. and second, as represented by the emergence of the u. s. subprime mortgage problem, investors and financial institutions eased their credit standards amid the prolonged, favorable economic environment and accommodative financial conditions, and this resulted in expansion of credit and a rise in asset prices. although the causes of the subprime mortgage problem and the rise in crude oil prices are complex, they seem to share a similarity in that neither might have occurred without a continuation of high economic growth and accommodative financial conditions worldwide. this fact would seem to hold several implications for the future development of the economies of both japan and the world. first, the world economy should be regarded as being in a process of transition to a sustainable growth path. an economic slowdown entails hardships in every economy. however, in view of the background of high energy and materials prices, which i mentioned earlier, a certain pace of adjustment in the world economy seems necessary for them to meet the conditions – such as stable resource prices – for moving to another stage of development. second, from the viewpoint of the conduct of monetary policy in general, the risks that may arise from prolonged accommodative financial conditions warrant attention. looking back at previous bubbles in financial activities and asset prices, including japan's asset price bubble, we can see that many have occurred following a period of price stability and continued low interest rates. it is difficult, however, to recognize the emergence and bursting of a bubble as they happen. given this, we should keep in mind the view that excessively accommodative financial conditions often cause large swings in the economy after a certain time lag, although such a view may not appear well grounded. and third, in view of the background of the current rise in energy and materials prices, the probability that these prices will fall back to the previous low levels is likely to be small, although the pace of increase seen to date may not continue. it therefore seems inappropriate to consider the current surge an " oil crisis, " which implies a " temporary supply shock. " in this situation, it is all the more important – even more so than during the periods of the two oil crises – for japan's economy to transform firms'production structure into one that is compatible with the new structure of relative prices for better resource allocation, and to react positively to the change in the operating environment and create areas of high competitiveness. in this regard, japanese firms have already started

now passing on the higher costs of imported raw materials to selling prices, even at the retail level. the likelihood that the price and wage norm seems to be shifting is indicated most of all by the first real increase in the cpi since the 1980s. of course, this increase is basically due to cost - push factors and therefore will not directly lead to an increase in underlying prices. nevertheless, if these developments go on to encourage firms to pass on costs, including wage costs, to selling prices, in turn inducing further wage hikes, this will push up the underlying inflation trend ( chart 16 ). see aoki, k., hogen, y., and takatomi, k., " price markups and wage setting behavior of japanese firms, " bank of japan working paper series, no. 23 - e - 5 ( april 2023 ). this paper, by using the data from fiscal 2005 to 2020, explains that, during this period, japanese firms had reduced their price markups - - in which they pass on costs to selling prices - - while they had increased their price markdowns - - in which they hold down wages to avoid price rises. one possible way of understanding why wage hikes have not quite materialized is that, while firms found it difficult to pass on wage hikes to prices, they had tended in particular to refrain from increasing the wages of regular employees, who are less likely to leave their jobs. 6 nonetheless, improvements in labor market conditions brought about by the bank's patient conduct of monetary easing to date have already begun to step up the pressure on firms to raise wages of regular employees, both in terms of the external pressure to curb turnover and of the internal pressure to ensure fairness among peers. 7 in this regard, the recent big push may have literally acted as a decisive factor driving this year's wage negotiations. d. outlook for sustainable wage increases the key issue now is to lock in the momentum behind wage hikes that is finally beginning to gather as a result of continued monetary easing, and to establish this as a lasting trend. if this happens, it should at last bring back the kind of economic growth based on a virtuous cycle between prices and wages that has long been missing from japan's economic landscape. the ultimate goal of the bank's patient conduct of monetary easing is to restore japan's economy to this state. meanwhile, for japan's economy to continue growing and for real incomes to continue increasing steadily,