have occurred since around the time of the global financial crisis. this may be attributable to the manner that the demographic trend and a decrease of capital stock due to physical disposal and wear are reflected in the estimate. third, the impact of tightening labor market conditions can also be captured using the bank ’ s output gap estimate. the output gap can be divided into labor input gap and capital input gap on the basis of resource utilization – just as with the tankan composite indicator ( chart 6 ). if the labor input gap is positive, actual labor input exceeds average labor input, which indicates a labor shortage ; if the labor input gap is negative, the converse is true. the labor input gap had already turned positive by october – december 2013. this reflects a continuous decline in average labor input, which was caused by a decrease in the number of employed people and labor hours. this trend has been augmented since 2012 by the retirement of the baby boomer generation reaching 65 years old. the labor shortage was exacerbated further by the rapid economic recovery since 2013 driven by labor – intensive nonmanufacturing. this observation is consistent with the following : ( 1 ) the tankan ’ s employment conditions di, which had already shifted to one of shortage ; ( 2 ) the unemployment rate of 3. 6 percent in february 2014, which approached the structural unemployment rate of around 3. 5 percent ; and ( 3 ) the positive growth trends in wages ( charts 7 through 9 ). the bank applies the hodrick - prescott filter method to smoothen the rate of the total factor productivity ( tfp ) growth. thus, there is no one - to - one relationship between the estimated rate of potential growth ( chart 5 ) and that derived from the output gap and the actual gdp growth data. although different methodologies and data are used, both the bank and cabinet office adopt the cobbdouglas production function approach and estimate the rate of potential growth by dividing into labor, capital stock, and solow residual ( tfp ). bis central bankers ’ speeches fourth, the bank ’ s estimate also reflects a rising shortage in production capacity mainly in nonmanufacturing, as shown in a rapid improvement in its capital input gap. chart 6 indicates that the capital input gap is presently in the vicinity of zero. the gap was nearly closed by a rise in the capital utilization ratio ; this was achieved by economic recovery while business fixed investment has remained sluggish since the global financial crisis. in particular

in order to fully ensure the effectiveness of monetary easing, it is important for the government to ensure market credibility of fiscal consolidation. japan is facing serious fiscal imbalances, and if the credibility of its fiscal management were to decline, long - term interest rates would likely rise in a manner inconsistent with economic and price developments. the government indicated in the joint statement released in january that it would steadily promote measures aimed at establishing a sustainable fiscal structure. moreover, in the medium - term fiscal plan, approved on august 8, 2013, it stated its targets of halving the primary deficit - to - gdp ratio by fiscal 2015 and of achieving a surplus in the primary balance by fiscal 2020. based on these targets, it is expected that the government will continue making efforts toward fiscal consolidation. 2. transmission channels of qqe the transmission channels of qqe are as follows. first, the purchases of financial assets will encourage declines in long - term interest rates and risk premiums on assets. this helps to increase firms ’ and households ’ investment and consumption by lowering their funding costs and through wealth effects. second, both financial institutions and institutional investors are expected to change their investment behavior and rebalance their portfolios to loans and / or risk assets, such as stocks, in the pursuit of higher returns. this is referred to as the portfolio rebalancing effect. this effect may strengthen the growth potential of japan ’ s economy if risk money is increasingly allocated to a wider range of emerging firms, for example. and third, the clear commitment to achieving the price stability target at the earliest possible time and the continuation of massive purchases of assets are expected to drastically change the expectations of markets and economic entities. with these channels acting together, qqe will contribute to pushing up prices by raising inflation expectations and, by stimulating private demand, improving the aggregate supply and demand balance. 3. financial market developments since the introduction of qqe looking at developments in economic activity and financial markets since the introduction of qqe, the monetary base has been increasing at an annual pace of about 60 – 70 trillion yen – in line with the bank ’ s guideline for money market operations – owing to progress in the bis central bankers ’ speeches bank ’ s large - scale jgb purchases as it proceeds with qqe. despite some instability observed in the jgb market at the onset, the intended effects of qqe seem to have begun to materialize on the whole, with favorable developments spreading to economic activity and