while domestic demand is likely to maintain firmness as external demand is expected to increase, albeit moderately, the virtuous cycle among production, income, and spending is likely to be maintained. in terms of the real gdp projections in the outlook report released last week, that for fiscal 2013 is somewhat high, at 2. 7 percent, partly reflecting a front - loaded increase in demand prior to the consumption tax hike. thereafter, real gdp is expected to decline in fiscal 2014 to 1. 5 percent, partly reflecting a drop following the tax hike, and should be 1. 5 percent in fiscal 2015 ( chart 1 ). therefore, while the economy will be affected by a swing of the front - loaded increase and subsequent decline in demand prior to and after the two scheduled consumption tax hikes, it is likely to continue growing at a pace above its potential, which is estimated to be around 0. 5 percent, as a trend. bis central bankers ’ speeches two points that deserve particular attention in looking to the future of japan ’ s economy are the sustainability of firm domestic demand and the outlook for overseas economies. sustainability of firmness in domestic demand first is the sustainability of domestic demand. the major feature of the recovery this time is that, starting with domestic demand such as private consumption and public investment, the nonmanufacturing sector has been leading the recovery. this differs from typical patterns of postwar recovery in japan, in which the recovery started with an increase in exports and production and was led mainly by the manufacturing sector. in fact, while production in the manufacturing sector has remained at about 80 percent of its peak prior to the lehman shock, the indices of teritiary industry activity, which show developments in the nonmanufacturing sector, have recovered to a level close to that seen prior to the lehman shock. looking at the diffusion index ( di ) for business conditions in the tankan survey, the di for the nonmanufacturing sector has been better than that for the manufacturing sector in this recovery phase ( chart 2 ). of this firm domestic demand, private consumption had been supported by an improvement in consumer confidence and wealth effects from the rise in stock prices since the turn of the year, while buoyant consumption by the elderly, notably baby boomers, had been serving as an underlying factor ( chart 3 ). recently, it also has begun to be backed by improvement in the employment and income situation. namely, the employment situation continues to improve moderately but steadily, with both

with high liquidity. there is a risk that if investors are attracted by such characteristics of the yen this will lead to a sharp appreciation of the yen that diverges considerably from economic fundamentals. this may cause a sharp increase in the shift of production overseas by japanese firms beyond a critical level. if not just a shift of a factory to abroad, but a shift of the entire manufacturing, or monozukuri, system – including suppliers – occurs, japan ’ s manufacturing would find it hard to recover even if the yen depreciated in the future. the essence of monozukuri is not efficiently producing goods at the lowest cost. rather, it is the repeatedly occurring innovation that generates value - added in various ways, in which all the parties concerned cooperate but compete with one another at the same time. innovation can sometimes be the identification and avoidance of unnecessary procedures in production, or it can be an effort to adapt goods to customers ’ changing needs. in order to continue to innovate in the monozukuri system, it is vital to maintain a system that can respond immediately and flexibly to changes in the situation. that said, we should continue to carefully monitor developments in foreign exchange and global financial markets from the standpoint of whether they will cause irreversible shifting of the monozukuri system to overseas locations. iii. bank ’ s conduct of monetary policy i would now like to talk about the bank ’ s conduct of monetary policy, taking into account the financial and economic situation in japan and abroad. the bank has been pursuing powerful monetary easing under the new monetary policy framework introduced in october 2010 – “ comprehensive monetary easing ”. this framework is composed of three measures. first, the bank sets the policy rate at 0 to 0. 1 percent, which can be deemed a virtually zero interest rate. second, the bank is publicly committed to continuing this virtually zero interest rate policy until it judges that price stability is in sight. and third, as an exceptional measure for a central bank, it purchases from the markets not only long - and short - term government bonds but also risk assets such as cp, corporate bonds, exchange - traded funds ( etfs ), and japan real estate investment trusts ( j - reits ). the aim of the bank ’ s purchases is to encourage a decline in longer - term interest rates and risk premiums. a program for purchasing financial assets, called the asset purchase program started at 35 trillion yen, but has been repeatedly expanded