mr hayami discusses the challenges for the japanese economy speech given by the governor of the bank of japan, mr masaru hayami, at the kisaragi - kai meeting on 27 july 1999. * i. * * introduction it is a great privilege to be invited to the kisaragi - kai meeting to make a speech in front of this distinguished audience. first, i will make use of this opportunity to discuss the current state of the japanese economy. then i will move on to the main theme – structural problems that have to be faced in revitalizing the economy. i hope that my view will give you some perspectives for the future. ii. recent developments in the economy and the outlook let me begin with the bank of japan ’ s view on the current state of the japanese economy and the outlook : japan ’ s economy, at present, has stopped deteriorating, and corporate sentiment has improved slightly, however, clear signs of a self - sustained recovery in private demand have not been observed yet. the following factors have combined to keep the japanese economy from a further deterioration. first, active fiscal policy has been stimulating public investments as well as housing investments. second, private firms have been reducing their inventories successfully helped to some extent by the development of final demand. third, financial conditions are improving, as a result of the bank of japan ’ s zero interest rate policy and the injection of public funds into major commercial banks. the buoyancy in the stock market since early spring and the improvements in corporate sector confidence shown in the tankan, are based on the increased anticipation of better business and financial conditions in the future, as well as the current improvements in final demand, output, and inventories. it is, however, uncertain at this stage whether the japanese economy, is on the way to a self - sustained recovery as anticipated above. the reasons can be summarized as follows. to begin with, i will address two factors that will have a negative effect on the future of the economy. first, the stimulus effects of public investment will fade out eventually. second, the corporate restructuring efforts of individual firms will expose the macro economy to downside pressures. this is an example where what are rational strategies from the viewpoint of individual firms may have undesirable effects on the economy as a whole. with corporate restructuring, workers faced with harsh income conditions, reduce consumption spending, while firms save the resulting cash or make debt repayments, instead of reinvesting. this “ paradox of thrift

s. it seems that u. s. capital markets, which tend to promote venture businesses, are supported by such household behavior to no small extent. in japan, despite the strong propensity for safe assets, it cannot be denied that how to make firms and financial products attractive for investment purposes will warrant study. i stated earlier that capital productivity in japan is low and thus not attractive for either domestic or foreign investors. this refers only to the overall trend of the economy thus far. if we closely examine each individual firm and project, there must potentially be many investment opportunities with an appropriate combination of risk and return. there should not be much difference between japan and abroad in that even a small firm will be able to become a big success if it takes advantage of technological innovation in telecommunications and deregulation. in fact, we may detect some seeds of new business opportunities in the recent buoyancy of the stock market. to germinate such seeds, it is deemed necessary to encourage new entry to the market through deregulation which leads to intensified competition and the revitalization of industries, and to create a variety of financial products through which the abundant savings of the household sector can be smoothly channeled as risk capital to investments in new businesses. viii. concluding remarks the japanese economy now stands at a crossroads as to whether it can move onto a self - sustained recovery path. needless to say, a stable macroeconomic environment is important for the smooth progress of structural adjustment. we are fully aware that monetary policy is expected to play an important role under such circumstances. with these considerations in mind, we will maintain current monetary easing until deflationary worries subside. having said this, the three structural problems discussed here are determined by supply - side factors, and cannot be dealt with only by demand stimulus measures from the monetary and fiscal side. for example, in addressing the corporate balance sheet problem, to what extent firms tackle the allocation of management resources will depend critically on the way corporate governance is being implemented. regarding the changes in growth mechanisms under globalization, whether new firms emerge to bring innovation to the productivity of existing domestic - oriented industries will depend on how regulations and traditional transaction practices change and how the capital market functions. as to the savings and investment imbalance and the provision of risk capital, much may depend on the future of pension, insurance, and taxation systems. since these supply - side measures work on the incentives of firms and households, it thus often takes time for effects to materialize unlike