to stimulate domestic investment spending and help new, innovative industries to grow and develop. only in this way will convergence towards the eu - 28 average accelerate. these should be joint efforts, however, which brings me to the second part of my remarks. europe can and should help, in three main ways. first, by providing the market that makes the development of new industries profitable. second, by channelling funds to sectors and countries where capital can be used most productively. and, third, by providing direct financial assistance to foster convergence and support national reform efforts. reaping the benefits of the single market let me take each of these points in turn, starting with the market dimension. the eu ’ s single market can be a valuable source of competitive advantage for firms located in cesee economies, in particular when competing with other economies at similar stages of development. it is the largest market in the world, offering the benefits of enormous economies of scale, and has helped establish product and safety standards that are used worldwide. there is compelling evidence that the single market has had a positive impact on exports, investment, innovation and productivity. 18 to exploit its full potential, and to accelerate convergence, two things need to be done. first, member states need to strengthen its enforcement so that single market initiatives translate into concrete and positive effects on the ground. a key ingredient for this is efficient administration at all levels of government. indeed, a lack of real convergence in income levels is, more often than not, the result of a lack of convergence in institutional quality. 19 you can see this on my next slide – a slide i like to show because i think it makes a compelling point, notwithstanding the usual caveat on the two - way causality between institutional quality and income levels. 20 8 / 16 bis central bankers'speeches most cesee economies are still in the lower left - hand corner, meaning there remains a significant gap in overall institutional quality compared with the average level observed in the eu as a whole. some eu member states have recently renewed their interest in the process leading to participation in the exchange rate mechanism ( erm ii ) and the adoption of the euro. this could become a fundamental catalyst for institutional reforms in the years to come. second, the scope of the single market must be broadened. for the eu, this means expanding its reach into industries that are prime drivers of innovation and catalysts for future growth. this is particularly relevant for cesee economies. as you can see on my next

prices as i explained, japan ’ s economy is likely to continue growing above its potential. however, growth in fiscal 2013 and 2014 is likely to turn out somewhat lower than previously expected due to the delay in the recovery in exports. despite these downward revisions, the year - onyear rate of change in the cpi for fiscal 2013 turned out as projected and the outlook remains unchanged. the output gap has been steadily narrowing mainly due to the tightening of labor market conditions as projected, and the rise in medium - to long - term inflation expectations seems to have started to influence actual wage and price settings. let me elaborate on these two points. the output gap and prices first, on the output gap. the current recovery has been led by domestic demand, and business conditions in nonmanufacturing in particular have been improving. as domestic demand tends to have large stimulative effects on employment, this has led to a further tightening in labor market conditions. for example, the unemployment rate is approaching the structural unemployment rate and the active job openings - to - applicants ratio is now at the same level as the peak reached before the global financial crisis ( chart 5 ). the employment conditions di in the bank ’ s tankan survey revealed that more and more firms feel that there is a labor shortage. this tightening of labor market conditions has started to influence wages. in the regular annual wage negotiations this spring, the number of firms that raised not only bonuses but also base pay increased substantially. in addition, more and more firms, especially in nonmanufacturing, feel that they have insufficient capacity. while estimates of the output gap are subject to a considerable margin of error, the gap seems to have narrowed to close to 0 percent, which is the past long - term average, reflecting the increased utilization of labor and capital ( chart 6 ). as for the outlook, it is likely that the tightening of labor market conditions will become more pronounced as the economy continues to grow above its potential, and inflationary pressure from wages and the output gap is likely to steadily strengthen. i will touch on what implications this might have in the last part of my speech. medium - to long - term inflation expectations next, according to various surveys and market indicators, medium - to long - term inflation expectations appear to be rising on the whole ( chart 7 ). as i mentioned at the outset, the year - on - year rate of change in the cpi excluding fresh food has been plus 1. 3 percent for four consecutive months