that we central banks are highly attentive to. in the long term, even under a low interest rate environment, securing banks'profitability will depend on whether banks can provide new financial services and expand sources of profits, how technological progress affects the financial industry, and how consolidation of the industry proceeds, including cooperation with non - banking financial or non - financial sectors. in the short term, as downward pressure on banks'profits continues, we need to be mindful of the possible consequences of banks'engagement in excessive risk taking. generally speaking, risk taking by banks that have abundant capital bases provides financial support to firms'production activities, thereby contributing to economic expansion. nevertheless, if appropriate risk management measures are not taken and the continued decline in profits leads to insufficient capital bases, credit costs could rise sharply, and the stability of the financial system could be threatened in the event of a large exogenous shock that leads to an economic downturn. the bank of japan publishes the financial system report semiannually, in which it assesses the stability of financial system and makes various analyses from a macroprudential perspective. in the latest report published in october, the bank assessed that japan's financial system has been maintaining stability on the whole, as financial institutions generally have strong resilience, in terms of both capital and liquidity, during potential tail events such as the lehman shock. however, regional banks'core profitability has continued to decrease amid both the prolonged low interest rate environment and the persistent decline in the population and the number of firms, and their capital adequacy ratios have also gradually decreased. we should be mindful of the possible consequences, including any downward pressure on the real economy from the financial system, since financial institutions tend to become more cautious in their risk taking if their capital adequacy ratios fall substantially or they continue to register net losses in the event of stress. iii. impact on the non - banking sector next, let me turn to the non - banking financial sector. although the activities of the non - banking sector and the associated risks vary across countries and industries, such sector tends to play greater role in financial intermediation in many advanced economies. this comes against the backdrop of a tightening of regulations on the banking sector, a prolonged low interest rate environment, and diversified demand for financial services. for example, in some countries, demand for health and long - term care insurance is expected to increase significantly as the population ages. as the activity of

extra revenues and lower debt - servicing costs, in turn, led to an even better fiscal position. at the end of 2002, canada's total government surplus represented just over 1 per cent of gdp - not including the surplus in the pension plans. last month, finance minister john manley announced a fifth consecutive surplus in the federal budget and projected that the budget will continue to be in a balanced position or better for the next three years. the budget maintained the fiscal planning framework of previous years. that framework includes a $ 3 billion contingency reserve, which is used to reduce debt if it is not needed. it also includes $ 1 billion in the upcoming budget year for additional economic prudence, and $ 2 billion in the following year, as further assurance that canada won't fall back into deficit. canada is expected to have one of the lowest debt burdens in the g - 7 this year. not only have we reduced the debt - to - gdp ratio, but we have paid down almost $ 50 billion of federal debt. this has led to the restoration of canada's triple - a credit rating and has freed up about $ 3 billion of resources every year for the federal government. the main point is that while the initial work of fiscal consolidation is certainly difficult, it is necessary in order to enjoy the dividends later on. the fourth principle : low and stable inflation the fourth principle relates to monetary policy - the responsibility of the bank of canada. this principle recognizes that, over the medium term, monetary policy should work to keep inflation low, stable, and predictable. let me explain how we do this. since 1991, following a joint agreement with the federal government, the bank of canada has operated with a system of inflation - control targets. i don't plan to spend a lot of time explaining our system to this audience, because the united kingdom adopted a system very similar to ours a couple of years after we did. we aim to keep consumer price inflation at the 2 per cent midpoint of a 1 to 3 per cent range. if the trend of inflation moves away from the target in either direction, the bank will take action so that inflation returns to the target within 18 to 24 months. canada's inflation - targeting framework works in a symmetrical way, minimizing the chances of both a sustained upward drift in inflation and the threat of deflation. indeed, through most of the past decade, we have managed to keep inflation around the 2 per cent target midpoint