will require. a reduction in investment and labor costs is indispensable for companies to recover their earnings power. if aggregated, however, such reduction will work to exert downward pressure on domestic demand and thus hinder the recovery of overall business conditions. i think the efforts of companies to restructure their businesses have finally begun to bear fruit recently. corporate profits have been increasing since last fiscal year. at present, the ratio of current profits to sales has approached almost its highest level since the bursting of the bubble. this implies that japanese companies have been succeeding in lowering the break - even point by restructuring and adapting their business structure so that they can secure profits even when sales are sluggish. c. search for new business models japan's proximity to rapidly growing east asia has an interesting implication from the viewpoint of the corporate response to changes in the global environment. on one hand, such proximity exerts a strong impact on competition and prices through the inflow of less expensive imports. on the other hand, it strengthens the competitiveness of domestic industries rather quickly. although japanese companies are significantly handicapped by higher labor costs compared with companies in east asia and other emerging economies, many export items, such as electrical machinery and transportation equipment, still maintain strong international competitiveness, and the trade surplus remains. behind this, japanese companies have been producing high value added by creating new business models through a combination of their own technology, quality control expertise, the production capability of east asian economies, and the ability in terms of design to respond to consumer needs in various countries. in the domestic market, including the nonmanufacturing sector, new business models have emerged in which overseas production and distribution channels are consolidated. some of the products created under such new business models are beginning to attract consumers and gain market share. d. institutional and legal measures it should be noted that institutional and legal measures have been taken, which allow active entry and exit as well as intensified consolidation of the corporate sector. for example, in dealing with the bankruptcy and reconstruction of companies, it is important to make use of market discipline and create a framework that maximizes the interests of all concerned, while retaining the value of companies on a going - concern basis to the greatest possible extent. in line with this view, enactment of the civil rehabilitation law and other adjustments to the legal framework have been effected, and legal procedures expedited. in the area of corporate law, revision has been undertaken to help firms reorgani

second oil shock allowed japan to find a new source of value added in energy efficiency and environmental protection technology. i am confident that we can make use of such value added in a variety of areas. as long as there remain issues to be resolved and needs to be addressed, we have infinite opportunities to create value added. c. risk - resilient financial intermediation system my second comment concerns the need to provide a framework sufficient to support private economic agents in their efforts to find and develop these opportunities. in this regard, dealing with risks involved in economic activity is an extremely important issue. since it is impossible to fully forecast the future, economic activity to produce value added will inevitably entail uncertainty. when adequate measures for dealing with the uncertainty are in place, economic agents can launch forward - looking plans with confidence. creating value added and managing risks are in fact two sides of the same coin. the framework for the diversification of risks among economic agents has been developed as fundamental infrastructure for economic development. for instance, modern corporate law, based on the idea of limited liability of shareholders, can be regarded as the framework that enables risks pertaining to economic activity to be absorbed by a wide range of economic agents. undoubtedly, these systems have played an important role in supporting economic development in many countries in the modern era. in the coming age in which risks pertaining to economic activity will grow as globalization advances, financial intermediation systems will play a very important role in constructing a framework for the efficient diversification of risks and their absorption by the overall economy. companies and other economic agents diversify risks stemming from economic activity by combining various means of financing. financial institutions make judgments about how to provide the best financial services by examining the profitability and risk of economic activity. if such judgments together with those of investors are eventually revealed in market prices such as lending rates and bond yields, economic activity will be disciplined and the efficient allocation of resources achieved. for the efficient reallocation of resources in an economy as a whole, the financial intermediation system must be capable of appropriately evaluating profitability and risks, and such evaluation must be duly reflected in lending rates and credit spreads. when an economy is experiencing high growth, financial institutions need not pay much attention to the ability to evaluate profitability and risks, because risks can be absorbed rather easily through larger revenues if these institutions maintain a certain volume of assets. market financing may tend to remain as the secondary source of funding. when an economy moves to a new stage with an