output gap estimates must be interpreted with wide margins. in any case, the trends indicate that both japan and the united states have been achieving steady improvement in the employment and output gap, and thus their downward pressures on prices have weakened. large swings in commodity prices and foreign exchange rates, however, have blurred the positive price effects driven by the domestic demand - supply balance. bis central bankers ’ speeches c. households ’ upward bias in inflation expectations and its relation to income as the third feature, short - and long - term inflation expectations ( median ) have been fluctuating at around 2 – 3 percent in japan and the united states ( chart 3 ). from the boj ’ s opinion survey on the general public ’ s views and behavior and michigan university ’ s surveys of consumers, short - term inflation expectations – one year ahead in japan and over the next year in the united states – have remained stable, at a similar level of around 3 percent over the past two years. long - term inflation expectations – five years ahead in japan and over the next five to ten years in the united states – have been stable for a longer period, at about 2 percent in japan and around 3 percent in the united states. furthermore, it is not widely known that households in japan kept positive inflation expectations even when mild deflation prevailed from 2009 to mid - 2013. similarly, japanese households ’ present perceived inflation ( defined as present perceived price changes relative to one year ago ) has never turned into the negative territory over the same mild deflationary period ( chart 4 ). another commonly observed trend that should be highlighted is that households ’ inflation expectations tend to be higher than the actual price developments captured in official price statistics in both countries – suggesting the presence of an upward bias in inflation expectations. this may reflect that households ’ responses in the survey are often affected by the recent price movements of everyday goods and services, such as food, daily necessities, and gasoline. however, there is a difference in the scale of upward bias ; it appears to be generally greater in japan than in the united states. let me assume that a gap between the average rate of long - term inflation expectations and the average rate of change in the headline price index roughly reflects an upward bias. the scale of the bias over about the decade before the sharp drop in oil prices in october 2014, averaged at around 2 percent in japan and around 1 percent in the united states. this implies that the seemingly stable long - term inflation expectations of around 2

equilibrium ( depreciated ) level, thus leading to the risk of a surge in domestic interest rates and economic recession. for this reason, the region could utilize the accumulated foreign reserves to mitigate abrupt exchange rate volatility. depending on the type of shocks, the scale of changes in foreign exchange rates, and the size of foreign reserves, policy responses vary widely across the region. • in the case of drawing down foreign reserves, a country may need to deal with possible slower growth in the monetary base. to offset the resultant shortage in liquidity supply to the market, a central bank may find it necessary to expand fundssupplying operations to a greater extent than before. to enable smooth operations, monetary policy conduct must be more centered toward a policy interest rate adjustment – together with measures to foster collateral asset markets, to develop yield curves with long maturities and sufficient liquidity, and to promote the monetary policy transmission mechanism based on the policy interest rate. • in this sense, this may be an opportunity for a country that once relied on liquidity supply through foreign reserve accumulation as a monetary easing tool to shift toward a more market - based monetary policy tool. such a practice may promote convergence of monetary policies to ones that are more consistent with the flexible inflation - targeting framework within the region, regardless of whether a country has an inflation - targeting framework. this concludes my presentation. thank you very much for your attention. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches