supply and demand balance ( the output gap ), which shows the utilization of labor and capital ; medium - to long - term inflation expectations ; and import prices. first, the output gap, estimated by the bank, has recently been around zero, which is the historical average, despite being affected by the front - loaded increase and subsequent decline in demand prior to and after the consumption tax hike ( chart 13 ). firms seem to regard the decline in demand as temporary, and are maintaining their positive hiring stance. more firms have faced insufficient capacity, mainly in nonmanufacturing. therefore, a trend in which the output gap will be positive ( in excess demand ) is likely to take root, and from firms ’ stance toward research and development investment is also important in assessing the potential strength of the supply side of the economy. survey results show that major firms in japan have been making active efforts in research and development investment recently ( chart 10 ). although most of this investment is not currently covered in the estimates of gdp, it is likely to steadily push up gdp, and in turn the potential growth rate of the economy. research and development investment is a component of gdp in the 2008 system of national accounts ( sna ), a new framework of the sna, and in the united states and the european union, where the 2008 sna has already been introduced, such investment has pushed up gdp. in japan, work is in progress for the 2008 sna to be adopted in 2016. bis central bankers ’ speeches fiscal 2015 onward, the gap is expected to move further into excess demand territory and upward pressure on prices is likely to steadily increase. second, medium - to long - term inflation expectations appear to be rising on the whole from a somewhat longer - term perspective, and are likely to gradually converge to around 2 percent – the price stability target – as the bank pursues qqe, which was expanded on october 31, 2014 ( chart 14 ). third, as for import prices, while the recent depreciation of the yen will exert upward pressure on consumer prices, a decline in international commodity prices, including crude oil prices, will exert downward pressure on consumer prices. in particular, the effects of the decline in crude oil prices – based on the outlook for these prices, to which i referred earlier – will continue to exert a considerable degree of downward pressure on consumer prices until around summer 2015, as these effects will spread to electricity and gas prices, in addition to prices of

petroleum products such as gasoline ( charts 11 and 15 ). considering the above points, the year - on - year rate of increase in the cpi ( for all items less fresh food and excluding the direct effects of the consumption tax hikes ) is likely to reach around 2 percent in or around fiscal 2015. i personally hold the view that the rate of increase in the cpi will likely be kept at around the current level of around 1 percent until summer 2015, mainly because downward pressure associated with the decline in crude oil prices will contain upward pressure on prices. thereafter, the rate of increase is likely to accelerate gradually toward the second half of fiscal 2015 and reach around 2 percent – the price stability target – in or around that half, as the effects of the decline in crude oil prices will dissipate and the output gap will continue expanding in positive territory ( chart 16 ). 3. balance of risks risks to the bank ’ s aforementioned baseline scenario regarding economic activity include the following : developments in overseas economies, particularly the u. s., european, and emerging economies, and their effects on japan ’ s exports ; the effects of the two rounds of consumption tax hikes ; and firms ’ and households ’ medium - to long - term growth expectations. risks regarding prices include developments in medium - to long - term inflation expectations, in the output gap, and in import prices. i view these upside and downside risks to economic activity, as well as to prices, as generally balanced. ii. monetary policy a. expansion of qqe at the monetary policy meeting held on october 31, 2014, the bank decided to expand qqe, in order to ensure that the price stability target of 2 percent would be achieved at the earliest possible time ( chart 17 ). specific measures of the expansion are as follows. first, the bank will accelerate the annual pace of increase in the monetary base from about 60 – 70 trillion yen to about 80 trillion yen. second, it will increase purchases of japanese government bonds ( jgbs ) so that the amount outstanding of its holdings will be increased by about 30 trillion yen from an annual pace of about 50 trillion yen to about 80 trillion yen. the average remaining maturity of the bank ’ s jgb purchases will also be extended from the former period of about seven years to a flexible range of about seven to ten years. third, the amount outstanding of the bank ’ s holdings of risk assets such as exchange - traded funds ( etfs ) and japan real estate investment