. the number of new job offers turned to a decline particularly in the manufacturing and construction industries. the unemployment rate reached and remained around a historically high level in line with the increase in involuntary unemployment. in the meantime, the growth in wages and salaries, particularly overtime compensation and bonuses, decelerated, reflecting reduced production and worsening corporate profits. consequently, the positive cycle of production, income, and expenditures that had supported the economic recovery during fiscal 1996 weakened from the beginning of fiscal 1997, exerting downward pressure on the overall japanese economy. with respect to final demand components, the primary factor that weakened this positive cycle was the sluggishness of household expenditures. fiscal year starting in april and ending in march. the consumption tax rate was raised on april 1, 1997. household expenditures began to show a clear downward trend in early autumn 1997 despite a slight rebound in summer 1997 after fluctuations resulted from the rise in the consumption tax rate in april 1997. the decline in real disposable income due to the rise in the consumption tax rate and the discontinuation of the special income tax reduction can be cited as a factor behind the sluggish household expenditures. in the past, when constraints on household income intensified, a mechanism often functioned whereby growth in expenditures was maintained by the increase in the households ’ propensity to consume ( the ratio of expenditures to household income ). this time, however, household expenditures were restrained reflecting cautious household sentiment, and this added to the sluggishness in final demand, leading to excessive inventory and its adjustment in the corporate sector. this development worsened labor market and income conditions in the household sector. it is difficult to quantify and verify the factors that have weakened household confidence. however, it is likely that the following factors contributed : ( 1 ) mounting anxiety regarding the future employment and income conditions as a result of a series of large financial institution failures ; and ( 2 ) growing uncertainty regarding the future burden on households amid the recent active debate on the budget deficit and the reform of national pension systems. the stagnation of household expenditures also affected corporate sentiment and business fixed investment through the sluggish domestic final demand and deteriorating corporate profits due to inventory adjustment. prior to the collapse of the “ bubble ” economy, brief periods of stagnant domestic demand were overcome through ( 1 ) active export drives by firms especially in manufacturing industry, which compensated for the weak domestic demand ; and ( 2 ) an improvement in cash flow as a result of monetary easing

klaus liebscher : financial deregulation in the eu – chances and challenges for financial stability speech by dr klaus liebscher, governor of the austrian national bank, to the 5th annual csi conference - “ new agenda of the wto : challenge and contribution of the european union ”, innsbruck, 18 november 2005. * * * ladies and gentlemen! it was with great pleasure that i accepted your invitation to again take part in the annual conference of the centre for the study of international institutions ( csi ). i feel honoured that the speech by the governor of the oesterreichische nationalbank has obviously become a traditional part of this conference. the liberalisation of trade in goods and services was at the centre of your discussions in the previous days. world trade is, after all, the most visible example of global economic integration. as a result of numerous trade agreements and tariff reductions, global exports have increased from one - tenth of world gdp in the early 1970s to one - quarter of world gdp today. a less visible, but even more dynamic recent phenomenon is global financial integration. some decades ago, the realisation of investment projects depended largely on the availability of capital in the local economy. meanwhile, both fund raising and investment occurs at an international level, which can be attributed mainly to the deregulation of capital movements. in the 1970s, worldwide crossborder holdings of assets amounted to only one - tenth of world gdp. now, countries have accumulated foreign assets equivalent to the annual gdp of the entire world. over the past 30 years, annual foreign direct investment ( fdi ) worldwide grew from around eur 8. 5 billion to almost eur 1 thousand billion – half of which is provided by the european corporate sector. at the same time, half of world fdi is invested in europe. for europe, these international linkages are of particular importance, and they illustrate that regional economic integration does not hinder global integration, but foster it. before taking a closer look at the european process of deregulation and integration, let me reflect a little on the objectives of financial integration : the integration of national financial markets, which used to be subject to entry barriers as well as different national regulations, practices and currencies, aims at fueling competition, reducing transaction costs and creating markets which are deeper, more liquid and more efficient. cross - border integration requires the removal of entry barriers, the convergence of legal, supervisory and fiscal conditions underlying financial markets, the harmonisation of financial standards