considerably below 2 percent during the years of deflation – through monetary policy. looking at the situation in japan, the year - on - year rate of change in the cpi had been in negative territory or slightly above zero since the second half of the 1990s up until before the introduction of qqe. in other words, over the business cycle, it has been at around 0 percent on average. amid protracted deflation over this long period, medium - to long - term inflation expectations declined, and consequently, a sense that prices would not increase became entrenched. under these circumstances, firms ’ incentives to launch new initiatives through investing in business facilities and in research and development became reduced, because the holding of cash or deposits became a relatively better investment strategy. thus, japan ’ s economy was deprived of vitality and this generated a vicious cycle in which the low vitality made it more difficult to overcome deflation. in order to escape from such a situation, it has become necessary to pursue a policy that quickly and drastically changes firms ’ and households ’ mindset that prices will not increase. to that end, what was introduced as a bis central bankers ’ speeches prescription was qqe. this policy aims at creating an economic situation where prices increase at around 2 percent on average, as is the case with the united states and europe, by raising people ’ s medium - to long - term inflation expectations to around 2 percent and re - anchoring these expectations at that level. the mechanism of qqe is expected to be as follows : first, inflation expectations will be raised through a clear commitment and through a large - scale monetary easing to underpin the commitment ; second, concurrently, downward pressure will be put on nominal interest rates through massive purchases of government bonds, thereby decreasing real interest rates and stimulating private demand such as business fixed investment. namely, to start this mechanism, the bank aimed at first igniting inflation expectations. raising inflation expectations by changing people ’ s deflationary mindset is itself an aim of overcoming deflation, and at the same time the key to implementing the mechanism of qqe. considering the unique situation facing japan and the prescription for it, importance is attached to a “ time frame ” during which the target should be achieved, compared with the target for price stability in other countries. if the bank had simply stated that it would achieve 2 percent inflation at some point in the future and that it therefore expects firms and households to change their actions, would those entities,

from china and commodity - exporting economies as a whole have continued to lose pace, but their pace of growth is likely to pick up gradually as the recovery in advanced economies exerts positive effects. taking the above into consideration, japan ’ s exports are expected to increase moderately, as overseas economies continue to see moderate recovery, mainly advanced economies. that said, due attention needs to be paid to various uncertainties such as the outcome of the debt problem in europe, including the developments in greece, developments in the emerging and commodity - exporting economies facing structural issues or political instability, and geopolitical risks. against the backdrop of the pick - up in exports and resilience in private consumption as a whole, about which i will discuss in more detail next, production has been picking up due to the progress in inventory adjustments. corporate profits have continued to improve, with the ratio of current profits to sales for major firms exceeding the level prior to the global financial crisis ( chart 4 ). in that situation, firms have maintained their positive stance in their business plans, and fixed investment is planned to be increased steadily following last fiscal year. some firms have increased their share of domestic investment for this fiscal year, and it has been noticeable in media reports recently that firms that relocated production sites overseas amid the phase of the appreciation of the yen have started to attach importance to domestic production. going forward, against the backdrop of a moderate recovery trend in the economy, an increase in exports, and the decline in crude oil prices, corporate profits are likely to continue improving and business fixed investment is projected to continue on a moderate increasing trend. household sector : developments in wages and private consumption turning to the household sector, firms ’ positive stance has led to a tightening in labor market conditions and, accordingly, an improvement in the employment and income situation. with regard to firms ’ views on employment, even amid the sluggish economic recovery until last summer, the degree of labor shortage has risen further ( chart 5 ). in this situation, total cash earnings have risen moderately, albeit with fluctuations since last spring. last year, the yearon - year rate of increase in scheduled cash earnings was positive, reflecting the revival of an increase in base pay at many firms, which had been lost for many years. this winter ’ s bonuses also increased solidly. on the back of the rises in total cash earnings and the number of employees, employee income has been rising moderately. private consumption as a whole has remained resilient against