jgbs. it is the year in which the gross amount of the bank ’ s jgb purchases is expected to almost reach the gross amount of jgb issuance by the government. this implies that it is becoming difficult for the bank to maintain the pace of increase in the amount outstanding of its jgb holdings solely by purchasing from the market the equivalent amount of jgbs issued by the government. it is considered that the bank increasingly will need to purchase jgbs from financial institutions before redemption of such jgbs up to the amount needed for it to maintain the pace of increase in the amount outstanding of its jgb holdings. given this, it is necessary to sufficiently recognize that it was at this exact timing that the negative interest rate policy – which discourages financial institutions to sell jgbs – was introduced. d. future conduct of monetary policy my assessment is that qqe, which focuses on jgb purchases, already has exerted a considerable effect, as evidenced by the closing of the negative output gap at an early stage and the subsequent correction of the weak prices. however, i consider that the additional effects of qqe have been diminishing, given that the continued decline in long - term real interest rates, which is considered to be the main source of policy effects, already has come to a halt. on the other hand, numerous side effects of qqe arising from the bank ’ s jgb purchases have not diminished ; rather, they seem to be increasing steadily. these side effects include ( 1 ) various problems stemming from the distortion of the jgb market – for example, a risk of instability in the financial system caused by impairment of the proper functioning of the jgb market in terms of liquidity and the pricediscovery function, and a risk that drastic fluctuations in jgb prices will cause revisions to prices of other financial products and assets ; ( 2 ) a limit to the bank ’ s jgb purchases and increased volatility in the market in case of arising concerns among market participants about bis central bankers ’ speeches such a limit ; and ( 3 ) deterioration in the bank ’ s financial soundness in the course of normalizing monetary policy. under these circumstances, i believe that, by reducing the pace of the bank ’ s jgb purchases – or the annual pace of increase in the amount outstanding of its jgb holdings – the balance between the positive effects and side effects of qqe could be improved while ensuring stability in the jgb

have risen has been outweighing that for which prices have declined by an increasing margin ( chart 8 ). monthly data for the cpi are susceptible to various factors, such as developments in import prices that reflect changes in energy prices and fluctuations in foreign exchange rates. on the other hand, the underlying trend in inflation is determined mainly by the output gap and medium - to long - term inflation expectations. from this perspective, significant changes that have not been seen in recent years are taking place. i will elaborate on these two aspects as follows. developments in the output gap the output gap indicates the supply and demand balance of japan ’ s economy as a whole ; that is, the extent to which capital and labor are utilized. although capacity utilization has continued its increasing trend as the economy continues to recover moderately, the effects of the flattening of exports, reflecting the slowdown in emerging economies, have been observed recently ( chart 9 ). meanwhile, labor market conditions have continued to tighten. this is partly because, reflecting firmness in domestic demand, the current economic recovery has been largely attributable to the nonmanufacturing sector, which is more laborintensive than the manufacturing sector. therefore, the output gap has steadily followed its improving trend, mainly on the labor side ( chart 10 ). looking ahead, with the economy expected to continue growing at a pace above its potential, capital and labor utilization is likely to rise further and thereby the output gap is expected to continue improving further. thus, upward pressure on prices stemming from the output gap is likely to increase steadily. bis central bankers ’ speeches developments in medium - to long - term inflation expectations let me move on to inflation expectations. medium - to long - term inflation expectations appear to have been rising on the whole from a somewhat long - term perspective. inflation expectations can be assessed from various market indicators and survey results. although there are some indicators or results showing that inflation expectations have been somewhat weak, they have been flat on the whole recently, despite the significant decline in crude oil prices ( chart 11 ). in addition, it is important to analyze firms ’ and households ’ views on prices upon which they engage in economic activities. since the turn of the fiscal year, firms ’ price - hiking behavior has been increasingly conspicuous. at the same time, households have come to accept price increases as well, against the backdrop of actual and prospective increases in their income. the increases reflect rises in wages, including base pay, which took place at