boost the growth potential, and in view of the discussions made after the introduction of the strategy, it is formulating a new growth strategy. the bank, for its part, is actively proceeding with measures such as provision of funds to support strengthening of the foundations for economic growth. these endeavors will continue to be made steadily in an effort to address the issues facing japan ’ s economy that i have explained, and medium - to long - term growth expectations of firms and households are likely to rise accordingly. bis central bankers ’ speeches ii. conduct of monetary policy a. quantitative and qualitative monetary easing ( qqe ) 1. framework of qqe next, i would like to turn to the bank ’ s monetary policy. in order for japan ’ s economy to overcome deflation as early as possible and achieve sustainable growth with price

, supported by a moderate increase in exports and developments in the foreign exchange market, in addition to firm domestic demand, corporate profits are expected to continue their improving trend. under these circumstances, business fixed investment is likely to follow a moderate increasing trend, given its noticeable growth on a gdp basis and the upward trend in machinery orders, which represent a leading indicator of machinery investment. three factors are supporting the strength in business fixed investment. first is the improvement in investment profitability. the extent of the monetary easing stimulus to encourage investment is likely to strengthen, owing to a rise in the rate of return on capital due to improvement in economic activity, combined with the decline in real interest rates that mainly reflects a rise in inflation expectations. second is the large potential demand. business fixed investment, which has increased for four consecutive quarters, has just entered a recovery phase after dipping due to the effects of the lehman shock and the great east japan earthquake. therefore, increased economic activity will easily encourage latent demand to materialize, such as for the maintenance and replacement of equipment. the third factor is a likely rise in firms ’ medium - to long - term growth expectations, due partly to the positive initiatives to strengthen the competitiveness and growth potential of japan ’ s economy, such as the government ’ s regulatory and institutional reforms and firms ’ restructuring efforts. looking at business fixed investment overseas, the last one to two years have coincided with the periods in which investment decisions that were made after the lehman shock – when the yen appreciated – proceeded to the actual implementation phase. thus, the ratio of overseas business fixed investment relative to domestic investment has increased rapidly. in view of recent movements in the foreign exchange market, however, the pace of increase is likely to decelerate somewhat. 3. exports i would now like to talk about developments in exports. exports have leveled off more or less, due partly to temporary downside pressure, such as the sluggishness in emerging economies, particularly the asean economies, which are closely linked to japan ’ s economy, and the effects of the unusually severe winter weather in the united states. moreover, the recent weakness in exports is likely to be affected to some degree by structural factors such as an increasing shift by japanese manufacturers to move production overseas. from a somewhat longer - term perspective, however, the correction in the appreciation of the yen to date is likely to ease downward pressure on exports by putting a brake on the shift to move production overseas. as for the outlook, exports are likely to