due to the wealth effect. as stated above, the decline in the expected real interest rates caused by the first arrow will lead to an increase in three demand components – consumption, investment, and exports. coupled with an increase in government outlays by the second arrow, the aggregate demand of goods and services will gradually increase. in slide 6, this is described as closing the negative output gap, as the aggregate demand catches up with the capacity to supply. the increase in the aggregate demand of goods and services will ignite production activity and increase the labor demand. this will lead to an increase in the workforce and eventually a rise in wages per person. as a result, the income of the workforce as a whole will increase and invigorate consumption. as consumption increases, business fixed investment and housing investment will rise accordingly. an increase in exports on the back of the yen ’ s depreciation will also lead to a pick - up in investment to increase production capacity. this vigor in consumption and investment will contribute to a further narrowing of the output gap, which will lead to an increase in production ; hence, the virtuous cycle prevails. in the initial stage of this whole process, the important key is for the public to expect that prices will go up. going through this process, demand will increase and prices will start to rise in reality toward the price stability target of 2 percent. this in turn will reinforce the public ’ s expectations that prices will rise stably in the future, thus contributing to low and stable expected real interest rates. as i have explained, japan ’ s economy, which had fallen into the vicious cycle of deflation and shrinking demand, is indeed on the verge of entering the virtuous cycle of moderate and stable inflation as well as increasing demand. you may have an impression that my belief in the need to exert an effect on the public ’ s expectations sounds as though it is taken from a fairy tale. intrinsically, monetary policy can elicit its effects through the public ’ s expectations. in my view, the most important point of our current conduct of monetary easing policy is to dispel the deflationary expectations that had been firmly embedded after nearly 15 years of deflation, and to generate mild and stable inflationary expectations. iv. economic activity so far, with the help of the flow chart, i have explained how the bank ’ s monetary easing policy works on economic activity. in the remainder of my speech, i would like to

interaction with great interest. i. three arrows today, i would like to explain the monetary easing that the bank has been conducting. as you know, the japanese government has already fired “ three arrows ” ; namely, bold monetary easing, flexible fiscal policy, and a growth strategy to encourage private investment. by combining these arrows, it aims to overcome deflation and address the challenges faced by japan ’ s economy. before discussing the main theme of my talk, let me elaborate on the respective roles that these play ( slide 1 ). the first arrow is bold monetary easing, with which the bank is making progress. in a nutshell, the bank conducts aggressive monetary easing with a view to achieving the price stability target of 2 percent. the intention is to close the negative output gap and put japan ’ s economy back on track to a sustainable growth path, or potential growth path. i will explain my own thinking about the first arrow ’ s transmission mechanism and its effects on economy activity as plainly as possible. bis central bankers ’ speeches the second arrow is flexible fiscal policy. while the first arrow is an extremely powerful policy measure, it takes some time until favorable effects from this permeate the economy. it is for this reason that flexible fiscal stimulus by the government is necessary at an initial stage of the policy package in order to underpin economic activity from the demand side. at present, public investment has been increasing mainly on the back of the emergency economic measures that were based on the supplementary budget for fiscal 2012 enacted in february 2013. the third arrow is a growth strategy to encourage private investment. this is aimed at raising the sustainable growth path itself and enhancing the room for japan ’ s economy to grow, whereas both the first arrow of monetary policy and the second arrow of fiscal policy are aimed at returning japan ’ s economy to the sustainable growth path by expanding the size of the aggregate demand. while i will not go into the details of the third arrow today, we expect that the government will steadily implement various measures including those of the “ japan revitalization strategy, ” released in june, under the leadership of prime minister abe. the respective roles of the three arrows that i just explained can be summarized as in my presentation slide ( slide 2 ). the real gdp growth rate – which represents the vigor in economic activity – is plotted on the vertical axis, while the horizontal axis represents the time horizon and the bold line shows the growth trajectory of japan ’ s economy. at present, the economy is below the dotted