2 percent inflation is a given. to reach this world, it is bis central bankers ’ speeches necessary to further raise both actual inflation rates and inflation expectations. this is the reason why i said earlier that we are only half way there. 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. if the outlook changes due to the manifestation of some risk factors, the bank will make adjustments without hesitation if this is judged necessary for achieving the price stability target. iii. toward strengthening japan ’ s medium - to long - term growth potential as i explained, japan ’ s economy has been recovering moderately and is on a path suggesting that the 2 percent price stability target will be achieved as expected. against this backdrop, discussions on labor shortages and supply capacity constraints have increasingly come to the forefront. although the decline in the potential growth rate was clearly recognized as one of the key challenges facing japan, this was overshadowed by concerns over excess labor and excess capacity, which were considered to be the most immediate problems, since demand was weak. however, the situation has changed in the past year or so. with the increase in demand thanks to large - scale monetary easing, fiscal spending, and the rejuvenation of private - sector activity, the supply capacity constraints that were lurking below the surface have now become apparent. in this situation, it seems to have become widely recognized that it is important to enhance supply capacity from a medium - to longterm perspective. in my view, with the supply capacity constraints having surfaced, this is a golden opportunity to push ahead with initiatives to address the challenges japan is facing. therefore, i would like to offer my view on the issue of japan ’ s medium - to long - term growth potential. an economy ’ s medium - to long - term growth potential, in other words, the potential growth rate, depends on the growth in production factors, that is, capital and labor, as well as improvements in productivity through innovation and the like. japan ’ s potential growth rate has been declining as a trend since the 1990s ( chart 10 ). looking in more detail at the reasons for the decline in japan ’ s potential growth rate, the deceleration in capital accumulation and in productivity growth in the 1990s played a major role. during this period, japanese firms were weighed down by the need to resolve the so - called three excesses – excess labor, capital stock

monetary policy responses given those reasons. powell, j. h., " monetary policy in the time of covid, " speech at " macroeconomic policy in an uneven economy, " a symposium sponsored by the federal reserve bank of kansas city, jackson hole, wyoming, august 27, 2021, https : / / www. federalreserve. gov / newsevents / speech / powell20210827a. htm. have intensified. the european central bank ( ecb ) faces a difficult dilemma of curbing inflation or supporting the economy. although the ecb has focused so far on supporting the economy and put off raising interest rates, ecb president lagarde has signaled that interest rates will be raised by the end of the july - september quarter as the second - round effects of inflation have started to be seen on wages and inflation expectations recently. in contrast, japan's cpi, despite having increased, has been only around 2 percent of late and has been lower than the respective indexes for europe and the united states. this seems to once again highlight japan's long - standing issue of prices being unlikely to rise. that is, goods prices in japan have shown cyclical fluctuations along with the output gap, as is the case in europe and the united states, although to a varying degree. however, services prices have remained extremely rigid, unlike in europe and the united states, and have barely risen during the pandemic. in order for japan to achieve inflation of around 2 percent every year, services prices will need to constantly make a roughly 2 percent contribution to the cpi and goods prices will need to see cyclical fluctuations at around 2 percent. on this point, comparing the distribution of price changes of items that make up the cpi in japan and the united states, the distribution in the united states before the pandemic shows some variation at around 2 percent, primarily for services ( chart 5 ). in japan, meanwhile, price changes for an overwhelmingly large number of items hover at around 0 percent, and there has been no major change to this during the pandemic. the primary reason for being unable to achieve the price stability target of 2 percent, despite the fact that the bank has carried out large - scale monetary easing for over nine years, is that this " zero percent anchoring " of inflation expectations - - in other words, " zero - inflation norm " - - has been extremely persistent. not all economic entities in the united states share the