, we can say that the financial system as a whole is restoring its soundness and evolving a forward - looking, more dynamic style of management. to sustain these actions, financial institutions need to upgrade the integrated risk management system, in which various types of complex risks are controlled in a consolidated manner, and construct a framework to deploy capital more efficiently. a draft of the new basel capital accord released at the end of june has adopted a risk - sensitive framework to encourage the upgrading of risk management. in line with this global trend, the bank of japan is working to improve the functioning of financial institutions through on - site examinations and off - site monitoring. price developments while the corporate goods price index, particularly raw materials and intermediate goods, has been rising partly because of higher crude oil prices, the consumer price index ( cpi ) has been on a slight downtrend. a small decline in the cpi is largely due to the unit labor cost reductions in the corporate sector reflecting higher productivity and the restraint on labor costs. thus, the outlook for prices depends on future developments in productivity and wages. three factors underpin the rise in productivity. first, resources are being used more efficiently as a result of the adjustment of excessive capital stock and labor as well as deregulation in a variety of areas, including the labor market. second, progress continues in it and technological innovation. third, as is generally observed during an initial phase of economic recovery, higher utilization of labor and equipment is increasing productivity. while the third factor is cyclical, the first two factors could spur structural changes, raising the potential production capacity of japan ’ s economy. many countries have experienced a situation in which prices do not necessarily increase in tandem with an upturn in economic activity. economists and central bankers have been exploring a plausible explanation of this discrepancy. from the viewpoint of conducting monetary policy, we are carefully monitoring price developments while keeping in mind the following questions. if the recovery continues, will the growth in productivity slow? or, will such growth continue thanks to deregulation and the progress in it? or, will wages rise along with the growth in productivity? in terms of developments in prices over the shorter term, we should pay attention to the effects of higher crude oil prices on the general price level. crude oil prices have been around record - high levels against the background of a rise in global demand and heightened concern about geopolitical risks. we have seen the impact of higher crude oil prices on the domestic corporate goods price

toshihiko fukui : economic situation in japan and abroad summary of a speech by mr toshihiko fukui, governor of the bank of japan, at a meeting in osaka, 2 september 2004. * * * today i will discuss the economic situation at home and abroad, and the conduct of monetary policy. amid the continued expansion of the world economy, japan ’ s economy has been on a recovery path since the summer of last year. the recovery has been initially driven in large part by an increase in exports. in addition to the favorable external conditions, the foundation has been laid domestically for a self - sustaining recovery. we should also note that the current recovery has been achieved while prices have been on a declining trend. world economy and japan ’ s economy let me start with the world economy. the economies of numerous countries including japan have become closely interrelated as globalization has progressed. this is evidenced by the growing prevalence of the international division of production processes. for example, it - related investment has been undertaken all over the world, led by the united states. high - value - added components of itrelated goods are being produced in japan, while processing and assembly have been concentrated in other east asian countries. overseas economies, particularly the united states and china, continue to expand. the u. s. economy has been maintaining expansionary momentum with a steady increase in capital spending and a large jump in corporate profits, despite several weak economic indicators. the federal reserve board raised its target federal funds rate by 25 basis points in june and august, respectively. the east asian economies have been growing steadily, with china likely to continue its high growth. in japan, real gdp growth slowed to an annual rate of 1. 7 percent in the second quarter, following high growth in the two preceding quarters. nevertheless, it is our overall judgment that japan ’ s economy has been in a recovery process, leading to a return to a sustainable growth path in light of the background i have just described. a rise in exports has raised industrial production and corporate profits, which in turn generates an expansion in business fixed investment. in the labor market, the number of employees has been increasing. japan ’ s economy is thus expected to continue recovering, gathering stronger momentum. the positive effects of the increases in production and corporate profits on household income are expected to become visible, laying stronger foundations for a gradual recovery in private consumption. corporate sector it is accurate to say that japan ’ s current recovery is due to the better