, a build up of economic activity should lead to improved business sentiment, which, in turn, should lead to increased earnings and income. the rises in earnings and income should eventually encourage sustained growth in business fixed investment and personal consumption, respectively. when the strength of the self - sustained recovery, or the momentum of this cyclical force, is very weak, there is a risk that private - sector activity might begin to decline, particularly if unable to absorb the negative impact of such exogenous factors as external demand and fiscal policy. however, when there is a reasonable measure of strength in the self - sustained recovery, the inherent force can be expected to withstand the negative impact and put the economy back on the recovery path, despite being temporarily decelerated. in this case, the negative impact is contained and the private sector ’ s economic outlook and investment attitude remain firm. as the pressures created by those exogenous factors subsequently subside, economic recovery should gradually become apparent. i will now turn to my second point, that is, assessment of the strength of japan ’ s self - sustained recovery. the japanese economy began to recover in late 1993 from a recession that followed the collapse of the “ bubble ” economy. in early 1995, however, the recovery paused, and there were even concerns about the occurrence of a deflationary spiral. in view of these circumstances, drastic monetary and fiscal policy measures were adopted. while the halt was directly attributable to the negative effects of the rapid appreciation of the yen, it was also due to the fact that the strength of the self - sustained recovery in the private sector was yet too weak to overcome the downward pressures from outside the private sector. it is true that the economy had been on a recovery trend since late 1993. however, we at the bank judge that because firms ’ profitability as well as capacity utilization had remained at a low level, the shock of a sudden appreciation of the yen applied the brakes to the economic recovery. the important issue now is how much strength there is in the recent economic recovery in japan. balance - sheet adjustment and adjustment of industrial structure are still in process. this being the case, we at the bank do not believe that the self - sustained economic recovery has gained sufficient strength. this is precisely why we have maintained the official discount rate at a low level since september 1995. in the course of the gradual economic recovery over the past two years, however, the level of economic activity has doubtlessly been rising steadily,

by sector and by the size of firm, large manufacturers are faced with only limited balance - sheet adjustment pressures since they did not take on large debts during the “ bubble ” period. these large manufacturing firms saw an early recovery in profits following the collapse of the economic “ bubble ”, and in fact, have been investing significant amounts in plant and equipment since fiscal 1995. smaller firms, however, especially those in the nonmanufacturing sector, continue to suffer heavy balance - sheet adjustment pressures, having borrowed heavily from financial institutions during the “ bubble ” period to invest in real estate. the ratio of financial liabilities to assets at market value of smaller nonmanufacturing firms remains at a high level. as these firms have been most strongly affected by industrial restructuring, their profits as a whole have been slow to recover. as a result, their business fixed investment has shown little signs of improvement. yet, it cannot be said that low interest rates have proved ineffective to alleviate firms ’ balance - sheet problems. the only ways to alleviate the balance - sheet adjustment pressures is for firms to increase profits, and low interest rates have contributed broadly to improving firms ’ profits. with increased profits, firms can repay borrowings and thereby recover their net worth. also, a forecasted rise in a firm ’ s profits would facilitate the raising of capital by that firm. thus, increasing profits is most effective in improving the financial strength of a firm, and the repayment of debt is an important process in allowing a firm to prepare for future business activity. although in the current phase of economic recovery, low interest rates have not yet triggered any significant rise in business fixed investment in the smaller nonmanufacturing firms, these rates have steadily contributed to establishing the foundation of the recovery by helping to improve firms ’ financial strength. including such indirect effects, the bank believes that the low interest rates have in fact been firmly supporting the recovery of economic activity in the corporate sector. i would now like to go on to another often raised question about whether low interest rates are delaying the structural adjustment. it is true that there may be firms that are managing to survive despite a deteriorating business performance, owing to lower interest rates alleviating the burden of paying interest. my view, however, is that structural adjustment of the economy is achieved not just through natural selection of firms, where those with extremely poor business performance are weeded out. rather, i believe that it is achieved when the large number of firms with high growth potentials