current phase is that, in contrast to somewhat weak external demand, domestic demand has been firm ( chart 5 ). in the past, large economic fluctuations often occurred in japan, where the negative impact on the manufacturing sector stemming from changes in the global economy spread to domestic demand. in the current phase, however, although exports have continued to show some weakness, domestic demand has continued to increase in all three sectors - - that is, the corporate, household, and public sectors. thus, the impact of the global economic slowdown on domestic demand has been limited so far. the bank expects that, with the virtuous cycle from income to spending operating, domestic demand will follow an uptrend and the impact of the global economic slowdown on domestic demand will remain limited. that is, although the momentum of domestic demand is likely to decelerate temporarily in the short run, reflecting the effects of the global economic slowdown and the consumption tax hike, it is expected that a large decline will be avoided. in what follows, i will explain the outlook for business fixed investment, private consumption, and public investment in further detail. let me start with business fixed investment. business fixed investment in japan has continued on an increasing trend on the whole, although it has been somewhat weak globally. this is attributable to an increase in sustained investment that is less susceptible to short - term economic developments ( chart 6 ). such investment includes labor - saving investment that reflects tight labor market conditions. while the labor market conditions remain tight and labor shortage is expected to continue from the long - term perspective, demand for saving labor and improving efficiency has increased, mainly in the nonmanufacturing sector that is labor intensive. since okayama prefecture, for which the active job openings - to - applicants ratio is ranked in the top three in japan, faces extremely tight labor market conditions, you may recognize this situation clearly. in industries that face labor shortage - - including retail, accommodations as well as eating and drinking services, and construction - - firms are making efforts to save labor and improve efficiency and actively are undertaking machinery and software investment. in addition, the uptrend in research and development ( r & d ) investment for growth areas is expected to be maintained. with a view to improving competitiveness from a long - term perspective, the pace of increase in r & d investment is planned to be maintained in industries such as automobiles and chemicals, which recently have been affected by the global economic slowdown. moreover

were used repeatedly for a chain of transactions, with liquidity multiplying in the process. put differently, we saw a sharp increase in collateral velocity through the nexus of repo transactions. we now know that asian financial institutions were not deeply involved in such financial daisy chains, which probably helped them navigate the post - lehman turbulence. asian banks have been known for their traditional or basic business models, in which loans are funded primarily by domestic deposits. in fact, the loan - to - deposit ratios are below 100 percent in many asian countries ( chart 1 ). business models built on such domestic deposits are less susceptible to an acute funding squeeze than models dependent on wholesale funding. i think this feature has also provided asian banks with some advantages over their western counterparts in weathering the current crisis. on the other hand, the economic ties among asian countries have grown stronger on the back of continued economic growth in this region. in line with this, cross - border transactions have grown substantially and more sophisticated financial services are being called for. in this regard, the expansion of the so - called transaction banking services in asia is noteworthy. transaction banking makes it possible to provide cash management and trade finance services in an integrated fashion and beyond national borders. in a similar vein, supply chain finance seems to be gaining momentum in asia as the need grows for cash flow management through the entire supply chain. for further discussion on this point, see masaaki shirakawa, “ what is so special about financial innovation? ” keynote address at the conference entitled “ welfare effects of financial innovation ” held by the de netherlandsche bank ( via videoconference ) on november 11, 2011 ( available at http : / / www. boj. or. jp / en / announcements / press / koen _ 2011 / ko111114a. htm ). bis central bankers ’ speeches iv. challenges for asian financial institutions these developments suggest that the business model of asian banks is evolving, and is not immutable. in this connection, i would like to mention two challenges facing asian banks. the first challenge concerns demographics. we all know that japan is already feeling the pinch of this headwind. asian countries now enjoy ample labor forces, but rapid aging coupled with low birth rates will inevitably present these countries with demographic adversities in the next decade or so. in fact, the ratios of working - age population to total population are nearing their peaks in many asian countries, which means that the size of the labor force relative