2019, although business fixed investment is likely to decelerate - - mainly reflecting cyclical adjustments in capital stock as well as olympic games - related demand peaking out - - and household spending is likely to decline in the second half of the fiscal year due to the effects of the scheduled consumption tax hike, japan's economy is expected to continue expanding, supported in part by the increase in exports led by external demand. according to the bank's january 2018 outlook for economic activity and prices ( hereafter the outlook report ), the medians of the policy board members'forecasts of the real gdp growth rate are 1. 9 percent for fiscal 2017, 1. 4 percent for fiscal 2018, and 0. 7 percent for fiscal 2019 ( chart 8 ). c. current situation and outlook of prices turning to price developments, the year - on - year rate of change in the consumer price index ( cpi ) for all items less fresh food is currently 0. 9 percent. the rate has been on an improving trend, although gradual, since january 2017, when it started to increase. during the 12 months since then, the rate rose by more than 1 percentage point ( chart 9 ). i believe that there are three factors to consider when projecting the outlook for prices. the first is the output gap, which determines future inflation rates. the output gap has widened steadily within positive territory on the back of the steady tightening of labor market conditions and a rise in capital utilization rates ( chart 10 ). in this situation, firms'moves to raise their employees'wages and prices have started to be seen. furthermore, upward pressure on prices is heightening steadily. specifically, labor market conditions have been tightening further in a wide range of industries - - as evidenced by the medical and nursing service industry, for example, where labor shortage has become more severe amid an increase in job openings resulting from large firms entering the market - - and hourly cash earnings of part - time employees in particular have started to increase. against this backdrop, in the service industry, such as dining - out and transportation, some firms have started to raise prices since the second half of 2017 by passing a rise in labor costs - - arising from labor shortage - - on to prices. the second factor is medium - to long - term inflation expectations, which are more or less unchanged, after having remained in a weakening phase since summer 2015 ( chart 11 ). going forward, with the improvement in the output gap, firms'stance is likely

of writing the wrong policy prescription. i do not go into the details of economic policy in each country, but i think that it is crucial to maintain the flexibility of the economic structure to smoothly reallocate labor and capital from the lower productivity sector to the higher productivity sector. that is, however, not necessarily easy, given the social climate after the burst of bubble, just i mentioned. fifth, we cannot rule out the possibility that the current unprecedented easy monetary policy in many advanced countries, if continued for an extended period, will produce unintended consequences. under the easy monetary condition, inefficient businesses tend to be preserved, and economic rejuvenation also tends to be delayed, thereby reducing the productivity growth. although easy monetary policy is needed, it alone cannot solve the problem. structural reform is indispensable. also, it cannot be denied that such easy monetary condition is likely to contribute to the emergence of another bubble. in fact, the prolonged low interest rates in the early 2000s, in the aftermath of intensified deflationary concern stemming from the burst of the dot - com bubble, partly contributed to the global credit bubble. a crisis comes to the surface with a different face every time. the current recovery in advanced countries is basically supported by strong growth in emerging countries. thus, if the strong growth in emerging countries turns out to be the one entailing the bubble - like nature, advanced countries as well as emerging countries themselves will be affected significantly. as for equity price developments, advanced countries still stay far below the level before the failure of lehman brothers, while a few emerging countries are reaching an all - time high due partly to capital inflows from advance countries. in some sense, it can be said that monetary easing in advanced countries has exerted stimulative effects through capital outflows to emerging countries. that suggests a significant change in the transmission mechanism of monetary policy from the conventional mechanism we generally assume. sixth, we need to implement financial reform in a well - balanced manner. in light of the lessons from the recent crisis, it is a fairly appropriate direction of the reform to strengthen the existing capital requirement. at the same time, it is also necessary to avoid undermining the economic recovery in raising capital requirements. in that regard, i appreciate that the new capital standards, so called “ basel iii ” agreed at the meeting of the group of central bank governors and heads of supervision in september, ensures a good balance between the two requirements