fundamentals have improved over the past two years or so – that is, the period during which the bank has further enhanced monetary easing. this can be confirmed by the improvement, for example, in firms ’ ratios of profits to sales, employee income, the quality of employment, and the labor force participation rate ( charts 1 through 3 ). moreover, japan ’ s net external assets have increased steadily, and its net income from the rest of the world has been on an increasing trend as a result of further global expansion by japanese firms ( chart 4 ). in addition, the recent substantial fall in crude oil prices will considerably improve trading gains. all of these developments point to a rise in the economy ’ s capacity to generate income on a sustained basis. this sustained improvement in the capacity has been the source of recovery in japan ’ s domestic expenditure. the increasing trend in business fixed investment is becoming clear against the background of favorable corporate profits ( chart 5 ). household sentiment, which worsened due to the consumption tax hike, has stopped deteriorating, and consumption expenditure has been resilient ( chart 6 ). the economy ’ s capacity to generate income seems to be firm and the momentum of consumption maintained. an improving trend in domestic demand leads to sustainable improvements in the output gap, and labor supply and demand conditions continue to tighten as a trend. as a result, upward pressure on price and wage inflation rates as a trend is likely to increase. if the uptrend in prices is taken into account at the time of the wage negotiations in spring 2015, the cyclical mechanism observed in 2014 – in which wages and prices rise spirally – will be maintained. that is to say, in 2015, we will be experiencing the second round of a virtuous cycle among income, spending, prices, and wages. bis central bankers ’ speeches if positive initiatives – such as replacement investment that embodies new technology for business facilities, research and development investment, creating new value - added services, and tapping new demand – are further taken, total factor productivity ( tfp ) will rise and the increasing trend in income and spending will accelerate and be more sustainable. under the expanded qqe, extremely accommodative financial conditions will continue to strongly support the virtuous cycle from the financial side. we expect that qqe will produce larger effects as japan ’ s economic fundamentals improve. if the virtuous cycle of economic activity is sustained, a view that “ around 2 percent inflation will continue

supra - national governance. therefore, asian regional collaboration does not have a lead player a priori. instead, a variety of players are involved. in fact, asia has several groups of different stripes, like emeap, asean, asean + 3, asian development bank ( adb ), each with its own unique membership. such an " open - ended " modality for regional cooperation reflects asia's diversity in ethnic, historical, religious, and linguistic backgrounds. some say that asia's diversity could weaken its regional unity. there is some truth in this view, but diversity has its own advantages as well. it can create an environment in which people appreciate different values and ideas, develop a sense of tolerance to others, and become more innovative through such cross - cultural interaction. this is a unique advantage for asia to maximize, and i believe asian cooperation should move ahead in this direction. the first east asian summit meeting is slated for this december. the summit will be attended by the leaders of asean + 3 nations, india, australia, and new zealand and will be the first of its kind. this gathering of countries attests to the flexibility of asia's cooperation. given the prospect for energy development in east siberia or sakhalin, the attendees to the east asian summit may even include russia in the future. but this is anyone's guess, of course. iv. looming challenges despite the collective progress so far made, asian countries are facing new challenges. in my judgment, response to these problems will define the path of asian cooperation going forward. there is no doubt that high growth has enabled asia to savor better economic welfare. however, i see four challenges to further prosperity in asia ; 2 / 4 • accelerate financial market integration • establish sound socioeconomic infrastructures like intellectual property right protection, transparent corporate governance, and impartial judiciary • tackle transnational problems like regional epidemics, natural calamities and environmental disruptions • formulate sustainable energy policy first, financial market integration. financial markets in asia are still ring - fenced by national borders. that makes it hard to link savings with investment opportunities within the region efficiently. as i said, the financial authorities in asia are working together to develop liquid bond markets, as they expect such markets to facilitate the marriage of savings and investment in the region. organic linkage of savings and investment would underpin sustainable growth in asia, thereby contributing eventually to the adjustment of global payment imbalances. second, socio