well as improvement in households'employment, wages, and consumption. an economy in which a virtuous cycle among prices, wages, and economic activity continues to operate would create a world in which the price stability target of 2 percent is achieved. b. why are prices sluggish? however, we are still halfway toward achieving the price stability target of 2 percent. the latest outlook report presents a fairly detailed analysis on reasons why prices have remained sluggish even though the economy has improved significantly. today i would like to present the essence of the report. there are likely to be two main factors behind the fact that the pace of improvement in prices has remained moderate. one is that the mindset and behavior based on the assumption that wages and prices will not increase easily have been deeply entrenched among firms and households due to the experience of prolonged low growth and deflation. the other is that the large room to raise productivity and the technological progress in recent years have allowed firms to constrain price rises as much as possible. let me explain these factors in detail by households'and firms'behaviors. first, it has been taking time for wage increases to fully take hold despite labor shortage. in particular, scheduled cash earnings of regular employees, who account for the majority of total employees, have been sluggish. the year - on - year rate of increase in such earnings over the past year has remained at around 0. 5 percent ( chart 4 ). it is said that regular employees, whose wage levels are relatively high, have a strong tendency to place priority on the stability of employment over wage increases. such tendency still seems to be persistent, reflecting the experience of severe employment adjustments under prolonged low growth. in addition, wage developments also are affected by growing diversity in terms of worker type. from a long - term perspective, an increase in labor participation by women and seniors in recent years is essential to cope with the declining trend in the working - age population, which is a challenge for japan's economy. in the short term, however, this increase will ease labor shortage, thereby constraining wage increases. second, the fact that households'tolerance of price rises has not been increasing clearly has been constraining a rise in inflation. according to the bank's survey, following the introduction of quantitative and qualitative monetary easing ( qqe ) in 2013, the level of households'tolerance of price rises shifted upward in a favorable direction compared to past levels. however

liquidity, and the quality of loans continues to deteriorate because of the adverse feedback loop between the financial system and the real economy. a “ mirage ” phenomenon is taking place in that, despite public capital injection, concern over additional losses on the assets mounts over time and such concern in turn will heighten concern for a capital shortage of financial institutions. under those circumstances, it is of vital importance to remove uncertainty. there are two options to remove uncertainty stemming from financial institutions ’ nonperforming assets ; the government purchases those assets or provides a loss guarantee to those assets. nevertheless, even in both cases, uncertainty might not be removed for the assets not covered by the purchases or the guarantees, and investors thus would continue to ask the institutions for high risk premiums. consequently, the institutions might not be able to fully restore confidence in the market. in addition, there are also other difficulties ; how to set the selling price of the nonperforming assets in the case of asset purchase scheme and how to set the fee in the case of guarantee scheme. what japan faced in the past and what the u. s. is facing now is arguably those difficulties. however, even with such difficulties, it is an indispensable process to promptly identify the amount of losses and to carry out recapitalization to secure financial system stability, if necessary. it should be noted that new issues have emerged in the global financial system as public capital injection prevails. one of them is a gap between the level of capital recorded on the balance sheet and market participants ’ perception of franchise value of financial institutions. the level of capital presumably should reflect market expectations about earning growth potential of a firm. on one hand, recapitalization by the government serves as a buffer for future losses, in the same way with privately raised capital. on the other hand, it comes from different incentives from private capital, in which investors shoulder the risk with an expectation to recoup their investments by the future growth of the firm. in addition, if people increasingly tend to judge the soundness of a financial institution simply by looking at the level of capital on the balance sheet – in other words, looking at the capacity to absorb future losses rather than the earning growth potential –, a financial institution could face a paradoxical situation. a financial institution which does not accept public capital because of its financial soundness might suffer a competitive disadvantage against another institution which accepts public capital, because the sound institution has a lower capital