cause of this inability to meet potential demand – namely, the shortage of supply in growing business areas – is not measured in the output gap. put differently, in a rapidly changing economy, the output gap only captures the shortage of demand in terms of the current supply of goods and services, and does not capture the shortage of supply against new potential demand. in this sense, the notion of the output gap is asymmetric. put differently, what should essentially be recognized as the mismatch between supply and demand is instead perceived in the form of the shortage of demand. in order to improve the output gap in a sustainable manner, it is necessary to restructure the supply side according to economic changes, which enables potential demand to materialize. the newly created demand is based on what people willingly want ; hence, this is likely to create a virtuous circle of increasing expenditure, revenue, and income. as such, not only short - term macroeconomic policies but also initiatives to change the economic structure in which new businesses are more likely to emerge, such as enhancing the metabolism of the economy, play an important role in achieving improvement in the output gap. importance of invigorating the growth potential last, but not least, is the importance of invigorating the growth potential. this is the issue that provides an overall summary of what i have been talking about. the bank has been emphasizing repeatedly that japan ’ s economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability, and that this challenge can only be met if efforts by a wide range of economic bis central bankers ’ speeches agents to strengthen growth potential and support from the financial side proceed hand in hand. growth potential is ultimately the ability to differentiate from the existing goods and services and to cultivate new demand swiftly at home and abroad. if one succeeds in providing attractive goods and services that consumers can acknowledge as having worth, one can maintain the ability to control prices while preserving value - added. such value - added will initially generate an increase in corporate profits. if this is eventually distributed in a balanced manner to the household sector in the form of a rise in employment and higher wages, it will result in a broad - based increase in purchasing power. furthermore, this will lay out the foundation for the economy where cultivating new demand is likely to be successful. once the virtuous circle in which rising wages leads to an increase in expenditure and income starts to work through, the general public will

iv. financial system although the japanese financial system still faces many difficult problems, we are beginning to see the result of the efforts to date toward overcoming the nonperforming - loan ( npl ) problem and restoring the soundness of the financial system. let me mention four points in this regard. first, adequate provisioning and write - offs based on appropriate assessment of the economic value of npls are extremely important in maintaining the financial soundness of banks. in the financial results of all banks for fiscal 2002, substantial losses were posted for the second consecutive year. while this underlines the severe predicament of the financial system, it also illustrates the result of the efforts, by major banks in particular, to reduce their npls and strengthen their provisioning. second, it has become commonly recognized that corporate revitalization is an integral part of dealing with the npl problem. for example, the industrial revitalization corporation of japan ( ircj ), which began operations in may this year, has decided to work on six companies to date through the purchase of their debt from non - main banks. since the debt purchase by the ircj will be terminated at the end of march 2005, we hope that the ircj will be used actively for the remaining rather short operating period. it is vital for the management of both companies and banks to become aware of the urgency of corporate revitalization through the effective dialogue, and act with speed and decisiveness. third, it is desirable to reduce the risk associated with stock price fluctuations in banks'shareholdings for financial system stability. at the same time, unwinding cross - shareholdings is also desirable from the viewpoint of strengthening corporate governance. considerable progress has been made in reducing banks'exposure to stock price fluctuation risk. so far, the bank has purchased a total of some 1. 8 trillion yen worth of shares from banks. it recently decided to extend the purchase period for an additional year since some banks'shareholdings still exceed their core capital, and there is demand for this stock purchase operation. lastly, banks should strengthen their profitability. the ultimate purpose of restoring the soundness of the financial system is to enable banks to fully perform their financial intermediation function, thereby providing support for sustainable growth. to this end, banks need adequate profitability and sufficient capital bases. the management of banks must select and concentrate various resources in key strategic areas. in this process, it should be kept in