mechanism are relevant in this context : one factor is exerting upward pressure on prices, namely, the continuing positive output gap ; while the other two factors are constraining inflation, specifically, the persistent deflationary mindset of the public and improvements in labor productivity. first, the output gap - - the factor exerting upward pressure on prices - - has remained consistently positive since the october - december quarter of 2016. in fact, the inflation rate and the output gap have been running in parallel with each other, with a certain time lag. this correlation indicates that the positive output gap has been acting as a factor placing upward pressure on prices. let me turn to the two factors constraining inflation. as for the first factor - - namely, the persistent deflationary mindset - - this cost - saving mentality has become deeply entrenched among consumers due to their experience of prolonged deflation, and has been influencing the cautious price - setting stance of japanese firms. in the formation of inflation expectations, the backward - looking expectation that reflects past inflation rates - - that is, the adaptive formation mechanism - - is more prominent in japan than the forward - looking expectation that reflects future economic conditions and changes in policy measures. this accounts for the persistent deflationary mindset. another factor constraining inflation relates to improvements in labor productivity, effects of which have been observed since around 2017. while the labor market is close to full employment, upward pressure on wages has not particularly increased. this is partly due to the fact that there was room for restraining wage increases as the labor force participation rate rose in parallel with the intensification of labor shortages ; moreover, it is worth noting that, with the anticipation of longstanding labor shortages, firms embarked on labor - saving investments, which in turn resulted in improvements in labor productivity. from the viewpoint of the output gap, a further widening of the gap within positive territory has been avoided by reducing labor input. improvements in labor productivity have prevented firms from passing increased costs, such as personnel expenses and raw material costs, on to sales prices ( chart 10 ). in other words, improvements in labor productivity have constrained inflation through the expansion in business fixed investment. b. outlook as the inflation mechanism has become more complex, it is not easy to forecast the outlook for prices. first, a positive inflation rate is necessary to overcome the persistent deflationary mindset grounded in the adaptive formation mechanism. assuming that the output gap remains positive, the

key will be predicting the outlook for the remaining factor - - namely, the constraining effects on inflation due to improvements in labor productivity. the rise in labor productivity promoting changes in the economic structure should be taken into account when considering the outlook. that is to say, changes on the supply side not only act as a factor constraining inflation but also raise the growth potential of the economy. with heightened uncertainty over the outlook for the global economy, the immediate challenge for japan's economy is to sustain the positive output gap and prevent any halt to the changes in the economic structure that have begun to progress, by maintaining moderate growth supported by steady domestic demand. if these immediate challenges are met appropriately, we should anticipate - - while keeping the economy free of deflation - - a moderate acceleration in the inflation rate when the labor force participation rate eventually stops rising and encourages real wage increases to catch up with the pace of growth in productivity. risks to the outlook for prices also warrant vigilance. if the slowdown in overseas economies continues for longer than anticipated, and the output gap reverses back into negative territory, japan's economy may face deflation again. as for now, given that the positive output gap is being maintained on the back of steady domestic demand, the bank should spare no effort in preparing for circumstances where additional policy actions may be necessary, while carefully examining future economic developments both at home and abroad. in order to maintain the inflation momentum, it is important to be fully prepared for the global economy to recover. iii. monetary policy a. current monetary easing policy and its basic framework the basic framework for the bank's current monetary easing policy introduced in september 2016 is quantitative and qualitative monetary easing ( qqe ) with yield curve control. under this framework, with the aim of achieving the price stability target under yield curve control - - in which short - and long - term interest rates are controlled - - the bank sets the shortterm policy interest rate at minus 0. 1 percent and the target level for 10 - year japanese government bond ( jgb ) yields at around 0 percent. it also purchases jgbs to facilitate the formation of these interest rates consistent with yield curve control. subsequently, in july 2018, the bank introduced forward guidance, and in april 2019, decided on a set of policy measures, including expanding eligible collateral for its provision of credit, to enhance the sustainability of the monetary easing policy. furthermore, at the most recent monetary policy meeting