inflation has been declining globally. this is due mainly to the successful conduct of monetary policy worldwide and the increasing penetration of emerging countries into market economies. firms have not regained pricing power in the market. therefore, there is a strong possibility that inflation will stay at a relatively low level, while the growth rate will increase. third, japan's economy is still suffering from structural problems such as excess debt, excess labor, and financial system fragility. because of these structural problems, cyclical recoveries at large manufacturers are not able to generate strong positive spillover effects for non - manufacturers, small to medium - sized companies, or households. to return to a sustainable growth path and overcome deflation, japan must thus solve its structural problems and enhance the growth prospects of both firms and households. in japan, as in europe, structural reform to ensure the more efficient use of capital and labor is urgently called for. despite the recent progress, we should not be complacent about the need for structural reform. the process of solving structural problems is still half - finished. for example, the debt to sales ratio for nonmanufacturing industries is still higher than it was before the bubble period. in addition, the sense that they are still holding excess labor remains among firms, whether in manufacturing or nonmanufacturing, and whether large or small. banks have also made progress in their restructuring. large banks have reduced outstanding amounts of nonperforming loans and have increased provisioning. they have also reduced the risk pertaining to stock prices by selling their shareholdings to the market as well as to the bank of japan under our stock purchasing scheme. almost all banks have reduced their shareholdings to levels below their tier 1 capital. banks'financial results turned out to be better than expected for the first half of the current business year ended in september. because losses resulting from the disposal of nonperforming loans were smaller than operating profits, most banks posted profits. the average capital adequacy ratio for large banks was around 11 percent. given the scheduled removal of blanket deposit insurance in the spring of 2005, time is running short for us to engage in the further restructuring of the financial system to restore the soundness of the banking system. moreover, the decline in bank lending illustrates not only that demand for loans is weak but also that the risk - taking ability of banks has not recovered sufficiently. under such circumstances, the bank of japan has adopted quantitative easing as its fundamental policy framework

of constitutional identity would dictate that competences cannot be transferred to another entity without violating the original power of the people. such an interpretation is based on the antiquated belief that the nation state is the sole locus of legitimacy. this belief is rooted in the so - called westphalian model of international relations. it assumes that only the nation state has sovereignty over its territory and domestic affairs. this model bis central bankers ’ speeches refers to the peace of westphalia – a series of peace treaties signed between may and october 1648 in osnabruck and munster ( in germany ). these treaties ended the thirty years ’ war ( 1618 – 48 ) in the holy roman empire, and the eighty years ’ war ( 1568 – 1648 ), in which the kingdom of spain, the dutch republic, the kingdom of france, the swedish empire and sovereigns of the free imperial cities were also involved. the westphalian model was justified as a means to end the long - lasting wars back in 1648. however, some 300 years later, after two devastating wars, the dangers of a warped understanding of patriotism, i. e. nationalism, became apparent. overcoming the limits of the nation state was a precondition for a peaceful europe. sharing sovereignty rather than sacrificing it has been the preferred method of achieving this. indeed, the european approach since then has shown that democratic states can share sovereignty in a number of policy areas without losing statehood. the eu has developed an identity as a union not only of member states, but also of citizens establishing a model of transnational democracy with an elected, european parliament and an independent court of justice ( the ecj ). eu citizens have ample reason to say, as the incoming president of the ecj, koen lenaerts, once put it : civis europaeus sum. 1 the treaty signed by member states also confers rights to citizenship which can be claimed in the european courts. in particular, the euro area has shown that like - minded people and their governments can introduce, manage and safeguard a single currency without having to merge into one overarching federal state. the “ currency beyond the state ” 2 has revealed as false the widespread belief that a monetary union without a state is not viable. there is a broad consensus that the design and implementation of monetary policy should be taken out of the political arena to protect citizens ’ purchasing power from short - term temptations and pressures of the election cycle. this is why monetary policy was transferred to an