large manufacturers has turned to " favorable " for the first time since december 2000. this result is more or less in line with the assessment of japan's economy that i have just described. it should be noted that there still remain persistent structural adjustment pressures stemming from excess debt and labor. therefore, the extent and strength of the likely recovery permeating through the economy are uncertain, and must continue to be monitored carefully. in the stock market, the nikkei 225 stock average is moving above the 10, 000 yen level, about 30 percent above the recent bottom in the spring, although the market is slightly bearish recently due to the appreciation of the yen. we consider that such movements reflect the signs of recovery that i have just described. yields on 10 - year japanese government bonds have risen significantly above their june levels of below 0. 5 percent. long - term interest rates reflect market participants'prospects of the economy. thus, higher long - term interest rates after june are basically the reflection of improved prospects. such observation can be reinforced by the simultaneous rise in long - term interest rates and stock prices. markets respond to various factors, and thus they are subject to overshooting in the short term. for example, some point out that the recent volatile movement of long - term interest rates was partly due to the speculation over the bank's monetary policy. in this regard, let me reiterate that the bank has made a firm commitment to maintaining the current policy of quantitative easing until the year - on - year increase in the consumer price index ( cpi ) becomes stably zero or above. this is a clear and specific commitment based on the published monthly data of the cpi, not its forecast. once the significance of this commitment is fully digested in the market, i believe it will contribute greatly to market stability. let me reassure you that the bank continues with this commitment, and communicates its policy stance to the market as and when necessary. the yen has been appreciating since around the time of the g - 7 meeting last month. it appears that such movement has been affected partly by misinterpretations by market participants regarding the g7 statement. there is no change in the view held by the finance ministers and central bank governors of the g - 7 countries that exchange rates should move in a stable manner reflecting economic fundamentals, and that the g - 7 countries will cooperate as appropriate if there is excessive short - term volatility in the foreign exchange market.

we are scarcely off track at all, from what appears to have been a secular trend of real appreciation of the currency. but others might argue that the structural changes of the eighties and nineties which were consistent with an appreciating real rate because of much more rapid productivity gains in the tradable than in the non - tradable sectors, cannot be repeated, so that the assumption of a continuing secular uptrend is invalid. on that view, the net appreciation over the past couple of years may be deemed to have dragged us away from our preferred path. it is hard to judge where the proper balance of these views lies. i recall how, 15 - 20 years ago, the doom merchants were prophesying the end of hong kong ’ s long run of growth because we were rapidly losing competitiveness in much of manufacturing. presumably they did not slides are not included in this text document. foresee the remarkable extent to which the service sector would develop as an alternative wealth - generating lynchpin of the economy. now, the next generation of doom merchants is prophesying imminent disaster as competitiveness in certain parts of the service sector appears to have been eroded. will they be wrong again? have they failed to appreciate the true workings of the market economy and comparative advantage? do they not realise how difficult it is to foretell exactly how an economy will evolve, even though the evolution is taking place right under our noses? indeed, as we sit here worrying about it, there are people out there who are busy exploiting niches and opportunities which will mould the future structure of the economy. we can try to facilitate that process, or even to guide particular aspects which we reasonably expect to be important ( eg the cyberport ), but there will always be surprises. in any analysis of competitiveness there is inevitably scope for argument about the appropriateness of the statistics one is using. i believe that in the current hong kong conjuncture the popular measures such as the real exchange rate may have been lagging somewhat behind the recovery of competitiveness that may have actually occurred. business decisions are influenced more by marginal prices and expectations of future prices, than by prevailing average prices ; yet the measure of rentals which enters the cpi is typically based on an average of outstanding contracts and not the price at which new contracts are being struck which have over the past year or so fallen much more steeply. thus, when thinking of business decisions, even assuming that residential rentals are a