easing that arose in regime 1. with the quantitative easing ( qe ) introduced in japan in regime 2 much larger in scale than previous easing measures, the process of closing the gap was more or less completed by the second half of 2016. further, this regime was widely regarded as a major change that encompassed economic policy overall, consisting of a framework for policy cooperation between the government and the boj. the closing of the gap meant that, by the end of 2016, the boj's balance sheet had expanded to the same extent vis - a - vis the level in 2007 as the fed's balance sheet, as shown in figure 1. in hindsight, it can be argued that qe had reached a point where some of its objectives had been achieved. the economy was close to full employment and inflation as of the second half of 2016 had become - - and remained - - positive. the negative spillovers from monetary policies abroad during regime 1 had disappeared by then. however, although inflation remained positive from 2016 onward, it did not accelerate, and the link between qe and inflation appears to have become less clear. the reason is that the link between the monetary base and the money stock as well as the link between output and the demand for money became less stable. in addition, tightening in the labor market due to sustained moderate economic growth led to an increase in labor - saving capital investment, which allowed firms to respond to upward pressures on labor costs without passing on rising costs to sales prices, resulting in weak inflation. a possible interpretation of these developments is as follows. thanks to the prolonged demand - side support through monetary policy, the economy neared full employment ; at the same time, this brought about changes on the supply side - - such as laborsaving capital investment - - that counteracted upward pressure on prices, resulting in sluggish inflation. however, despite such developments in prices, it seems fair to say that monetary easing policies during this period did have a certain effect. 2016 - 2019 ( regime 3 ) : regime change to yield curve control the next regime change, from the second half of 2016 onward, was a switch in the nature of monetary easing from qe to monetary easing via the control of interest rates through yield curve control ( ycc ). during this period, ( 1 ) japan's economy was close to full employment, ( 2 ) it experienced positive inflation, and ( 3 ) on the international front, there were no longer major differences in monetary policies

financing, such as of firms, and also is a prerequisite for monetary policy to exert maximum effects. on this front, there has been international cooperation. given that financial institutions'capital and liquidity have been under considerable stress, prudential standards have been applied flexibly and operational burden in terms of regulation and supervision has been reduced. for example, the deferral of full implementation of the finalized basel iii standards by one year has been agreed and banks have been encouraged to use their regulatory capital and liquidity buffers. similarly, in early april, the financial services agency and the bank announced an easing of regulation on the leverage ratio requirement, which leads to expanding financial institutions'lending capacity. in japan, financial institutions have considerable resilience in terms of both capital and liquidity, and the financial system has maintained stability on the whole. however, if the impact of the spread of covid - 19 becomes prolonged, there is a risk that deterioration in the real economy will affect financial system stability, thereby exerting further downward pressure on the real economy. although this risk is judged as not significant at this point, it is necessary to pay close attention to future developments. let me also touch on the bank's business operations. in reflection of the government's declaration of a state of emergency, the bank, as a designated public institution, has established a system for continuing to provide essential central banking services, such as maintaining financial functioning and ensuring smooth settlement of funds, even while reducing some operations so as to prevent the spread of covid - 19. the bank will continue to steadily conduct central banking operations that are necessary to people's livelihoods. thinking on future policy conduct the bank recognizes that its responses mentioned earlier will contribute to supporting economic and financial activities, coupled with various measures by the japanese government as well as those by the government and central bank of each country and region in response to the spread of covid - 19. on this basis, for the time being, the bank will closely monitor the impact of covid - 19 and will not hesitate to take additional easing measures if necessary. in the meantime, it expects short - and long - term policy interest rates to remain at their present or lower levels. lastly, i will talk about the bank's mandate of ensuring price stability and its thinking on future monetary policy conduct. prices in japan are expected to be somewhat weak for the time being, affected by the extremely large shocks of the global spread of covid