these expectations are firmly anchored, it is possible that the actual inflation rate, short - term inflation expectations, and medium - to long - term inflation expectations will continue to affect each other. my thinking on this, which i will now present, is based on such a perspective. bis central bankers ’ speeches will the actual inflation rate promote an increase in medium - to long - term inflation expectations? in terms of the first conceptual channel, as the public grows convinced that the actual inflation rate has been rising moderately to date and is expected to approach 1 percent by the end of 2013, medium - to long - term inflation expectations may increase further. according to the opinion survey on the general public ’ s views and behavior conducted by the bank in september 2013, the respondents who chose “ developments in gasoline prices ” as the basis for their outlook for price levels over the next five years were nearly 50 percent of the total, and those who chose “ developments in prices of frequently purchased items ” ( such as food and daily necessities ) also were nearly 50 percent ( with multiple answers allowed ). thus, it is conceivable that the continuation of price increases, especially in these items, will contribute to raising inflation expectations. let me now refer to the experience of the united kingdom, although in that nation it is a case of lowering medium - to long - term inflation expectations in the presence of a high level of actual inflation – the opposite of the case of japan. the united kingdom exited the european exchange rate mechanism ( erm ) in september 1992. to raise the credibility of monetary policy in line with this new move, the bank of england ( boe ) adopted inflation targeting in october 1992, with the initial target set in the range of 1 – 4 percent. the target was subsequently lowered to a level equivalent to or less than 2. 5 percent in may 1995, and further changed to a point target level of 2. 5 percent in may 1997. in 1998, the boe achieved operational responsibility for setting interest rates and established the monetary policy committee. the target level was further changed to 2 percent at end - 2003, together with a change in the reference price indicator from retail prices to consumer prices ( chart 11 ). currently, inflation below 2 percent is judged to be just as bad as inflation above 2 percent. if actual inflation surpasses 3 percent or falls below 1 percent, the governor of the boe must write an open letter to the chancellor, explaining the reasons for such a deviation and

minor differences in quality. underlying factors may be national differences in the competitive environments of the retail sectors and quality adjustment. ( main factors contributing to a flattening in the slope of the phillips curve ) • a structural shift to the services sector : in general, the frequency of price changes in the services sector is lower than that in the manufacturing sector. given the relatively large shares of raw material and input costs in the total production costs in the manufacturing sector, changes in these prices and costs tend to be reflected in sales prices. by contrast, in the labor - intensive services sector, lower shares of raw material and input costs as well as sluggish growth in nominal wages lead to a low frequency of price changes. • an increase in the price elasticity of demand : intensified competition at home and abroad and a series of negative shocks ( and associated plunge in domestic demand ) have led to an increase in the price elasticity of demand. this has made it difficult for firms to pass their marginal cost of production on to sales prices, generating constant downward pressure on profit margins and wages. consequently, firms, supermarkets, and large discount stores have begun to set their sales prices according to their competitors ’ and clients ’ demand, rather than in response to the output gap or cost developments. a discount - based marketing strategy has become prevalent. based on the observation of the aforementioned factors, turning the viewpoint conversely may lead to the following inference. that is, the phillips curve may change positively – shifting upward with a steepening slope, in the case of japan – if the trend in some of these contributing factors can be reversed ( chart 10 ). b. conceptual channels leading to an upward shift in the phillips curve this subsection will focus on my current thinking on the conceptual channels that may lead to an upward shift in the phillips curve. under the inflation - targeting framework, in general, “ medium - to long - term ” inflation expectations have little correlation with relatively volatile “ short - term ” inflation expectations, especially when medium - to long - term inflation expectations are anchored at the inflation target level. in this circumstance, medium - to longterm inflation expectations also become less correlated with the “ actual ” inflation rate ; however, in the long run the actual inflation rate tends to move at around the level of these inflation expectations. this situation is not yet applicable in japan, since the economy is still in the process of establishing an anchor on the higher medium - to long - term inflation expectations at around 2 percent. until