of growth. the pressure on various economic entities to adjust their balance sheets has more or less disappeared since the beginning of 2000. however, the prolonged period of weak domestic demand has been compounded by the recent onset of population decline, pushing down economic entities ’ expectations for economic growth and forestalling forward - looking expenditure. the lehman shock in 2008 dealt another serious blow to demand and its impact continues to this day. one reason that supply capacity has not been sufficiently adjusted despite stagnant demand is that, as a result of various regulations and protection measures, factors of production have remained in areas from which demand has shifted away. there is a possibility that inflation expectations will lessen if expectations for future economic growth continue to decline and the output gap does not narrow steadily. in this case, consumers of goods and services may put off spending, while suppliers may cut prices further to stimulate demand. under these circumstances, although the output gap remains unchanged, prices may fall further and deflation may become even more difficult to quell. at present, medium - to long - term inflation expectations remain stable and it is important to make sure that they do not decrease. b. overcoming deflation in order for japan ’ s economy to overcome deflation, it is necessary to narrow the negative output gap. to this end, demand has to be expanded. the task is not impossible and there are various areas with potential demand to be tapped, such as sectors related to the provision of healthy and safe food, the environment, and population aging. an example of such latent demand is the recent government measures that sharply increased demand for environment - friendly durable goods. needless to say, it is also important to follow developments in overseas demand. as i mentioned earlier, economic growth in emerging and commodity - exporting economies has been astounding, and it is very likely that their demand for japanese goods and services still has much room for growth. the issue at stake is how to tap such demand. the government ’ s “ new growth strategy ” and “ fiscal management strategy, ” both announced in june, may provide some pointers. the “ new growth strategy ” aims to create a strong japanese economy on the basis of the measures for demand creation that i just mentioned, together with steps to overcome constraints on the supply of goods and the circulation of funds to be implemented in accordance with a specific timetable. the “ fiscal management strategy, ” meanwhile, aims to restore a sound and sustainable fiscal structure in a way that is consistent with

. this is because, even as euroscepticism rises, the external case for working together has rarely been stronger or more visible to the public. it is now plain to see that the rules and norms which have governed international relations since the second world war are being challenged – replaced by a new power politics where large economies try to impose their will on smaller ones. in such a world, it is undeniable that the eu amplifies the sovereignty of its members. in parallel, brexit has served to underline the pros of membership and the cons of being outside. it is now established that leaving the eu presents a trade - off : countries either have to follow the rules they could once set ; or they have accept a diminished level of market access, and ultimately lower welfare for their people. this renewed visibility presents an opportunity for the eu to reconnect with the european public 1 / 2 bis central bankers'speeches and re - find its raison d ’ etre. in this spirit, with the ep elections approaching, those who believe in europe have two imperatives : to promote and defend the eu where it is working ; and to fix it quickly where it is not. i hope this conference can help carry that debate forward. 2 / 2 bis central bankers'speeches