can be observed. given that the bank continues to steadily pursue qqe and that inflation continues to be above 1 percent, medium - to long - term inflation expectations will likely follow an increasing trend, which will further reinforce inflationary pressure. upward drift of the phillips curve although somewhat technical, let me summarize this price rise mechanism by using the concept of the phillips curve ( chart 9 ). the phillips curve depicts the relationship between the output gap and inflation, and illustrates the following mechanism : if economic conditions are favorable and the labor market and the market for goods and services are tight, inflation will rise. in the chart, the vertical axis depicts the inflation rate, while the horizontal axis depicts the output gap. the phillips curve is assumed to be upward - sloping ; that is, if economic conditions improve and we move to the right along the phillips curve, the inflation rate will increase. note that the inflation rate here depicts the year - on - year rate of change in bis central bankers ’ speeches the cpi excluding food and energy, both of which are likely to be affected by changes in the exchange rate of the yen. let us first look back at the situation before the introduction of qqe. the green curve is based on data up to the first half of the 1990s, while the blue curve is based on data since the second half of the 1990s. comparing these two, you can see that the phillips curve shifted downward during the prolonged period of deflation. as a result, the relationship between economic activity and prices had become such that even when the output gap is zero – when the economy is in a normal state – inflation is about 0 percent. under these circumstances, the view that prices will decline or not rise had become firmly entrenched among firms and households. qqe aims at drastically changing this deflationary mindset of firms and households and at raising inflation expectations toward 2 percent. in terms of the phillips curve, this means that the bank aims at shifting the phillips curve upward, slightly above the green curve, so that the relationship between economic activity and prices is such that inflation will be 2 percent when the output gap is zero, that is, when the economy is in a normal state. developments in the past year in light of this aim, how much progress have we made? let us next look at changes since the introduction of qqe. the red circles in the chart illustrate developments over the past year and indicate the following. first, with the economy growing at

the unemployment rate has been approaching the structural unemployment rate, which is considered to be around 3. 5 percent, and the active job openings - to - applicants ratio has risen to 1. 08, which is the same level as the peak reached before the global financial crisis ( chart 6 ). this tightening of labor market conditions has started to influence wages, and, in the regular annual wage negotiation this spring, the number of firms that raised not only bonuses but also base pay has increased substantially. in addition to this increase in the utilization of labor, a growing number of firms, particularly in the nonmanufacturing sector, are experiencing capacity shortages, and the output gap has been narrowing moderately. while the level of the output gap is subject to a considerable margin of error, the gap seems to have narrowed to close to 0 percent, that is, the long - term average ( chart 7 ). as for the outlook, inflationary pressure from the output gap is likely to strengthen further, given that the economy is expected to continue growing at a pace above its potential. upward pressure on prices from inflation expectations let me next outline developments in medium - to long - term inflation expectations. according to various surveys and market indicators, inflation expectations appear to be rising on the whole ( chart 8 ). looking at the mechanism behind this rise, it appears that, in the first instance, the bank ’ s strong and clear commitment to overcome deflation through qqe, together with bold monetary easing to underpin this commitment, has affected expectations of economic entities, and inflation expectations started to rise. subsequently, the actual increase in the inflation rate due to the narrowing of the output gap has then led to a further rise in inflation expectations. as mentioned earlier, the year - on - year rate of change in the cpi ( excluding fresh food ) has been above plus 1 percent. except for the period of the surge in global commodity prices around 2008, this is the first time in the two decades since 1993 that the cpi has risen by more than 1 percent year - on - year for several months in a row. with firms and households experiencing these price increases, their inflation expectations have changed and have started to influence wage and price setting. as seen in the wage negotiations this spring, the increase in inflation has been taken into account in the wage negotiations between management and labor. in addition, a shift in firms ’ price - setting strategies from strategies focusing on low prices to strategies seeking to raise sales prices while increasing value added