in which investors focusing on the interest rate differential between japan and abroad favored the yen carry trade. recently, however, there has been some unwinding of this trade. although these adjustments seem so far to have been limited basically to technical corrections in position - taking by those who felt overexposed, careful attention should be paid to whether the higher volatility in asset prices may have some implications for investors'risk - taking behavior in the future. ii. developments in japan's economy against the background of the strong growth in overseas economies, japan's economy has been experiencing a sustained period of moderate expansion. the economy maintained a rate of growth of about 2 percent from fiscal 2003 to fiscal 2006, a pace which it seems likely to sustain during fiscal 2007. a. slow permeation of strength in the corporate sector through to the household sector the current economic expansion is now six years old, but partly because of the gradual pace of growth, it is not making itself felt by households to the same extent as in past economic expansions. in the corporate sector, however, corporate profits have been favorable and business fixed investment is growing at a rapid pace, especially among manufacturers. corporate profits and business fixed investment are expected to keep increasing steadily, and this suggests that the engine of the economic expansion remains intact. despite the strength in the corporate sector, the pace at which this positive influence has filtered through into the household sector has been slow. faced with intensifying global competition and greater exposure to the discipline of the capital market, corporate management has been increasing the emphasis it places on raising profitability. reflecting these factors, growth of wages has been modest. especially since summer 2006, the effects of the baby - boomers'retirement and of cuts in personnel expenses for local civil workers are exerting additional downward pressure on the growth of wages per person. the modest increase in wages seems also due to management's greater efforts to reduce fixed costs to cope with sharp rises in prices of crude oil and other materials from 2004 through fall 2006, and employees'preference for employment stability over a wage increase after their past experiences of a severe employment situation. with regard to the employment situation, the number of employees has continued to increase steadily at an annualized rate of slightly over 1 percent, and labor market conditions are gradually becoming tighter. the unemployment rate for women was 3. 8 percent in january 2007, lower than that for men ( 4. 1 percent ), and women's wages have been increasing steadily

investment will record an increase for the fourth consecutive year ( since 2003 ). the current strong business fixed investment continues to be led by the manufacturing sector, although nonmanufacturers as well as small firms have started to step up their fixed investment. the acceleration in business fixed investment reflects the fact that firms are seeking to reinforce their capacity to supply goods and services by increasing capital equipment as they look to capture profit opportunities in overseas markets. in the 1990s, when japan was undergoing severe adjustments after the bursting of the bubble economy, there was a view that the increasing supply capacity of emerging economies was a threat that would deprive japanese workers of job opportunities. this view, however, is one - sided, and the rapid development of emerging economies has in fact been playing a significant role in establishing the foundation of japan's economic development toward a new era. it is very beneficial to the development of japan's economy that japan and emerging economies - especially strongly growing asian emerging economies - have established a new system of international division of the production process and interdependent relations in a constructive manner. for example, goods requiring a relatively high degree of processing, such as it - related machinery, have been gradually increasing their share in japan's imports from other asian economies, replacing labor - intensive goods, such as clothing and other light manufactured goods. this is mainly because japan's direct investment in other asian economies has been increasing as japanese firms optimize their production processes. as a result of the creation of production bases and employment opportunities with the increased direct investment, asian economies have been increasing their presence in the global economy, not only as global suppliers but also as markets with high growth potential. asian economies are becoming one of the driving forces of the ongoing expansion of the global economy, and this in turn is spurring japan's exports. one of the notable characteristics of the current recovery phase of japan's economy is that many japanese firms continue to scrutinize investment profitability. they are not only increasing investment to boost production capacity but also accelerating the replacement of obsolete capital equipment to improve efficiency. such corporate behavior can be interpreted as reflecting the fact that the management of firms, amid intensifying global competition and greater exposure to the discipline of the capital market, is becoming more attentive to increasing corporate value. the positive influence of the strength in the corporate sector has fed steadily through to the household sector, albeit at a moderate pace. labor market conditions have been tightening as the