toshihiko fukui : recent economic and financial developments in japan speech by mr toshihiko fukui, governor of the bank of japan, at a meeting in fukuoka, 8 december 2003. * i. * * the current economic situation and the route to sustainable growth largely in line with the standard scenario in the outlook and risk assessment of the economy and prices published at the end of october, japan ’ s economy is starting to recover gradually, after a period of generally flat economic activity that lasted up until around summer. with corporate earnings improving, business fixed investment continues its gradual recovery. against the backdrop of an improvement in overseas economies, exports, which had been flat until summer, have started to turn upward. production, whose recovery had been somewhat delayed due to the unusually cool summer, is starting to increase recently. the fact that the rise in exports and business fixed investment has led to a recovery in production suggests that cyclical momentum for a recovery is kicking in, and that the japanese economy is at last settling onto a recovery path. from the second half of fiscal 2003 through fiscal 2004, a moderate recovery is expected to continue. exports and production are likely to continue increasing against the background of high growth in the united states and asia, particularly in china, with a recovery in global demand for it - related goods. in europe, it is becoming more apparent that the economy has bottomed out. there is a greater probability that these increases in exports and production will promote further business fixed investment along with the improvement in corporate earnings. the pace of the recovery will most likely be contained to a moderate clip, considering ongoing structural adjustment pressures as well as not so favorable prospects for employment and income. the corporate sector, especially non - manufacturing, is still suffering from excess debt. with no clear signs of improvement in employment and income, personal consumption is expected to continue following a generally flat trend. it will be quite some time before we can eliminate the word “ moderate ” from the description of the current recovery. after decreasing constantly for five and a half years, the consumer price index excluding fresh food, which we refer to as the core cpi, increased by 0. 1 percent year - on - year in october. this was partly due to a hike in rice prices caused by the unusually cool summer, in addition to factors such as the rise in medical treatment costs and the tobacco tax. although the core cpi may fluctuate due to temporary factors, its underlying trend is expected to be for a slight decline

from regulatory authorities. at the end of march 2005, major banks are expected to reduce their nonperforming loan ratios to about half autumn 2002 levels. at the same time, the industrial revitalization corporation of japan will cease its purchase of loan assets. from april 2005, fixed asset impairment accounting rules will be introduced. firms continue to strengthen their business structures and competitiveness. initiatives based on the private sector ’ s creativity and vitality will be the driving force for japan to achieve steady economic growth under global competition. together with firms, financial institutions also play an important role in supporting the japanese economy. dynamic expansion of the economy will not be possible if financial institutions remain dependent on regulatory authorities and generous safety nets. not only firms but also financial institutions will be confronted with frequent new entries to and withdrawals from the market, as well as consolidation and reorganization in their respective industries. this makes it all the more critical for financial institutions to demonstrate their firm intention to stand on their own feet, and enhance their credibility in the market. in this regard, let me point out some of the major tasks to be addressed in 2004. in order to achieve reform of the economic structure and a sound financial system more rapidly, financial institutions, especially major banks, must work harder with firms to revitalize the corporate sector, while expediting the disposal of nonperforming loans. it is true that some financial institutions have already established subsidiaries specializing in corporate revitalization. further efforts, however, are still required in areas such as the more effective use of the industrial revitalization corporation of japan and the resolution and collection corporation. in corporate revitalization, regional financial institutions basically face the same problems as major banks. there are more than a few borrower firms with competitive technology and expertise, which find it difficult to improve profitability because of the financial legacy of past borrowing. for this reason, the strategically important issues that many regional financial institutions address include the provision of detailed consultation services to borrower firms, the extension of greater assistance to borrower firms, and the prompt realization of business revival. we hope that their efforts will bear fruit. financial institutions also have an important role to play in helping the corporate sector to develop the new businesses that will underpin japan ’ s future economy, while at the same time supporting ailing business firms. regional financial institutions in particular are expected to play an active role in generating new businesses in their region. we observe the first shoots of new regional businesses in a variety