trend. housing investment is likely to continue to trend moderately upward, supported by the improvement in household income and the view that interest rates will only rise from current levels, as land prices are starting to rise particularly in major metropolitan areas. increases in household spending will feed back to the corporate sector via increases in sales and profits, and thus, a virtuous circle between the household and corporate sectors is likely to keep operating. the second element is that there is likely to be a cyclical slowdown in the economic growth rate as the recovery has already lasted for over four years and is likely to mature. given the high level of corporate profits and the expansion in domestic and external demand, the momentum driving increases in business fixed investment is likely to be maintained. however, considering that there is a stable relationship in the long term between the capital stock and aggregate demand, the pace of increase in business fixed investment will probably slow eventually. business fixed investment has steadily increased for the third consecutive year since fiscal 2003, and this has resulted in high growth in the capital stock relative to the projected increase in aggregate demand. therefore, unless firms can make stronger forecasts for the economic growth rate and the rate of return on investment, it is becoming unlikely that they will keep up the current pace of increase in business fixed investment. in this situation, the growth rate of japan's economy is likely to slow toward the potential growth rate, which the bank estimates to be in the 1. 5 - 2 percent range. the forecast is around 2. 5 percent for fiscal 2006 and around 2 percent for fiscal 2007. the third element is that, as the economic recovery matures, a slowdown in the growth in productivity and upward pressure on wages are expected to exert upward pressure on prices. at an early stage of economic recovery, firms usually retain surplus labor and capacity and are therefore able to increase productivity by raising their rate of resource utilization. with the maturing of the economic recovery, however, firms have less scope to increase productivity in this way. as i have already explained, the output gap has closed, and as the economy is likely to continue expanding at a pace above its potential through fiscal 2007, the output gap is likely to become positive and then to widen moderately. moreover, in a situation of improving labor market conditions and with labor shortages being observed in a relatively wide range of industries, wages are likely to continue rising moderately. the rise in wages and the slowdown in the growth in productivity will together put upward pressure

last disbursement of new loans is to take place. areas eligible for loans or investment range, for example, from environment and energy business, development of social infrastructure, medical and nursing care business, and regional revitalization business to business deployment in asian countries, and include efforts to support local industries. the measure is gradually producing positive effects as a catalyst – its intended purpose – since, although the maximum duration of loans provided under the measure is four years, more than 70 percent of actual individual loans or investments exceed this period. moreover, following the introduction of the measure, financial institutions have been establishing new dedicated funds and lending schemes, and some of them in certain cases have set a higher ceiling on the total amount of lending or investment than the 150 billion yen ceiling for the total amount of loans that they could obtain from the bank. bis central bankers ’ speeches iii. toward a sustainable growth path with price stability i will talk next about the structural problems facing the japanese economy. as i have explained, the economy has been showing signs of a moderate recovery but is still experiencing deflation because the growth momentum remains weak. the “ lost decade ” following the bursting of the bubble economy has unfortunately turned into “ two lost decades. ” it is necessary to consider what can be done to avoid a third lost decade. a. japan ’ s process of economic development let us look back on japan ’ s process of economic development in the past. right after the end of world war ii, japan looked to the affluent advanced economies of europe and the united states. at this point, japan enjoyed a latecomer advantage and, with hard work, was in a position to aim at catching up and even overtaking these economies relatively quickly. moreover, benefiting from a rise in the working - age population and the so - called population bonus – the increase in the share of the working - age population in the total population – it was easy to accelerate growth. furthermore, with industrialization having already gotten underway before the war, japan at the time was among the few countries that could produce high - quality manufactured goods at a low price and had few competitors in the international market. this favorable environment and japan ’ s economic model – based on detailed government industrial policy, strong support for firms from the main bank system, and strong employee loyalty based on the seniority system and lifetime employment – helped form a positive cycle facilitating a high rate of growth. as a result, in 1968, japan became the world ’ s second largest