with which you may not be familiar, refers to the extent to which people expect prices to rise in the future. in japan, with deflation continuing for nearly 15 years, the expectation that prices will not rise had taken hold. breaking out of the status quo and achieving the price stability target of 2 percent in a stable manner means that firms ’ and households ’ behavior is based on the expectation of continued inflation of around 2 percent. in this regard, there have been signs of changes in corporate behavior, such as the fact that an increasing number of firms have raised base pay in the annual wage negotiations this spring, and that some firms have changed their price - setting strategy from putting priority on low prices to putting priority on quality and reflecting increases in costs in sales prices. in fact, according to surveys of households, firms, and economists, as well as market indicators, inflation expectations appear to be rising on the whole ( chart 6 ). the qqe policy introduced in april last year aims to raise trend inflation by bringing about an improvement in the output gap and encouraging a rise in inflation expectations with largescale asset purchases and a clear commitment. the policy has been having its intended effects. under the bank ’ s large - scale purchases of government bonds, long - term interest rates have been stable. at the same time, inflation expectations have been rising on the whole, so that real interest rates – that is, nominal long - term interest rates minus the expected rate of inflation – have declined, thereby stimulating private demand. as a result, the output gap has improved and inflation has accelerated. looking ahead, with this mechanism at work, the year - on - year rate of increase in the cpi and inflation expectations are expected to increase. as i mentioned before, japan ’ s economy is likely to achieve an inflation rate of about 2 percent in or around fiscal 2015, and thereafter gradually shift to a growth path that sustains such inflation in a stable manner. therefore, the conquest of deflation in japan is now in sight. we are, however, only halfway toward achieving the price stability target of 2 percent. the bank will therefore continue with qqe, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. but, as i have consistently said, if the outlook changes due to the manifestation of some risk factors, the bank will make adjustments without hesitation if it is judged necessary for achieving the price stability target. ii.

judging whether the target is maintained in a stable manner. there are no quantitative criteria or specific indicators to assess such conditions. whether the target is maintained in a stable manner should be judged comprehensively by closely monitoring developments in a wide range of price - related indicators and sufficiently examining and assessing the current situation and the outlook for economic activity and prices. iii. toward the sustainable growth of japan ’ s economy thus far, i have talked about the bank ’ s monetary policy. japan ’ s economy has been following a path toward overcoming deflation. in this situation, a trend in which the output gap is positive ( representing excess demand ) – has begun to take root, albeit with some fluctuations due to the consumption tax hike. this trend is seen in the tightening of labor supply and demand conditions. given that slack in the economy has shrunk, as widely recognized, it has become increasingly necessary to strengthen supply capacity in order for japan ’ s economy to raise its growth potential in the medium to long term. an economy ’ s growth potential, from a relatively longer - term perspective, depends on the growth in capital stock and labor input, as well as improvements in productivity through innovation and the like. this indicates that it is private economic entities that play the most important role in efforts to strengthen growth potential and pursue the growth strategy. at the same time, to strengthen growth potential, it is essential to build an environment that enables private economic entities to unleash their creativity and “ animal spirits ” by ( 1 ) increasing the labor participation of women and the elderly, ( 2 ) eliminating restrictions to market entry, and ( 3 ) carrying out regulatory and institutional reforms. in promoting such an environment from a macroeconomic perspective, the government plays a critical role. in june 2014, the cabinet decided the new japan revitalization strategy and basic policies, which aim to revitalize japan ’ s economy. i strongly expect that efforts based on these measures will proceed steadily. bis central bankers ’ speeches