why long - term interest rates are so extraordinarily low in advanced economies around the world. the yield on our own benchmark 10 - year u. s. treasury security has increased lately, but at 2. 3 percent it is still far below what was normal before the financial crisis. in fact, this next chart shows that, as growth and inflation have fallen, longer term interest rates have fallen as well over the past 35 years ( figure 13 ). so why are long - term interest rates so low? many of you will no doubt be thinking, “ they are low because you people at the fed set them low! ” while there is an element of truth there, that is not the whole story. the fomc has considerable control over short - term interest rates. we have much less influence over long - term rates, which are set in the marketplace. long - term interest rates represent the price that balances the supply of saving by lenders and demand for funds by borrowers, such as businesses needing to fund their capital expenditures. lenders expect to receive a real return and to be compensated for inflation and for the risk of nonpayment. meanwhile, borrowers adjust their demand for funds based on their changing assessment of the risks and expected returns of their investment projects. when desired saving rises or investment - 9demand falls, then long - term interest rates will decline. today ’ s very low level of longterm rates suggests that both of these factors are at play. both expectations of slower growth and the aging of our population are having significant effects on desired saving and investment and are thus important causes of lower interest rates. if the economy is expanding more slowly, then the level of investment needed to meet demand will be lower. the lower path of growth reduces future income prospects of households, and they will tend to raise their saving. the pending retirement of baby boomers means higher saving, because people tend to save the most in the years just before their retirement. in addition, the lower rate of return on capital owing to lower productivity growth will lead to less investment and lower interest rates. as with productivity, the factors behind the fall in u. s. interest rates include an important global component, as rates are low around the world. indeed, although our rates are near historical lows, u. s. treasury rates are among the highest among the major advanced economy sovereigns ( figure 14 ). is this the new normal? what can we do

' s economy has continued to expand strongly and economic recovery in the euro area has become more evident. oil - producing countries, especially those of the middle east, and the asean economies continue to show steady growth. given these developments, our main scenario is that the global economy as a whole will likely keep expanding through 2007, with possible slowing growth in the u. s. economy being offset by high growth in other regions. ii. developments in the corporate sector japanese firms are succeeding in utilizing the strong growth of overseas economies to realize good business performance. in 2006, the strength in the corporate sector, as seen in steady growth of profits and increases in business fixed investment, became more evident. the recently released december tankan ( short - term economic survey of enterprises in japan ) shows that firms are projecting growth in their current profits for the fifth consecutive year since fiscal 2002 and the ratio of current profits to sales is exceeding the peak reached in the bubble era. in this situation, business sentiment continues to be favorable and firms are planning to increase fixed investment for the fourth consecutive year. moreover, their projections of both current profits and fixed investment for fiscal 2006 have been revised upward from the september tankan. nevertheless, we believe the current strength in business fixed investment does not indicate " overheating, " given that firms are increasing investment to reinforce their production capacity not only to meet domestic demand but also to capture opportunities for higher profits in growing overseas markets. firms continue to scrutinize the investment profitability of each project amid greater exposure to the discipline of the capital market. continuation of this disciplined investment stance under accommodative financial conditions is important if japan's economy is to follow the path of sustainable growth. iii. developments in the household sector the positive influence of the strength in the corporate sector is feeding through to the household sector at a moderate pace. throughout 2006, the number of employees has increased steadily. a closer look reveals that not only part - time employees but also full - time employees have been increasing steadily. many firms seem to have hired a greater number of new graduates this year. the december tankan shows that both large and small firms are planning to continue hiring more new graduates in the coming year. labor market conditions are tightening as suggested by the fact that the annual average of the ratio of job offers to applicants is almost certain to exceed 1. 00 for the first time in 14 years and the unemployment rate decreased further from last year's level. as for wages, with overtime