the emergence of geopolitical risks. on such occasions, financial institutions ’ management should be able to make decisions calmly and promptly. such ability depends on continual updating and preparation on a daily basis. for financial institutions to be able to react promptly and appropriately to changes in the environment depends on the efforts of both staff and management. for example, staff should, regularly and concretely, provide management with information and analysis about not only the current situation but also future scenarios such as demand forecasts. at the same time, management should always strive to retain a broad perspective, solid insight, strategic ability, and strong determination. 3. reform of public finance including the postal savings system the third challenge is the need to reform the postal savings system and other public financial institutions. it has been pointed out that a fairly large portion of funds is intermediated outside of the market mechanism, reflecting the substantial share of postal savings among financial assets in japan. some claim that this may result in distorting the efficient allocation of resources. furthermore, due to the full protection of demand deposits, the share of deposits with public protection is extremely high among financial assets. in such an environment, individuals are less inclined to closely review risk - return profiles of various financial assets and hold diversified types of savings. this appears to be one of the obstacles hindering innovation in japan ’ s financial system. the japanese government has therefore already taken action. for private banks, the removal of blanket deposit insurance is scheduled in april 2005, a little more than eight months from now. the privatization of japan post is also under serious discussion. in discussing the privatization of the postal savings and insurance system, we consider three points especially important from the viewpoint of the central bank. first, equal footing with private banks must be maintained. second, a sufficient risk management system must be established and profits must be earned. third, financial businesses must be clearly insulated from the risks associated with nonfinancial businesses. i strongly hope that the discussion of postal savings privatization will produce a concrete blueprint, which contributes to fair competition and further innovation in the financial system. ii. effects of sophisticated financial services on the economy the financial services industry offers a variety of services, including payment and settlement services, means for customers to raise funds and invest, hedging of risks, managing of assets for customers, and provision of information. i will now take up some of these categories and use them as examples to show the kind of sophisticated services required by firms and households.

opportunities. for example, banks should closely monitor the condition of a firm ’ s business, and promptly revise the conditions attached to credit when the firm ’ s situation changes substantially. the firm can then accelerate its actions to improve performance in response to the changes, and both firms and financial institutions can move forward in a dynamic environment. to this end, it may be useful to clarify the covenants of loans from their origination, or to differentiate debt and equity functions by utilizing financial techniques such as giving a lender an option to purchase new stocks issued by a borrower in the future. if we are able to rebuild the sophisticated relationship between firms and banks, eventually it may even be possible to present this as a “ new ” model for corporate finance. 2. hedging of risks firms are exposed to a wide range of risks in the form of foreign exchange risks, market risks, and credit risks of business counterparties. financial institutions play an important role in providing firms with financial services including hedging of risks. it is expected that the request for risk hedging tailored to the business profile will increase as business activities diversify further in the future. the development of financial theories and cutting - edge technologies has enabled financial institutions to hedge even extremely complex risks. and yet, it is not easy to satisfy such demands with specialized hedging. the more specific the request, the more difficult it will be to find risk takers. financial institutions that routinely bear broader risks may nonetheless be able to unbundle the customized risks into standardized risks and take on the risks by themselves or transfer them in the relevant derivatives markets. in the process of unbundling and transferring risks, the division of labor may be effective among a wide range of financial institutions with specialized skills. the provision of risk - hedging tools to firms will be of primary importance on a par with the provision of loans. b. supporting households ’ activities 1. investment turning to households, i will begin by looking at investment needs. the risk preferences of households occasionally shift in response to changes in the environment. for example, the year - on - year growth in banknote issuance outstanding reached 16 percent in april 2002 when blanket deposit insurance was partially lifted. currently, the growth rate has declined as low as the 1 - 2 percent level as stability returns gradually to the financial system. furthermore, households began to take a positive attitude toward equity investment as corporate profits recovered. as a result, the share of equities traded