bank subordinated debt would be and what access small and medium - sized banks would have to this market. this suggests that an operationally feasible program of mandatory subordinated debt would require a considerable amount of further thought. ii. reforming capital standards market discipline, as i noted, is a complement to the regulation and supervision required by the safety net. the foundation for bank regulation has long been capital standards. since 1998, these have been international standards as embodied in the basle accord. capital standards can be thought of as a way of reinforcing market discipline, because they shift more of the risk to shareholders relative to taxpayers. in this way, capital is the closest relative to market discipline among bank regulations. that is the good news about capital standards. the bad news is they are becoming increasingly less meaningful and progressively undermined as a result of regulatory capital arbitrage. regulatory capital arbitrage refers to the gaming of the capital standards, the exploitation of loopholes that allows banking organizations to lower the amount of capital for a given level of risk. regulatory capital arbitrage has been encouraged by the limitations of and excessive rigidity in the current capital standards. to be sure, it serves as a kind of safety valve, preventing the capital rules from distorting bank behavior in non - economic ways. but capital arbitrage also undermines the effectiveness of our capital rules and creates some economic distortions. banks engage in regulatory capital arbitrage mainly through securitizations and credit derivatives. these vehicles offer improved opportunities for banks to manage their risks and liquidity. securitizations allow banks to transfer the risk of an underlying loan pool to capital markets, retaining their role in the origination of loans, but transferring more of the ultimate funding to the capital markets. credit derivatives are another vehicle for shifting some of the risk of the underlying loan pool, while avoiding disclosure of an effective loan sale and possibly harming a customer relationship. there are two problems with the use of securitization and credit derivatives. first, banks often use these vehicles to reduce capital charges by more than they reduce the risk associated with the underlying loan pool. this is the problem of limited transference of risk. banks generally retain the risk of “ first dollar ” or “ second dollar ” loss on the underlying assets via various credit enhancements. indeed, through devices such as “ remote origination ” and “ indirect credit enhancements ” the regulatory capital associated with retained risks can be very low, even

first force, decelerated after reaching a peak in the middle of last year, and the rate of change has been negative since around spring this year. in addition, the rate of increase in producer prices has clearly slowed since the beginning of the year, and the year - on - year rates of increase in prices of items such as food and daily necessities at supermarkets and other retail stores have started to decelerate recently ( chart 6 ). taking these points into account, the effects of the first force pushing up prices are likely to gradually wane, even if a rise in crude oil prices, for example, causes that process to take time. based on this thinking, the bank projects that the year - on - year rate of increase in the cpi for all items excluding fresh food for fiscal 2025 will be lower than that for the period through fiscal 2024. the second force and sustainable and stable achievement of the price stability target that said, the projected year - on - year rate of increase in the cpi for fiscal 2025 is at 1. 7 percent for all items excluding fresh food and at 1. 9 percent for all items excluding energy in addition to fresh food. the bank projects that, even after the first force diminishes, the inflation rate will not return to the range of 0. 0 - 1. 0 percent, which was the pre - pandemic level. this is because the bank expects that underlying cpi inflation will increase gradually toward 2 percent as the second force pushing up prices - - namely, the virtuous cycle between wages and prices - - strengthens. the bank has been aiming to achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases, as the second force strengthens. recently, some aspects of firms'behavior have begun to shift more toward raising wages and prices. on the wage side, the wage growth rate agreed in this year's annual spring labor - management wage negotiations marked the highest level in 30 years, partly on the back of price rises. as for price setting, some firms in industries where personnel expenses account for a large proportion of costs have reported that they have raised prices in anticipation of a continued increase in personnel expenses. looking at the tankan, figures for firms'outlook for output prices for one year ahead have declined because raw material costs have settled down, while those for five years ahead have increased somewhat, particularly for the nonmanufacturing industry. this suggests that