and bonus payments rising, household income overall is increasing. nonetheless, the pace at which the positive influence of the corporate sector is feeding through to the household sector is, in fact, slow relative to the corporate sector's strength. this is evident especially in regular payments, which remain virtually unchanged year on year. this seems to be responsible for the often - heard statement that it is difficult to realize that japan is in the middle of the longest postwar economic expansion. the slowness of the increase in regular payments is attributable to both the stance of firms and the preference of employees : given the intensifying global competition, firms remain cautious about raising regular payments because this is likely to push up fixed costs ; while employees, having experienced a severe employment situation, continue to prefer stable employment to a wage increase. however, in a situation where the population of those 15 years old and over has been leveling off, further tightening of labor market conditions seems inevitable if demand for employees remains on the rise in line with the continuing economic expansion. given this situation, upward pressures on wages are likely to increase gradually. wages for part - time and temporary workers have, in fact, started rising. if an increase in wages becomes more apparent, the pace of increase in household income is expected to accelerate, thereby firming the sustainability of the upward trend in private consumption. some indicators related to private consumption have recently been somewhat sluggish, partly reflecting unfavorable weather conditions and consumers holding back from buying before the introduction of new products. although these developments continue to require close monitoring, our basic view is that private consumption will remain on the rise if increases in household income are in prospect. although, as i explained, developments in the corporate sector have been somewhat stronger than projected while those in the household sector have been somewhat weaker, we believe the basic mechanism of an economic expansion based on a virtuous circle of production, income, and spending is in operation. nevertheless, given the fact that there are some weak developments in indicators related to private consumption and consumer prices, we will carefully examine various types of incoming data and information. iv. developments in prices with these developments in the economy, the environment surrounding prices has been changing, albeit gradually. in the december tankan, for the first time in more than a decade, the number of firms that reported a shortage of production capacity outnumbered those reporting an excess, and it has become clear that firms are increasingly feeling a shortage of labor. these developments imply that

this period, in a sense, the policy effects stemming from the ample liquidity provided by the bank, through which concern about the availability of liquidity was eased, may have been greater than those of the bank's policy commitment, namely, its commitment in terms of policy duration. since then, both the economy and the financial situation have been on an improving trend. since fiscal 2002, the year - on - year growth rate of real gdp has been positive, and the year - on - year rate of decline in consumer prices has diminished to almost zero percent. an accommodative corporate financing environment has been supporting these developments. together with an increase in financial institutions'capital adequacy ratios and an improvement in firms'financial strength and profitability, increased confidence among financial institutions and firms about the availability of funds brought about by the quantitative easing policy has produced this desirable environment. the quantitative easing policy framework provides stronger support for economic recovery, the more the economic recovery gains momentum. here, the effects stemming from the bank's commitment in terms of policy duration are gradually playing a larger role than those stemming from ample liquidity provision by the bank. interest rates usually rise with an improvement in economic activity and an increase in prices. the bank's commitment, however, keeps longer - term interest rates low by stabilizing expectations about the future level of interest rates, and this will allow firms to continue to enjoy low funding costs. while funding costs remain low, the rate of return on investment increases with economic recovery, and, accordingly net returns on investments in economic activity will improve. the quantitative easing policy has continued to contribute to the japanese economy with some changes in the way it affects the economy, as i have just described. recently, the market situation that surrounds the policy is changing significantly with the enhanced soundness of the financial system and abatement of anxiety about financial system stability. financial institutions have become more confident about raising funds in the market. furthermore, they are increasingly placing emphasis on strengthening their profitability with a view to improving their credit ratings and raising stock prices, and this may have been reducing their incentive to maintain funds in current accounts at the bank that yield no interest. as financial institutions'demand for liquidity has been declining, their demand for funds supplied through the bank's market operations has decreased. recently, as a result, undersubscription, where financial institutions'bids fall short of the bank's offers, has occurred frequently in funds -