in a variety of initiatives toward strengthening growth potential and improving the supply side, with strong support from the financial side through qqe. japan ’ s economy has continued to recover in a well - balanced manner as employment, wages, and corporate profits have improved in a sustainable manner, and the year - on - year rate of change in the cpi has been increasing gradually toward the 2 percent price stability target. b. the role of qqe in april 2013, the bank introduced qqe to achieve the 2 percent price stability target at the earliest possible time, with a time horizon of about two years. with the aim of achieving the target, the bank decided to continue with qqe, as long as it was necessary for maintaining that target in a stable manner. qqe is mainly composed of three important components : a large expansion of the monetary base ( at an annual pace of about 60 – 70 trillion yen ) ; large - scale purchases of jgbs ( at an annual pace of about 50 trillion yen ) with an extension of the average remaining maturity ( to about seven years ) ; and an increase in the purchase of risk assets. it also incorporates elements of an open - ended framework that links the continuation of such large - scale bis central bankers ’ speeches monetary easing with its policy target. that is, the bank has committed to continuing with qqe “ as long as it is necessary for maintaining the 2 percent price stability target in a stable manner ” without restricting the time frame or the total amount in advance. this commitment seems to have helped create further accommodative financial conditions by exerting a strong influence on market expectations about future monetary policy. the effects of qqe are more likely to materialize if the potential strength of the economy heightens. specifically, given an increase in firms ’ profitability, extremely accommodative financial conditions will drive their positive efforts and risk - taking activities, thereby further heightening economic stimulus effects. large - scale purchases of jgbs can exert downward pressure on longer - term interest rates and upward pressure on asset prices. if fundamentals such as corporate profits improve at the same time, asset price rises will become more sustainable and justified. as a result, potential negative side effects – such as heightened financial imbalances – will likely be suppressed. in addition, if some decisive measures produce further positive effects in a situation where the potential strength of the economy heightens, positive efforts of firms and households, business

in a situation where demand is expected to increase sustainably, firms will be able to charge higher markups ( profit margins ) or pass production costs more directly on to sales prices. if these developments are structural, this will steepen the phillips curve, which will also increase upward pressure on prices. third, it is likely that a mechanism will operate through which improvements on the supply side increase people ’ s medium - to long - term inflation expectations. if people expect that economic activity and sales will continue to improve, their inflation expectations will increase – considering, for example, the phillips curve relation in the future. this mechanism is called forward - looking expectation formation of the new keynesian phillips curve. improvements on the supply side thus increase people ’ s somewhat long - term inflation expectations, and in turn shift up the intercept of the phillips curve. in fact, medium - to long - term inflation expectations have been increasing gradually ( chart 4 ). developments in medium - to long - term inflation expectations seem to largely correlate with those in the potential growth rate per capita that i explained earlier, with the exception of the most recent period ( chart 13 ). in a situation where these mechanisms work in combination, it is possible to say, as suggested from chart 3, that upward pressure on the consumer price inflation rate has been increasing. in other words, mechanisms such as ( 1 ) sustainable improvement in the output gap and increasing expectations for future improvement, ( 2 ) firms ’ increased ability to pass costs on to sales prices, and ( 3 ) a rise in medium - to long - term inflation expectations have all contributed to heightening upward pressure on overall prices. i should note that, as a different kind of logic to explain the recent rise in prices in japan, some argue that prices have risen due to the constraint of sluggish supply. how should we explain this argument? i consider the key to be whether the supply capacity of the economy is actually increasing. price rises that are not accompanied by improvements on the supply side will restrain growth in demand and thus prevent economic activity from expanding. looking at the recent situation in japan, however, improvements on the supply side have see ryuzo miyao, makuro kinyu - seisaku no jikeiretsu bunseki ( time - series analysis of macroeconomic monetary policy ), chapter 8, nikkei inc., 2006, pp. 209 – 245 ( available in japanese ). bis central bankers ’ speeches become clear over the past year