Second, among factors that determine prices, I would like to point to developments in inflation expectations. The inflation rate is determined mainly by two factors. One is the aggregate supply and demand balance of the economy – the so-called output gap – and the other is medium- to long-term inflation expectations.
In order to achieve the price stability target of 2 percent, both factors need to operate toward raising prices. As for the first factor – namely, the output gap – the intuitive view is that prices will rise if economic activity improves and the supply and demand balance tightens.