albeit with monthly fluctuations. with the year - on - year rate of increase in the cpi ( excluding fresh food ) continuing to exceed 1 percent, a shift is observed in firms ’ price - setting strategy, from a low - price strategy to one of raising sales prices while increasing value - added. as for wage setting, as seen in annual wage negotiations this spring, the rise in inflation is increasingly being taken into account in wage negotiations between management and labor. this improvement in the output gap and the rise in inflation expectations are expected to continue. therefore, the year - on - year rate of increase in the cpi, which is likely to be around 1¼ percent for some time, is expected to subsequently follow an uptrend again from the second half of this fiscal year and reach about 2 percent – the price stability target – around the middle of the current projection period from fiscal 2014 through 2016. iii. monetary policy management toward achieving the price stability target of 2 percent finally, let me discuss the bank ’ s monetary policy management. the bank has been pursuing qqe, aiming to achieve a state in which the 2 percent inflation rate is maintained in a stable manner. in this state, the inflation rate will be around 2 percent when the economy is at a normal level. that is, firms will be able to base decisions on an assumption of about 2 percent inflation when they consider how to set prices and when management and labor negotiate wages. if such an economy is achieved, economic entities will act based on an expectation that inflation will return to about 2 percent sooner or later – even if the economy faces temporary downward pressure on prices and wages due to, for example, a downturn in economic activity. therefore, the risk of falling into deflation, where prices and wages continue to decline, will be lowered. as i mentioned, japan ’ s economy has been on a path suggesting that the price stability target of 2 percent will be achieved as expected. we are only halfway there, however, and the bank will continue with qqe, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. if the outlook changes due to the manifestation of risk factors and it is judged necessary for achieving the price stability target, the bank will make adjustments without hesitation. i would like to conclude my speech today by assuring you that, through the bank ’ s monetary policy management, the prolonged deflation will be overcome and an economy based on

##ly to what thomas carlyle described as the dismal science. any arrangement to retain sterling in an independent scotland would need to be negotiated between the westminster and scottish parliaments. the bank of england would implement whatever monetary arrangements were put in place. what follows is not an assessment of whether scotland will be overall better or worse off under independence – that is a multi - faceted judgement for the scottish people. it does not pass judgement on the relative merits of the different currency options for an independent scotland, but instead draws attention to the key issues. this is a technocratic assessment of what makes an effective currency union between independent nations. the costs and benefits of currency areas let me begin by outlining the basic rationale for sharing a currency. bis central bankers ’ speeches economist robert mundell first wrote about what determined an “ optimum currency area ” 1 spurred by the breakdown of the bretton woods system and the move to floating exchange rates as well as by the formation of the european monetary union, others have elaborated and extended his work. we now have a fairly comprehensive sense of the costs and benefits of sharing a currency. for mundell, the main benefit was that it eliminates the transactions costs associated with using, and switching between, different currencies. the european commission estimated the size of these direct benefits for europe to be almost 0. 5 % of gdp every year. 2 sharing a currency can promote investment by reducing uncertainty about currency movements and giving businesses access to deeper, more liquid financial markets. 3 it can also reduce borrowing costs for countries with a history of high inflation and currency devaluation. by tying themselves to the mast of the monetary policy of others they can import credibility. this is exactly what the uk and other european countries aimed to do in joining the exchange rate mechanism. sharing a currency also helps promote integration. it does so by eliminating one of the barriers between markets, improving transparency of pricing and increasing competition. sharing a currency can also help to increase the mobility of labour and capital, raise trade in goods and services, and improve the flow of technology and ideas. 4 in these ways, members of a currency union can exploit more fully comparative advantage and ensure greater dynamic efficiency. set against these benefits are the potentially large costs of giving up an independent monetary policy tailored to the needs of the region and a flexible exchange rate that can help absorb shocks. a flexible exchange rate acts as a valuable shock absorber when domestic wages and prices are sticky. 5 for example,