( cpi ) of the previous year is used as a benchmark in determining the rate of increase in wages for the following year ( chart 13 ). for this reason, even when a decline in the cpi is attributed to external factors, including a decline in crude oil prices, the low inflation rate tends to be referred to in wage negotiations. that said, such a price decline is a positive factor in corporate profits with an improvement in the terms of trade at a macroeconomic level. 12 in my view, it is necessary to replace the existing practice of referring to the observed cpi in the past and negotiating the wage increases for only one year in an adaptive manner. instead, it is necessary to implement the practice of negotiating wage increases for several years in a forward - looking manner by sharing the outlook on the path of price changes over several years, or over the medium to long term. 13 third, there should be a change in the practice of applying the result of labor - management wage negotiations at large manufacturers to other industries. in japan, the result of wage negotiations at large manufacturers - - especially automobile, steel, and other major manufacturers - - tends to be used as a benchmark for such negotiations in other industries, including non - manufacturing. therefore, even when the terms of trade at a macroeconomic level improve due to the yen's appreciation, if a higher yen causes major manufacturers to have lower profits and depress the rate of wage increases, such a rate for non - manufacturers also tends to be depressed accordingly. in japan, the share of manufacturing in gross output is less than 20 percent. therefore, it is not suitable at this time to use wages at major manufacturers as a benchmark for wage negotiations in other industries. i believe that wage increases should reflect individual firms'profits with forward - looking inflation expectations being used as a basis. iii. addendum : recent discussion on fiscal policy measures the roles of fiscal policy measures have regained attention in japan recently, following the insufficient increase in expectations even with the large - scale unconventional monetary the bank has conducted a quantitative analysis on this point. see appendix 4, bank of japan ( 2016 ). the japanese government also recognizes the importance of forward - looking wage negotiations. at the council for the realization of work style reform, prime minister abe has asked the business community for wage increases that take inflation expectations into consideration. policy. " helicopter money " and the fiscal theory of the price level ( ftpl ) are examples of this ( chart 14 ).

their formation mechanism ; ( 2 ) reasons for low expectations in japan ; ( 3 ) the relationship with japan's financial crisis ; and ( 4 ) the relationship with labor market reform. ii. issues regarding long - term inflation expectations a. formation mechanism in economics theory, long - term inflation expectations are irrelevant to the potential growth rate. however, i doubt that this holds true in reality, in light of what is happening in japan. rather, i think that long - term inflation expectations and the potential growth rate do have a correlation, although it may not be strong ( chart 3 ). long - term inflation expectations declined sharply in japan, before and after the financial crisis in the late 1990s. economic fundamentals already had been weak before the crisis because of the negative interaction between demand and supply conditions ; specifically, a negative financial accelerator on the demand side due to the dire asset price deflation, and ( 2 ) the impairment of the financial intermediary function, as well as the distortion of economic resource allocation caused by the bubble economy on the supply side. the financial crisis triggered further weakening of economic fundamentals ( chart 4 ). in this situation, pessimism about the future led to a decline in people's expectations for mediumto long - term growth, and the potential growth rate remained low over a long period of time. as a result, people's perception of prices became excessively conservative. in other words, long - term inflation expectations turned downward. b. reasons for low expectations in japan next, let us take a look at developments in survey - based measures of expected long - term inflation in japan. a survey - based rate marked a sharp decline during the period of the financial crisis in the late 1990s, and then leveled out at around 1 percent. since then, even throughout the period of the global financial crisis and the european sovereign debt crisis, it has been more or less unchanged at around 1 percent ( chart 5 ). however, i am somewhat doubtful about this figure. 3 i believe that it is more persuasive to say that long - term inflation expectations in japan have actually declined to around 0 percent, for the following four reasons. 4 first, the frequency of micro - level price changes suggests that the mode value remains zero. in other words, the year - on - year rate of increase in the prices of sample items concentrated on 0 percent. therefore, people are likely to consider that zero inflation is a steady and constant state. it is helpful to