5 ). therefore, japan ’ s economy looks to be on course toward achieving the 2 percent price stability target, and we feel that developments under our policy are promising. ii. the relationship between monetary policy and the government ’ s growth strategy so, what is the relationship between the bank of japan ’ s monetary policy and the growth potential of japan ’ s economy ( chart 6 )? the japanese government has been pursuing a three - pronged strategy that comprises bold monetary easing, flexible fiscal policy, and a growth strategy that aims to spur private investment. these policies are often referred to as the three arrows of abenomics. the role of monetary policy in this policy mix, in an immediate sense, boils down to overcoming deflation. however, it is also linked to japan ’ s potential growth rate. the relationship between the two can be summarized as follows. the first role of monetary policy in this context, needless to say, is to stimulate aggregate demand through large - scale monetary easing, fill the output gap, and thereby bring japan ’ s economy back to its potential growth path ; in other words, to break the vicious cycle between deflation and recession by overcoming deflation. during the process of the output gap diminishing as a result of qqe, japan ’ s potential growth rate is likely to rise to some extent. the reason is that workers will be able to work more efficiently, and capital investment will increase and technological innovation advance as firms, reflecting the improved business sentiment, become more willing to take risks. however, raising the growth potential further is not the role of the central bank and its monetary policy, but of the government and policy measures it can take, such as deregulation. therefore, the second role of monetary policy is to prepare, by overcoming deflation, the environment necessary for the government to pursue economic structural reforms through its growth strategy to shift the potential growth path upward. bis central bankers ’ speeches unless the economy is more or less in good shape, the government cannot promote structural reforms to enhance the efficiency and dynamism of the economy to raise productivity. the reason is that in a deflationary recession there will be strong resistance to the pain that pro - competition policy measures through deregulation might bring. you will have heard of the term creative destruction. when deflation continues, destruction will not be followed by creation. if structural reforms under the growth strategy make progress, these reforms are basically supply - side measures that increase the aggregate supply capacity

easing to underpin that commitment will raise inflation expectations. in addition, with short - term nominal interest rates almost at 0 percent, the policy will exert downward pressure on expected long - term real interest rates by containing upward pressure on longterm nominal interest rates through the massive purchases of long - term government bonds. as a result of the stimulus provided by the decline in expected real interest rates, the output gap, which is thought to be the cause of deflation, will disappear. in addition, qqe is expected to give rise to a virtuous cycle in which closing the output gap will lead to a rise in observed inflation, which in turn will further increase inflation expectations toward the price stability target. bis central bankers ’ speeches skeptics argue that achieving the 2 percent price stability target will be difficult without a further depreciation of the yen. however, the point of qqe is to achieve the target through the mechanism just mentioned, that is, through a virtuous cycle of a rise in inflation expectations and an improvement in the output gap. qqe does not rely on an increase in import prices due to depreciation of the yen. a key challenge in japan is that, with deflation having taken hold since the second half of the 1990s, people ’ s inflation expectations have declined and deflationary expectations have become entrenched. against this background, one of the core aims of qqe is to work directly on people ’ s inflation expectations to dispel deflationary expectations and raise people ’ s inflation expectations. c. the current state of japan ’ s economy one year and two months have passed since the introduction of qqe. so far, qqe has been having the intended effects. surveys on various economic entities and indicators such as break - even inflation rates observed in the government bond market suggest that japan ’ s inflation expectations have been rising on the whole ( chart 3 ). as for nominal interest rates, yields on japanese government bonds have been hovering stably at low levels. against such accommodative financial conditions, japan ’ s economy has continued to recover moderately accompanied by a virtuous cycle among production, income, and spending ( chart 4 ). regarding prices, for example, the year - on - year rate of change in the consumer price index ( cpi ) excluding fresh food has moved from negative territory to 1. 5 percent as of april, excluding the direct effects of the consumption tax hike ( chart