inflation has been declining globally. this is due mainly to the successful conduct of monetary policy worldwide and the increasing penetration of emerging countries into market economies. firms have not regained pricing power in the market. therefore, there is a strong possibility that inflation will stay at a relatively low level, while the growth rate will increase. third, japan's economy is still suffering from structural problems such as excess debt, excess labor, and financial system fragility. because of these structural problems, cyclical recoveries at large manufacturers are not able to generate strong positive spillover effects for non - manufacturers, small to medium - sized companies, or households. to return to a sustainable growth path and overcome deflation, japan must thus solve its structural problems and enhance the growth prospects of both firms and households. in japan, as in europe, structural reform to ensure the more efficient use of capital and labor is urgently called for. despite the recent progress, we should not be complacent about the need for structural reform. the process of solving structural problems is still half - finished. for example, the debt to sales ratio for nonmanufacturing industries is still higher than it was before the bubble period. in addition, the sense that they are still holding excess labor remains among firms, whether in manufacturing or nonmanufacturing, and whether large or small. banks have also made progress in their restructuring. large banks have reduced outstanding amounts of nonperforming loans and have increased provisioning. they have also reduced the risk pertaining to stock prices by selling their shareholdings to the market as well as to the bank of japan under our stock purchasing scheme. almost all banks have reduced their shareholdings to levels below their tier 1 capital. banks'financial results turned out to be better than expected for the first half of the current business year ended in september. because losses resulting from the disposal of nonperforming loans were smaller than operating profits, most banks posted profits. the average capital adequacy ratio for large banks was around 11 percent. given the scheduled removal of blanket deposit insurance in the spring of 2005, time is running short for us to engage in the further restructuring of the financial system to restore the soundness of the banking system. moreover, the decline in bank lending illustrates not only that demand for loans is weak but also that the risk - taking ability of banks has not recovered sufficiently. under such circumstances, the bank of japan has adopted quantitative easing as its fundamental policy framework

i am well aware that there are those both at home and abroad who argue for adopting an inflation target or a numerical definition of price stability. in this regard, let me reiterate that when nominal interest rates are constrained by the zero bound and financial institutions are not performing their intermediary function sufficiently, we cannot expect the transmission mechanism of monetary policy to function properly. under such circumstances, it is hard to believe that the adoption of inflation targeting would increase the effectiveness and enhance transparency regarding the future conduct of monetary policy. i believe that the current policy commitment is most effective in enhancing the transparency of monetary policy and stabilizing the expectations in the market. it clarifies under what conditions and for how long the bank intends to maintain the framework of its current quantitative easing policy. in addition to enhancing transparency, we need to strengthen the transmission mechanism of monetary policy in the area of corporate finance. in this regard, the bank has begun purchasing assetbacked securities backed by private sector corporate debt. the credit markets in japan have traditionally been dominated by bank lending. however, given a situation in which banks'ability to take risks is constrained, we need to expand the markets for asset - backed securities and other such credit instruments, which are not susceptible to fluctuations in banks'capital levels. to date, the bank has purchased about 200 billion yen of asset - backed securities and asset - backed commercial paper. we hope that our efforts will contribute to the further expansion of the asset - backed securities market by raising awareness of its advantages among financial institutions and investors as well as encouraging the origination of asset - backed securities in the market. earlier this month, the bank initiated a series of workshops with a wide range of market participants on how best to coordinate efforts to improve the markets for asset - backed securities and other similar credit instruments. our current framework for quantitative easing coupled with measures to strengthen the transmission mechanism of monetary policy will improve the financial environment within which firms and banks engage with the structural problems. it will thus facilitate the japanese economy's return to a sustainable growth path and also bolster the efforts to overcome deflation. since the strategy of the bank of japan relies on the efforts of the private sector, this policy may take time to pay off, but it is the most effective way of tackling the roots of the structural problems. in closing, i express my sincere hope that the current momentum for recovery in both europe and japan will be successfully translated into sustainable economic growth.