background of increases in redevelopment projects and steady demand for office space. these developments may also cause activity of both firms and financial institutions to accelerate. if greater assertiveness should be based on optimistic assumptions regarding future sales and profits, financing costs, foreign exchange rates, and asset prices, the result could well be a misallocation of resources in the long run as agents become over - extended in financial markets or pour funds and other resources into inefficient economic activities. such developments may push up economic growth in the short run, but lead to later downward adjustments and hamper the sustainability of economic growth. iv. sensitivity of prices to changes in the output gap these upside and downside risks to the outlook for economic activity may affect prices should they materialize, but there are also upside and downside risks unique to price developments that could cause prices to deviate from the projection. the sensitivity of prices to changes in the output gap has been declining in recent years. this tendency has been taken into account in our projection for prices mentioned earlier, but the degree of decline is uncertain and the sensitivity of prices may turn out to be lower than assumed in the projection. if factors strongly restraining wage growth remain despite prolonged economic expansion, downward pressure on prices from labor costs would persist. moreover, if the positive influence of the strength in the corporate sector feeds through into the household sector more slowly than expected due to sluggish wage growth, supply and demand conditions for consumer goods and services may not improve as much as the output gap suggests. in such a situation, prices may not be responsive to the improvement in the economic situation. on the other hand, if the economy continues to grow at a pace exceeding its potential through fiscal 2008, it is likely that the utilization of resources such as labor and production capacity will rise further and the output gap will show further tightening of supply and demand conditions. inflation expectations, which have been low and stable, may rise with higher resource utilization, particularly in labor, along with increased prices of crude oil and other international commodities. moreover, although firms are likely to continue to restrain labor costs, they may change their attitude with the aim of hiring or retaining skilled workers. these potential changes would exert upward pressure on prices. v. conduct of monetary policy next, i would like to elaborate on the future conduct of monetary policy, keeping in mind the projection for economic activity and prices and the possibility that they may deviate from the projection. the bank assesses the economic and price situation

has been that ( 1 ) given the extremely accommodative financial conditions, the level of interest rates is to be raised if japan's economy is to follow a path of sustainable growth under price stability, and ( 2 ) the pace of increase in interest rates should be determined in accordance with improvements in the economic and price situation without any predetermined view. so far, weak inflationary pressures have given the bank latitude in conducting monetary policy. the actual interest rate adjustments have therefore been slow based on a thorough assessment of the future path of the economy and prices and its likelihood, as well as both upside and downside risks. the bank's basic thinking in this regard will remain the same in the conduct of future monetary policy. that is, while confirming that the japanese economy remains likely to follow a path of sustainable growth under price stability and assessing relevant upside and downside risk factors, the bank will adjust the level of interest rates gradually in accordance with improvements in the economic and price situation. we believe that, from the long - term perspective, the conduct of monetary policy in such a manner will prevent the risk of larger swings in economic activity and prices from materializing and will help to realize sustainable growth under price stability. conclusion japan's economy is expanding moderately. corporate activity has been increasing due partly to strong exports, as can be seen here in the kansai region, and the positive influence is clearly spreading throughout the wider economy as evident in the declining unemployment rate. in order for japan's economy to continue sustainable growth in the face of various challenges including the declining population, it is crucial for all regions and industries to persist with their efforts to innovate. since, along with the kanto and tokai regions, the kansai region is pulling japan's economy forward, i fully anticipate that your originality and inventiveness will continue to play a leading role. as for the bank, we will continue to support your efforts through our conduct of monetary policy.