##preciation of the yen. recently there has been an upward trend in external demand. in addition, inventory adjustment in some raw materials and semiconductor industries had almost reached completion by the end of 1996. as a result, production has started to grow at an accelerating pace, reflecting fully the increase in final demand. personal consumption continues to grow moderately but steadily, supported by the buoyant sales of passenger cars, and the recovery in business fixed investment is spreading to a wider range of industries and to smaller firms than previously observed, reflecting improvements in corporate sales and profits. it should be borne in mind that increase in demand ahead of the rise in the consumption tax rate scheduled for fiscal 1997 is contributing to the recent improvement in economic indicators, as in housing investment, and these improvements need to be seen in this light. however, despite a gradual decrease in public - sector investment from the latter half of 1996, the virtuous circle - in which increased production leads to a recovery in business fixed investment and personal consumption through improved corporate profits and employment income - is gradually becoming more apparent. this improvement is encouraging. in contrast to these recent improvements in economic indicators, the beginning of the year saw a significant fall in stock prices and this, together with the decline in long - term interest rates in the financial markets, indicates that the confidence of the market participants in the economic outlook is still slow to improve. various causes can be considered for the market ’ s uncertainty as to future developments in the economy. while the renewed concern over the nonperforming - loan problem of financial institutions may be one important factor, the strong awareness of the effects of the anticipated fiscal tightening in the next fiscal year is also significant. from spring to summer this year, a temporary slowdown in economic recovery seems inevitable due to a reaction to the boost in demand that is occurring ahead of the rise in the consumption tax rate. however, given the strengthening of the virtuous circle, it is more likely than before that the recovery trend of the economy will be sustained. in addition, stock prices appear to have stabilized. therefore, in considering whether the economy can overcome the effects of fiscal tightening to sustain the trend of recovery, it is important to examine macroand micro - economic data, including the economic indicators that will be released in the future, signals from financial markets, and firms ’ business plans for the next fiscal year. i will now turn to the environment surrounding domestic prices. the depreciation of the yen has continued since the beginning of

large volumes of banknotes that are returned to the bank of japan every day from financial institutions. careful attention is also paid to the cleanness of each of the banknotes in circulation. the bank also exerts itself to the utmost to improve anti - counterfeiting measures, and has recently been engaged in joint research with overseas central banks on the prevention of banknote counterfeiting using color copiers. through such efforts, the bank aims to preclude the circulation of counterfeits. the bank also provides current accounts at the bank as another means of settlement. the bank offers accounts to private financial institutions, and the funds in these accounts, or deposit money, are equivalent to banknotes in their function as a means of settlement with finality. in order to improve the safety and efficiency of settlements using these boj accounts, the bank has made various efforts, including the introduction of the boj - net the bank of japan financial network system, which is an on - line system for funds transfers among the current accounts held by private financial institutions with the bank of japan. the bank intends to further improve the system in cooperation with those concerned by making realtime gross settlement the only settlement mode, which i shall discuss in detail later. the second function of the bank of japan with regard to the payment and settlement systems is to attend to the safety and efficiency of payments and settlements in japan, and to provide adequate liquidity when necessary. as i mentioned earlier, the important tasks of the bank include ensuring a smooth supply of banknotes throughout the country, and monitoring the stability of daily settlements across the boj accounts. in addition, the bank, in coordination with the operators of the private clearing systems such as the bill and check clearing, plays an important role in preventing any troubles in the systems or participants from jeopardizing the entire payment and settlement systems in japan. in any settlement system, there is the risk that a failure of one bank to meet its obligations will trigger a chain reaction of defaults, eventually paralyzing the entire system. in addition, both payment and settlement systems and individual banks constituting the systems are supported by the market ’ s confidence. as this confidence is in large part a psychological factor, a failure of a single bank could lead to a run on deposits at other banks. such risk is referred to as systemic risk. materialization of systemic risk will disrupt not only settlements between banks but also those between firms and households, having a profound impact on the economy