buys unlimited amounts of jgbs at a specific interest rate level. as this new tool was used in a timely manner, market confidence regarding the bank's ability to control interest rates has strengthened. since mid - 2017, long - term interest rates have shown a greater tendency to move at around the target level. for the effects of jgb purchases on long - term interest rates in japan, see nao sudo and masaki tanaka, " do market segmentation and preferred habitat theories hold in japan? : quantifying stock and flow effects of bond purchases, " bank of japan working paper series, no. 18 - e - 16, 2018. the second point is to maintain the minimal market functioning while controlling the long - term interest rates appropriately. of course, there is a trade - off between strengthening a central bank's ability to control interest rates and maintaining the market functioning. increasing market confidence in the central bank's ability implicitly works as a put option. if this situation progresses further, the market functioning could be overly constrained. in fact, from around early 2018, as confidence in the effectiveness of yield curve control strengthened, daily fluctuations in jgb yields clearly became smaller and the jgb transaction volume also showed a decreasing trend ( chart 7 ). to deal with this difficult situation, in july 2018, the bank clarified that long - term interest rates might move upward and downward to some extent mainly depending on developments in economic activity and prices, and made clear that it would conduct jgb purchases in a more flexible manner depending on market conditions. meanwhile, the bank has proceeded with adjustments to maintain and improve the market functioning, for example, by relaxing the terms and conditions for the securities lending facility ( slf ). reflecting these efforts, price movements and the transaction volume of jgbs have recovered recently. as i mentioned earlier, yield curve control was introduced in 2016 to enhance the sustainability of the monetary easing policy. in addition, i believe that the bank can maintain accommodative financial conditions for a long time by continuously making efforts to strike a balance between conducting yield curve control as well as maintaining and improving the market functioning. c. examination of the financial functioning the third challenge in continuing with powerful monetary easing is to examine its impact on the financial functioning. to achieve price stability, it is essential to ensure financial stability and sustain the transmission mechanism of monetary policy. if long - term and super - long - term interest rates decline excessively, the rates of return on

labor productivity and accordingly, if a mismatch between supply and demand of labor is reduced, this may open the possibility of lowering the structural unemployment rate. the rate was generally in the range of 2 – 3 percent in the 1980s ; it rose to a peak of above 4 percent in the early 2000s before dropping moderately to the current level of around 3. 5 percent ( chart 8 ). the structural unemployment rate appears to have risen on the backdrop of slow labor supply responses in adjusting to changes in the domestic demand structure driven by the progressive aging of the population and a steady decline in public investment. over the bank ’ s projection period, the potential growth rate is expected to rise from the current level of around 0. 5 percent toward around 1 percent. this will occur mainly through an accumulation of capital stock, a moderate increase in the labor force participation ratio for women and the elderly, and further improvement in total factor productivity ( tfp ). at the same time, an economic growth rate exceeding the potential growth rate will expand the output gap into the positive territory, mainly in fiscal 2014 and fiscal 2015. the greater positive output gap will promote business fixed investment and an extension of working bis central bankers ’ speeches hours by part - time workers, thereby helping to raise further the potential growth rate. it is also expected that greater efforts will be made by the government to update existing institutions and tax systems aimed at promoting full - time employment, settling the issues of children on waiting lists for nursery schools, and promoting economic growth strategies. to summarize, japan ’ s potential growth rate has declined in the aftermath of the global financial crisis, partly owing to the sluggish economic growth. decline in the potential growth rate is commonly observed among other advanced countries. going forward, japan ’ s potential growth rate is expected to gradually rise toward about 1 percent, while the actual economic growth will exceed the potential growth rate. the output gap will be expected to improve from summer 2014 through fiscal 2015, and remain in the positive thereafter. d. medium - to long - term challenges implied by the output gap i will now touch on the medium - to long - term challenges implied by developments in the output gap. the pace of aging will accelerate in japan, and the labor shortage will likely intensify despite an increase in the labor force participation ratio for women and the elderly as well as in the number of full - time workers. given that the elderly tend to increase demand for medical and nursery care, trips, and social expenditure