The first point warrants considerable attention currently in predicting the outlook for Japan's economic activity. If overseas economies slow further and negative effects on Japan's economic activity materialize, it may become necessary to take policy actions. In this case, it will be important that such actions should be decided after examining the scale of the negative effects and how fast they spread.
At this point, our labour force would be fully employed, and the economy overall would be using all of its productive capacity.3 This is what we mean when we say the economy is operating at its potential output.4 The concept of potential output is important because inflation should be close to our 2 percent target when the economy is operating at that level.