) let me start my presentation by providing you with a brief summary of the economic performance since the 2000s and the experience under qe of 2001 – 06. a. framework for the qe policy before falling into a prolonged mild deflation phase, japan experienced the collapse of the bubble in real estate and stock prices in the early 1990s, and the subsequent financial crisis in the second half of the 1990s. over the same period, japan suffered from a prolonged recession and negative output gap notwithstanding several short - lived recovery phases ( chart 1 ). the growth rate of the headline consumer price index ( cpi ) and core cpi ( defined as all items except fresh food ) gradually dropped and shifted to a continuous modest decline from 1998 ( chart 2 ). moreover, the economy was adversely affected by the bursting of the u. s. it bubble in 2000. exports and production dropped sharply in early 2001, while cpibased price changes remained in negative territory. under this environment, the bank adopted a new monetary easing framework – the so - called qe policy – in march 2001 with a view to stemming the continuous price decline and setting bis central bankers ’ speeches the basis for sustainable economic growth. 1 this unique policy was a nonstandard monetary policy since it was introduced in the presence of a virtually zero uncollateralized overnight call rate or very short - term money market interest rate. 2 it consisted of the following three main elements. first, the main operating target was shifted from the policy rate ( uncollateralized overnight call rate ) to the current account balance at the bank – a transformation from interest rate targeting to reserve targeting. the target balance was then increased gradually by expanding excess reserves ( chart 3 ). to be precise, the target amount was raised nine times from the initial 5 trillion yen ( which is higher than the required reserve level of 4 trillion yen ) to around 30 – 35 trillion yen in january 2004 in response to the deteriorating economy. the same target amount was then maintained until the end of the qe policy. the attempt was made to achieve this reserve target mainly through money market operations with various maturities of one year or less. theoretically, this measure, which led to an expansion of the bank ’ s balance sheet ( or the monetary base ), was supposed to affect the financial and capital markets through the following : ( 1 ) the portfolio rebalance effect ( lowering the risk premiums of financial assets that are imperfect substitutes for the monetary base ) ; and ( 2 ) the

to the effects of monetary easing as well as various economic measures, and that growth rates of overseas economies gradually pick up. thereafter, while the economy will be affected by the frontloaded increase and subsequent decline in demand prior to and after the two scheduled consumption tax hikes, it is likely to continue growing as a trend from fiscal 2013 toward fiscal 2015, at a pace above its potential, as a virtuous cycle among production, income, and spending is maintained ( chart 1 ). regarding prices, the year - on - year rate of change in the consumer price index ( cpi ; all items less fresh food ) has recently been around 0 percent or slightly negative. the outlook for prices as measured by the year - on - year rate of change in the cpi – excluding the direct effects of the consumption tax hikes – is expected to follow a rising trend ; as such, it will reflect factors such as the improvement in the output gap ( the difference between actual and potential gdp ) as well as the rise in medium - to long - term inflation expectations. according to the “ median ” of the policy board members ’ forecasts, the cpi inflation is likely to reach about 2 percent toward fiscal 2015 ( chart 2 ). chart 2 indicates the rate of change in prices bis central bankers ’ speeches with and without the effects of the consumption tax hikes. 1 the output gap is expected to follow a moderate improving trend ( chart 3 ). moreover, as a tightening of labor market conditions is expected to become evident, nominal wages are likely to see gradual upward pressure ( charts 4 and 5 ). in addition, some indicators suggest a recent rise in medium - to long - term inflation expectations ( chart 6 ). these expectations are likely to continue on a rising trend under qqe and the pace of increase may accelerate – especially after the actual rate of price change turns from negative to positive this year, gradually converging to around the 2 percent target. import prices are also expected to continue rising during the projection period ( fiscal 2013 – 2015 ), reflecting upward pressure for the time being from developments in the foreign exchange market and assuming that international commodity prices will follow a moderate rising trend in line with global economic growth. b. upside and downside risks to japan ’ s economy with respect to the upside and downside risks to the bank ’ s aforementioned baseline scenario for economic activity, the following five factors were examined : ( 1 ) developments in global financial markets ; ( 2 ) performance of overseas economies ; (