and household sectors. exports are expected to increase moderately on the back of emerging economies moving out of their deceleration phase. as in the january 2016 outlook for economic activity and prices ( outlook report ) released by the bank last week, the real gdp growth rate is projected to be 1. 1 percent for fiscal 2015 and 1. 5 percent for fiscal 2016, and thus is estimated to continue to exceed the potential growth rate ( chart 3 ). against this backdrop, japan ’ s economy is likely to shift from the phase of recovery to expansion ; namely, the output gap is expected to turn positive ( excess demand ). in fiscal 2017, the real gdp growth rate is projected to maintain positive growth of 0. 3 percent, although with a slowing in its pace to around a level somewhat below the potential growth rate, reflecting the effects of a front - loaded increase and subsequent decline in demand prior to and after the consumption tax hike as well as the cyclical developments in the economy. ii. price developments in japan let me now turn to price developments in japan. bis central bankers ’ speeches the year - on - year rate of change in the consumer price index ( cpi, all items less fresh food ), which had been minus 0. 5 percent just before the introduction of qqe, increased to as high as 1. 5 percent in april 2014, excluding the effects of the consumption tax hike ( chart 4 ). however, as a result of a substantial fall in crude oil prices since summer 2014, it has declined gradually and currently is around 0 percent. nonetheless, the bank is of the view that the underlying trend in inflation has been improving steadily. next, i would like to elaborate on the background to our view on prices. to begin with, i would like to touch on the relationship between the price stability target of 2 percent and the underlying trend in inflation. the bank has set the target at 2 percent in terms of the year - on - year rate of change in the all - item cpi. it is common in major economies to define the price stability target as the all - item inflation rate. this is because the all - item cpi comprehensively covers goods and services that households consume. however, when assessing price developments at each point in time, there is a need to exclude the effects stemming from the factors that fluctuate temporarily and evaluate the underlying trend in inflation appropriately. since such factors will dissipate eventually, we cannot make appropriate policy decisions if we look only at superficial price

developments, which are affected by temporary factors. we usually refer to the cpi ( all items less fresh food ) to explain price developments because prices for fresh food fluctuate remarkably in japan. given this, in a case where crude oil prices fluctuate largely, it is natural to think that the cpi should be looked at on a basis excluding energy. on this basis, i would like to examine the underlying trend in inflation in japan. the bank is of the view that the underlying trend in inflation has been improving steadily, and this is based on two factors. first, the year - on - year rate of change in the cpi excluding fresh food and energy – both of which are with large fluctuations – had been negative until the introduction of qqe, but turned positive in october 2013. since then, it has remained positive for 27 consecutive months and increased to 1. 3 percent recently ( chart 4 ). second, both the output gap and medium - to long - term inflation expectations, which determine the underlying trend in inflation, have been improving. let me now briefly reflect on the output gap and medium - to long - term inflation expectations. first off, the output gap – an indicator for the supply and demand balance – fluctuates, reflecting the utilization of labor and capital. as i mentioned earlier, the labor market is in a situation of “ full employment, ” and the output gap has steadily followed an improving trend driven mainly by labor market developments, with the tightening trend in labor market conditions having continued ( chart 5 ). with the economy continuing to grow at a pace above its potential, the tightening of the labor market conditions is likely to strengthen and capacity utilization rates are expected to increase as exports and production pick up. against this background, the output gap is likely to turn positive, or in other words, become a situation of excess demand. secondly, we have medium - to long - term inflation expectations. according to various survey results and the beak - even inflation rate using inflation - indexed bonds, there is concern that medium - to long - term inflation expectations have been somewhat weak recently, mainly reflecting the decline in crude oil prices. on the other hand, the share of price - increasing items minus the share of price - decreasing items in the cpi, as well as daily and weekly indices of the prices of food and daily necessities, have been on a remarkable expanding trend since last spring up to the present ( chart 6 ). in the annual labor - management wage negotiations