participants regard the improved sales of luxury goods as a sign of a self - sustaining recovery, i believe that the situation in private consumption still requires careful monitoring. meanwhile, the decline in housing investment has almost leveled out, as evidenced by, for example, improved sales of newly built condominiums in the tokyo metropolitan area. reflecting the situation in domestic and overseas demand i just described, production has been rising. the decline in inventories has almost leveled out, and the shipment - inventory balance, on the whole, has improved to a level where there are no inventory adjustment pressures. looking at developments in prices in japan, the pace of the year - on - year decline in the cpi ( excluding fresh food ) – which posted the largest fall on record, minus 2. 4 percent, in august 2009 – has started to decelerate with the effects of the drop in the prices of petroleum products following their surge in 2008 waning. the moderating trend in the pace of decline in the cpi has continued against the background of the gradual improvement in the aggregate demand and supply balance. recently, the rate of change in the cpi has been hovering around minus 1 percent once the effects of subsidies for high school tuition fees are taken out. c. outlook for the economy and prices japan ’ s economy is starting to recover moderately, induced by the improvement in overseas economic conditions. the bank ’ s projections for economic activity in japan are as follows : while the effects of various policy measures are likely to wane, emerging and commodityexporting economies are likely to maintain high growth, and the momentum for a selfsustaining recovery in japan ’ s domestic private demand is expected to gradually gather pace ; japan ’ s economy therefore is likely to be on a recovery trend. 1 for these projections to materialize, it is important that improvements in the corporate sector feed through to the household sector supported by a virtuous cycle of increased production, income, and spending. however, considering japan ’ s experience during the economic recovery phase since 2002, the pace with which improvements in the corporate sector feed through is likely to remain moderate. moreover, uncertainties regarding the economic outlook have been heightening due to instability in global financial markets reflecting concerns over fiscal problems in some european countries. i will discuss these risk factors later on, and would now like to address the outlook for each demand component. to begin with, japan ’ s real exports are likely to continue increasing, especially those to emerging and commodity - exporting economies. examining

on march 31, 2008 ), competition in the banking sector has increased in recent years with the emergence of private players as also with greater private shareholding of psbs. listing of psbs on stock exchanges and increased private shareholding have also added to competition. the new private banks which accounted for 2. 6 per cent of the commercial banking sector in march 1997 have developed rapidly and accounted for nearly 17 per cent of the commercial banking assets by end march 2008. financial health of the banking system the implementation of reforms has had an all - round salutary impact on the financial health of the banking system, as evidenced by the significant improvements in a number of prudential parameters. let me briefly highlight the improvements in a few salient financial indicators of the banking system ( statistical annex sa 3 & 4 ). the average capital adequacy ratio for the scheduled commercial banks, which was around 10. 4 per cent in 1997, had increased to 13. 08 per cent as on march 31, 2008. in regard to the asset quality also, the gross npas of the scheduled commercial banks, which were as high as 15. 7 per cent at end - march 1997, declined significantly to 2. 3 per cent as at end - march 2008. the net npas of these banks during the same period declined from 8. 1 per cent to 1. 08 per cent. the reform measures have also resulted in an improvement in the profitability of banks. the return on assets ( roa ) of scheduled commercial banks increased from 0. 4 per cent in the year 1991 - 92 to 0. 99 per cent in 2007 - 08. the indian banks are well placed in this regard too vis - a - vis the broad range of roa for the international banks. the banking sector reforms also emphasised the need to improve productivity of the banks through appropriate rationalisation measures so as to reduce the operating cost and improve the profitability. a variety of initiatives were taken by the banks, including adoption of modern technology, which has resulted in improved productivity. one area that needs to be watched continuously due to recent crisis is the off - balance sheet ( obs ) exposure of the banks. the spurt in obs exposure is mainly on account of derivatives whose share averaged around 80 per cent. the derivatives portfolio has also undergone change with single currency interest rate swaps ( irs ) comprising 57 per cent of total portfolio at end - march 2008 from less than 15 per cent at end - march 2002. with