would say we are only bis central bankers ’ speeches halfway there. however, if developments in prices in the past fiscal year and the outlook for prices will be somewhat taken into consideration in the wage negotiations between management and labor unions toward the next fiscal year, thereby realizing a rise in base pay for two consecutive years, this in turn will lead to a greater breakthrough in changing people ’ s fixed idea that wages, base salaries in particular, will not rise under deflation – in other words, their deflationary expectations. i am therefore carefully monitoring developments in wage negotiations toward the next fiscal year. my understanding is that what is truly essential to achieve the price stability target is a rise in productivity through efforts by various entities to carry out structural reforms and the resultant increase in the potential growth rate of japan ’ s economy. on this basis, the inflation rate would increase moderately and wages would continuously improve in line with the increase in productivity, and consequently people would enjoy benefits from the overcoming of deflation. b. effects of qqe second, attention needs to be paid to the diminishing marginal effects brought about by the expansion of qqe. interest rates are expected to decline further owing to such expansion ; however, considering that nominal interest rates are already at historical low levels while real interest rates are substantially negative, it is judged that the marginal upward pressure from such easing on economic activity and prices will not be large. moreover, the effects of qqe will increase in a cumulative manner with the progress in asset purchases by the bank. these effects have become clearly evident in both the front and back ends of the yield curve, and are expected to strengthen further with the progress to be made in such purchases. there seems to be insufficient need for the bank to accelerate this development process by expanding qqe, considering the accompanying costs and benefits. now, i would like to touch on the effects of qqe on interest rates. the bank has committed to purchasing japanese government bonds ( jgbs ) at an annual pace of about 80 trillion yen on a net basis – an amount substantially exceeding the planned amount of newly issued jgbs by the government. for this larger amount, the bank consequently will directly or indirectly reduce the amount outstanding of jgbs in the markets. partly due to financial regulations, many of the institutional investors holding jgbs have a compelling reason to do so as there is no better alternative, and therefore their preference for jgbs is strong. if the bank conducts asset

has not been observed since the bubble period in the early stage of the 1990s, and manufacturers ’ business sentiment remains resilient, although japan ’ s production has been unfavorable ( chart 8 ). the resilience in business sentiment can be attributed in part to firms ’ high consolidated profits, reflecting the favorable business performance of their overseas subsidiaries. firms ’ favorable performance on a consolidated basis seems to have been playing a complementary role to the recent weakness in exports. this may mean that a new pattern of generating income is strengthening, through the repatriation by japanese firms of their overseas subsidiaries ’ profits in the form of dividends ( chart 9 ). although some weakness certainly remains in japan ’ s economic indicators, i feel that it is necessary to make a more comprehensive assessment, taking into account the current globalization of firms. risk factors to the outlook for japan ’ s economy also warrant attention. the first factor is developments in exports. japanese manufacturers are likely to continue shifting production sites to overseas – although the pace is slowing – amid uncertainty over whether overseas economies will steadily increase their pace of growth. therefore, it is uncertain whether the recent further depreciation of the yen will support the recovery in exports. the second factor is the effects of the yen ’ s depreciation. while the decline in energy prices will raise the real purchasing power of households and firms, clearly exerting positive effects on japan ’ s economy, the depreciation of the yen will become a downside factor in terms of trade for the nonmanufacturing industry, which accounts for a large share of gdp and is a driving force of bis central bankers ’ speeches the current economic recovery. the third factor is developments in household and business sentiment. sentiment indicators – especially of manufacturing – had been resilient, despite the weakness in japan ’ s economic indicators ; however, sentiment now seems to have weakened, as evidenced by the fact that developments in the diffusion indices ( dis ) in the latest economy watchers survey have become more sluggish recently. developments in these dis warrant attention as these indices are leading indicators of the economy in the short term. looking at the comments made by the survey ’ s respondents, those regarding the second round of the consumption tax hikes, irregular weather, and depreciation of the yen stand out. the effects of these factors on sentiment warrant attention. d. developments in prices the year - on - year rate of increase in the consumer price index ( cpi, for