and labor, and financial institutions with significant holdings of nonperforming loans. firms have since restructured their business lines and improved their financial standing, while the rate of banks'nonperforming loans has been reduced from a peak of above 8 percent to below 3 percent. i think it is fair to say that those impediments have now mostly been removed. ii. the price situation on the price front, there is not yet any evidence of inflationary pressure despite steady growth in the economy. the annual rate of change in consumer prices ( excluding fresh food ) stayed negative from fiscal 1998 through 2004. although small but positive in both fiscal 2005 and 2006, the recent figures are again negative, albeit marginally. the absence of inflationary pressure despite steady growth in the economy is one of the distinctive features of the current recovery and also a somewhat puzzling phenomenon. behind it, i believe, lie three changes affecting the formation of prices and wage - setting. the first is the advance of economic globalization. as globalization proceeds, competition with newly industrialized economies that enjoy lower labor costs has been compelling firms to raise productivity and to retain their restrictive stance on labor costs, together with greater exposure to the discipline of the capital market. the second is the influence of deregulation. even nonmanufacturing firms, which are relatively unexposed to the global market, find themselves in a fiercely competitive environment as deregulation and realignment of the industry continues. attitudes on the part of employees could be listed as the third change. employees, having experienced a protracted period when the employment situation was severe, still tend to prefer stable employment to wage increases. taking a rather longer perspective, however, the environment surrounding prices is likely to change gradually. first, with the economy continuing to grow steadily, overall supply and demand conditions are likely to tighten. second, labor market conditions are becoming tighter, as indicated by the decline in the unemployment rate. that will eventually lead to rising wages although this may be gradual. third, surveys of inflation expectations in the private sector suggest moderate rises in prices ahead. given those factors, the annual rate of change in our consumer prices is expected to be around 0 percent in the short run, but gradually to rise in the longer run. iii. the conduct of monetary policy i will now turn to the conduct of monetary policy. in a situation where prices are not rising while the economy is growing steadily, the bank has been adjusting the level of interest rates in a

the stage is now set for the actual task of unflinchingly cleaning up the nonperforming loans. i have repeatedly stressed the need for enhancing the capital base of japanese financial institutions, based on my thinking that the fundamental issue behind the deterioration in the credibility of individual institutions and the financial system as a whole is insufficient capital. in this regard, i truly appreciate the government ’ s decision to inject large amounts of public funds into major banks as a significant step toward restoring the credibility of financial institutions. this alone, however, is not enough to solve the problem. the bank strongly hopes and expects that financial institutions will continue to do their utmost to remove nonperforming loans from their balance sheets and also to restructure their businesses within the context of the restructuring of the entire financial sector. in the past several years, the united states and europe have witnessed large - scale mergers and business tie - ups of financial institutions, which illustrate the dynamic competition in the global financial market. there have been mergers and alliances across business and national boundaries in efforts to respond to european unification or to enter new business areas. meanwhile, similar moves in japan have been limited. however, the very recent trend toward diverse alliances and reorganizations, which was in part triggered by the injection of public funds, merits attention. it is clear that financial services are becoming greatly diversified driven by deregulation and innovation in information technology. under these circumstances, the management of financial institutions is required more than ever to establish effective strategies for selection of areas in which they can find comparative advantage and invest management resources, and for efficient supplementation of their weak business areas. in order to achieve corporate objectives, it may be more effective in certain instances not to limit alliance partners to japanese institutions. these considerations, in my view, should lead to still greater reorganization of the global financial community. b. lessons learned from experience one of the most important issues for japan today is how to establish an efficient and stable financial system that can fully perform financial intermediation as well as other functions required in the 21st century. japan is still in the process of resolving the nonperforming - loan problem. therefore, the lessons that will ultimately be learned from it is not yet known. nevertheless, i believe it is meaningful to go over the lessons we have learned to date from our experiences in order to successfully build a new financial system. in my view, we have learned that japan should have reviewed its principles to place emphasis on risk management and should