financial institutions'profits have been improving markedly. as a result, financial institutions'lending attitude has become more accommodative, and their lending has been recovering. financing in capital markets through, for example, issuance of cp and corporate bonds has continued to be favorable, indicating that firms'financing demand is being sufficiently met. these extremely accommodative financial conditions are supporting private demand. the third factor supporting the ongoing economic recovery is the positive interaction which has started to operate between the corporate and household sectors : the positive effects stemming from the increased corporate profits have gradually spread to household income, feeding back to the corporate sector via increased private consumption. looking at the employment situation, the number of employees has been increasing since 2004, with the number of full - time employees also increasing recently. regular payments have been increasing steadily, and winter bonus payments are expected to have registered a steady increase. moreover, increases in receipts of dividends and wealth effects stemming from higher stock prices have started to contribute to the steady developments in private consumption. reflecting the improvement in the employment and income situation, consumer confidence continues to be favorable on the whole and private consumption is likely to remain steady. housing investment has shown some strength, as evidenced in housing for sale and housing for rent, reflecting low interest rates. the fourth and last factor supporting the economic recovery, relating back to its moderate pace, is that corporate behavior has remained cautious so that an excessive buildup of stocks, such as production capacity and inventory, is unlikely to occur. the current levels of business fixed investment appear modest relative to the historically high level of current profits. since cautious corporate behavior will help prevent large economic fluctuations, the economy is likely to experience a sustained period of recovery at a moderate pace. iii. uncertainty over the outlook for economic activity japan's economy continues to recover steadily and is unlikely to fall into recession due to domestic factors. nevertheless, in discussing the outlook for japan's economy, it is necessary to maintain a close watch on the rise in crude oil prices and its impact on developments in overseas economies, including the united states. crude oil prices have softened somewhat since marking a record high around the end of august 2005, but they still remain at high levels. the high crude oil prices are mainly due to increased global demand, reflecting the expansion of the global economy. but another factor, highlighted by the two hurricanes that recently struck the united states and revealed supply - side weaknesses, particularly in refining capacity, is the risk that the supply

of crude oil will fail to meet growing global demand. if crude oil prices rise further due to supply - side constraints, the global economy will be affected by a decline in real purchasing power in non - oil - producing countries, or by rising concerns over increasing inflationary pressures worldwide. in the united states, the federal reserve has gradually raised the targeted federal funds rate to above 4 percent. partly due to these monetary policy actions, the rise in the core consumer price index ( cpi ) has been contained. however, concern about inflationary risks is emerging due to such factors as the surge in crude oil prices. the current u. s. economic growth has been supported by relatively low long - term interest rates, which have been underpinned by well - contained long - term inflation expectations due to the appropriate conduct of monetary policy. should, however, price stability be undermined and the financial environment become destabilized, not only would growth in the united states slow, but the global economy could also be affected by abrupt changes in the international flow of funds. another issue that every country should address in an effort to achieve sustainable global economic growth from a slightly longer - term perspective is increasing global imbalances. at the meeting of the g - 7 countries held at the beginning of december in london, the view was shared that each country was taking steps to address these imbalances but more vigorous, mutually reinforcing action was needed. iv. developments in prices the environment influencing prices has been improving as the economy continues to recover. the output gap is likely to continue narrowing moderately, as the economy continues to recover at a pace slightly above its potential. the decline in unit labor costs is likely to slow along with the increases in wages, despite continued downward pressure from the rise in productivity. various survey results show that firms'and households'expectations regarding prices are gradually being revised upward. as for the potential growth rate, some argue that it is higher than previously estimated, and thus that the output gap is unlikely to narrow much. it should be noted, however, that a rise in productivity tends not only to expand production capacity but also to stimulate demand via increases in firms'expected growth and households'expected income. thus, the overall effect on prices of the rise in the potential growth rate varies depending on how these opposing mechanisms work over time. the impact of the expansion of emerging market economies on price developments is increasingly significant. it has been pointed out that the expanding production capacity of emerging market economies,