during their working lives. the increase in capital intensity may induce a lower rate of return on real capital stock and thus savings, due to the law of decreasing marginal productivity of capital. this leads to a reduction in the per capita consumption of elderly people. for the retired elderly, it is crucially important to secure a higher rate of return on savings. in order to prevent a decline in the rate of return on capital, it is necessary to increase the labor input. in the absence of a change in the participation rate in the labor market and immigration, it is impossible to augment the labor input. however, it is possible to increase the labor input in the efficiency unit by raising labor productivity. it is well known that per capita consumption is maximized on the path where the economic growth rate is equal to rate of return on capital ( called the “ golden rule ” growth path ). the economic growth rate can be decomposed into labor productivity growth and the rate of increase in the labor input. this implies that in japan, where the labor input will decline, the desirable increase in labor productivity should be larger than the rate of return on capital, if the nation seeks the maximum per capita consumption growth path. 2 the next question, then, is how to increase labor productivity. there are two ways. one is to promote technological innovation and more efficient allocation of resources : that is, to increase the total factor productivity. the other is to increase capital intensity. yet an increase in capital intensity is accompanied by a decline in the rate of return on capital stock. therefore, what we should seek to attain is an increase in total factor productivity. it is interesting to note that the japanese economy has suffered from distortions in resource allocation created during the bubble period. the size of the distortions is estimated by the bank of japan ’ s staff to be equivalent to nearly 0. 5 percent of gdp growth ( figure 3 ). it is reasonable to assume that the final disposal of nonperforming assets by the banking sector implies the restructuring and reorganization of the corporate sector ; this would lead to more efficient allocation of resources and thus the removal of such distortions. furthermore, there exists a wide gap in labor productivity between the manufacturing and the non - manufacturing sectors. the labor productivity of the latter is less than half that of the united states. this points to the potential to raise productivity of the non - manufacturing sector through the application of advanced information technology and the more efficient management of firms. the wide productivity gap

exports showed a significant rise. real exports rose again in october. real imports, on the other hand, have remained virtually unchanged on average. as a result, the real trade surplus has been increasing with some fluctuations. reflecting these developments in exports and imports, the nominal current - account surplus has also been expanding significantly since april 1997. industrial production has recently been somewhat weak. production in the third quarter 1997 remained virtually unchanged on the whole. this is because production has been cut back mainly in the industries with excessive inventories, such as consumer durables and construction - related goods, although production of electrical machinery continued to increase, reflecting steady exports. production in october and november is expected to decrease as a result of inventory adjustment pressures. with respect to labor market conditions, the unemployment rate has remained at a high level, and the ratio of job offers to job applications has recently eased somewhat. growth in overtime working hours and nominal wages has slowed slightly reflecting weak production. however, year - to - year employment growth has been moderate but steady. thus, employment and income conditions continue to improve moderately on the whole, but the pace of recovery has slowed somewhat. prices remained stable on the whole, excluding the effect of the consumption tax hike. domestic wholesale prices ( adjusted for seasonal electricity rates ) have declined to some extent as domestic demand and supply conditions started to ease, particularly in construction - related goods. the year - to - year declines in corporate service prices on the whole have been narrowing further owing to the improvement in supply and demand conditions, particularly for real estate rents and information services, although leasing charges continue declining. consumer prices ( nationwide, excluding perishables ) rose year to year in september, reflecting the temporary factor ; i. e., a rise in medical charges which resulted from medical insurance reform. excluding this, however, consumer prices have remained stable at a level slightly above that of the previous year. monetary aggregates, measured in terms of year - to - year growth of m2 + cds average outstanding, declined somewhat in october to 2. 7 per cent. regarding money market rates, the overnight call rate ( uncollateralized ) has moved at a level slightly below the official discount rate. the 3 - month cd rate has stayed at around 0. 50 - 0. 55 per cent. against the background of uncertainties about future economic growth, the long - term government bond yield had been declining since the end of may and reached the record low of 1. 5 - 1. 6 per