sides of the same coin. under qqe with yield curve control, the bank will continue with its large - scale purchases of jgbs in order to control interest rates. on this point, i would like to reiterate that there is no change in the bank's stance that it will continue with monetary easing from both the quantitative and interest rate aspects. iii. challenges facing japan's economy and monetary policy next, i would like to elaborate on my own thinking regarding challenges facing japan's economy and the bank's monetary policy conduct from a somewhat long - term perspective. over many years, the economy continued to see low growth under a moderate decline in prices. in january 2013, the government and the bank released a joint statement, and they have worked together since then to achieve sustainable economic growth with price stability. the economy is no longer in deflation, which is commonly defined as a sustained decline in prices, but the price stability target of 2 percent has not yet been achieved. although the economy has been on a moderate recovery trend, it has not yet fully succeeded in achieving sustainable growth as the potential growth rate has remained at a low level. under these circumstances, firms and households seem to be conducting their economic activities on the assumption that prices and the economic growth rate will not rise so much going forward. firms have maintained their cautious stance toward expanding their fixed costs, because they have not been confident regarding whether sales will increase steadily in the future. growth in business fixed investment and wages - - particularly in base pay, which leads to a permanent increase in wages - - has been slow relative to the improvement in corporate profits and the employment situation. households have also been cautious in increasing their spending, despite the rise in their incomes, as they see that it seems impossible to project a permanent expansion in income and / or a rise in prices. i view this current situation as a sort of equilibrium. in general, a virtuous cycle from income to spending among firms and households promotes sustainable economic growth and price stability. an increase in business fixed investment raises the potential growth rate through accumulation of capital and improvement in labor productivity. wage growth exerts upward pressure on prices mainly through expansion of firms'costs, as i have mentioned earlier, and an increase in household spending brings about improvement in the output gap, also leading to price rises. currently, however, it seems that the expectations for low inflation and low economic growth that have taken hold among firms and households have been hampering

risk triggering exchange rate adjustment among competitor economies – particularly in asia, and would spread deflationary forces across the globe. although its recovery has been slower than previous economic expansions, the us is the main bright spot in the global economy. but even here there are significant puzzles around the labour market and investment climate. why, for example, has recent us labour productivity growth been so slow, and what explains the substantial wage moderation and weakness in business investment at this stage of recovery? on the policy side, there is uncertainty as to when and how fast the process of raising interest rates might take place, and its possible impact on international growth and asset prices – especially at a time when the bank of japan and european central bank are considering expanding their quantitative easing programs. these are some of the considerations that shape the world of central bankers. it ’ s a world of complex linkages, of instantaneous information, massive daily cross - border portfolio flows, unprecedented monetary accommodation and, in some instances, sharp swings in market liquidity and asset prices. it ’ s also a world in which high expectations have been placed on central banks to use all of the scope within their mandate to stimulate growth in demand and counter the risk of inflation remaining below desired goals for extended periods. in seeking to do so, central bankers have often had to work without the support of fiscal policy, or the structural adjustment reforms needed to raise potential output growth. 3. monetary policy in a small open economy central bankers also operate in a world where there is widespread overestimation and misunderstanding of what monetary policy can deliver. i will elaborate on three areas that may contribute to this. these concern the scope of monetary policy ; the dynamics – notably in terms of transaction volumes, driving forces and time horizons – of financial markets and their interaction with monetary policy ; and the degree of precision of the links between policy actions and outcomes. i ) scope of influence flexible inflation targeting here and overseas has been successful over the last 25 years in reducing inflation to low and stable levels – the best contribution monetary policy can make to an economy ’ s long - run growth. over the shorter term, monetary policy stabilises inflation by countering fluctuations in demand growth and employment away from their longer - run trends. 5 with inflation expectations stabilised at low levels, and the associated gain in policy credibility, g wheeler, reflections on 25 years of inflation targeting, international journal of central banking, september 2015. bis central bankers ’ speeches the ability of monetary policy to