Going forward, as the economy continues to grow at a pace above its potential, the output gap is expected to improve further into positive territory. Next, as I described earlier, inflation expectations appear to be rising on the whole. In particular, the recent changes in firms’ wage- and price-setting behavior are drawing specific attention.
As for wage setting, many firms have increased their base pay for two consecutive years. Moreover, their price-setting has also been shifting from a low-price strategy to raising sales prices while increasing value-added. Under deflation, firms could not raise sales prices against weak demand, and thus focused on lowering costs as much as possible – including personnel expenses – in order to secure profits.