. rebuilding of the disaster areas involves the process of reconfiguring places for industries and employment in accordance with local peoples ’ needs, by making use of the areas ’ advantages and competitiveness. needless to say, the first priority is to return the people in the affected areas to safe and comfortable lives as soon as possible. after completing such rebuilding of lives, even if it takes some time, the disaster areas will definitely move forward into the next phase, in which measures with new innovative ideas for regenerating the regional economy will be implemented. moreover, the earthquake disaster has brought a renewed recognition that the japanese islands always hold the inherent risk of earthquakes and tsunami. not only the disaster areas but also japan as a whole need to make efforts to improve both physical and human infrastructures, in order to make the country more resistant to natural disasters. there are many kinds of potential demand, and in order to meet such demand, innovation again plays an important role. b. efforts toward sustaining fiscal balance i have stressed the importance of addressing the challenge of raising the medium - to longterm growth potential of the economy, which is closely related to another challenge : efforts toward sustaining fiscal balance. as the aging of the population will advance further, pension payments and the costs of health and nursing care are projected to increase substantially. in this situation, allowing the fiscal deficit to perpetuate itself would result in the uncontrollable expansion of government debt outstanding, which is not sustainable. once concern about fiscal sustainability heightens, this could impair the smooth issuance of government bonds. moreover, if more people expect that a greater burden on the working - age population is inevitable, the economy could fall into a vicious circle in which more cautious spending by firms and households leads to a further economic downturn and a deterioration in fiscal conditions. as just described, the two challenges of raising the growth potential and fiscal consolidation are not independent but inextricably linked. one challenge should not be given priority over the other, but rather these must be addressed together. the large fiscal deficit has continued since the 1990s on the back of successive fiscal stimulus measures and the rise in social security costs, and addressing fiscal consolidation was an urgent task even before the earthquake. fiscal measures for the rebuilding and revival of the disaster areas will definitely push up fiscal spending further even though it is still difficult to make an accurate estimate. the expected fiscal deterioration in the short run makes it all the more important for the government to present a

and bonus payments rising, household income overall is increasing. nonetheless, the pace at which the positive influence of the corporate sector is feeding through to the household sector is, in fact, slow relative to the corporate sector's strength. this is evident especially in regular payments, which remain virtually unchanged year on year. this seems to be responsible for the often - heard statement that it is difficult to realize that japan is in the middle of the longest postwar economic expansion. the slowness of the increase in regular payments is attributable to both the stance of firms and the preference of employees : given the intensifying global competition, firms remain cautious about raising regular payments because this is likely to push up fixed costs ; while employees, having experienced a severe employment situation, continue to prefer stable employment to a wage increase. however, in a situation where the population of those 15 years old and over has been leveling off, further tightening of labor market conditions seems inevitable if demand for employees remains on the rise in line with the continuing economic expansion. given this situation, upward pressures on wages are likely to increase gradually. wages for part - time and temporary workers have, in fact, started rising. if an increase in wages becomes more apparent, the pace of increase in household income is expected to accelerate, thereby firming the sustainability of the upward trend in private consumption. some indicators related to private consumption have recently been somewhat sluggish, partly reflecting unfavorable weather conditions and consumers holding back from buying before the introduction of new products. although these developments continue to require close monitoring, our basic view is that private consumption will remain on the rise if increases in household income are in prospect. although, as i explained, developments in the corporate sector have been somewhat stronger than projected while those in the household sector have been somewhat weaker, we believe the basic mechanism of an economic expansion based on a virtuous circle of production, income, and spending is in operation. nevertheless, given the fact that there are some weak developments in indicators related to private consumption and consumer prices, we will carefully examine various types of incoming data and information. iv. developments in prices with these developments in the economy, the environment surrounding prices has been changing, albeit gradually. in the december tankan, for the first time in more than a decade, the number of firms that reported a shortage of production capacity outnumbered those reporting an excess, and it has become clear that firms are increasingly feeling a shortage of labor. these developments imply that