of policy makers to formulate and implement an appropriate mix of policies. imbalances and asia adjusting imbalances, however, is easier said than done. the united states now imports 50 % more than it exports. if imports are to grow by 5 % per year, exports must grow by 7. 5 % just to keep the dollar amount of current account deficits at present levels. viewing from a slightly different angle, even if the income elasticity of u. s. imports to u. s. demand growth were to suddenly drop to zero while exports continued to grow at 5 %, it would take nearly 5 years before the deficit halved. how then could we realize this significant adjustment? what should asian economies, which are running surpluses, do in the context of global imbalances? first of all, economies should, in principle, accept adjustment through market forces. rigidity can lead to a build - up of stress in the system. many words have already been spent on this subject, and i will not repeat them. i would just note that, in our recent meetings with central bank colleagues from asia, they were fully aware of the need for flexibility and the challenges facing them in pursuing that goal. in addition to enhancing flexibility, today i would like to explore another option : the possibility of asian economies enhancing absorption in their economies. for japan, demography would aid the adjustment process. academic literature tells us that the rate of savings tends to decline in an aging society. in our case, as baby - boomers begin to retire in the next few years, they would start drawing down their savings. this should gradually influence the overall rate of savings and hence the level of external surplus. in this context, one important element would be rebuilding confidence in the social security systems that are now under pressure from the rapid aging of the population. in many non - japan asian economies, the government does not provide a sufficient social safety net. this is one area where a quick action is needed. in a financial context, one challenge is to explore a better use of capital. emerging asia collectively earns about 150 billion dollars a year in surpluses. these dollars are often invested in the united states. meanwhile, as developing economies, emerging asia has an almost insatiable appetite for capital. there are still numerous investment opportunities out there in the region. today, these ventures are often financed by overseas investors, often from the united states. at a risk of oversimplification, i would

reduce their payroll expense to some extent during downturns in the economy. during the 1990s, there has also been a development towards limited period employments, which should lead to greater flexibility in the labour market. these new elements in the functioning of the labour market may help the riksbank to combat inflation and will probably be good for growth and thus employment in the long term. however, they must be weighed against a possible deterioration in security of employment for the individual. how high can the rate of wage increase go without causing inflation to accelerate? in the long term the development of real wages must reflect the labour force's ability to produce goods and services. thus, real wages can only rise as long as productivity is increasing. if real wages rise faster than productivity, companies are forced to either raise their prices if they can, which means that inflation rises, or to reduce their labour force or curtail their operations. nominal wages can thus increase by the total of the inflation target of 2 per cent and the growth in productivity. if we assume that the swedish productivity rate trend is approximately 1 to 2 per cent, a reasonable assessment is that an average increase in payroll expense of around 3. 5 per cent should be sustainable in the long term. however, it is important to point out that the arguments regarding wage scope are based on several assumptions. the first concerns an increase in total payroll expense, i. e. both wage increases through collective or local bargaining and other types of increase in payroll expense, such as payroll tax and collective charges. the second entails initial profit margins being sufficiently high to stimulate investment and enable continued rapid growth in the economy. the final assumption concerns the overall, average wage scope for the country as a whole. the definition of a long - term sustainable wage increase may differ between sectors and regions depending on the different conditions for production technology, productivity development and competition. if the economy is not balanced, there may be a short - term deviation in nominal wage developments from the long - term sustainable level. this could be due to a stronger exchange rate, for instance. the inflation target is expressed in terms of cpi, which consists of the prices of both imported and domestically - produced goods and services. if imported inflation, which comprises approximately onethird of cpi, develops weakly as a result of a stronger krona or lower international price pressure, domestic prices may rise more rapidly than 2 per cent over a period of time without causing a threat to the inflation target. there is then temporary