risk of a deflationary spiral. in a low - inflation environment, nominal interest rates are typically low and are thus more probable to be constrained by the zero bound. because nominal interest rates cannot be lowered below zero, real interest rates are likely to become higher than the optimal level for the economy when prices fall. that increases the risk of the economy falling into a vicious cycle of declining prices and deteriorating economic activity. in japan, such a risk has been a matter of strong concern since the end of the 1990s. at present, this risk has become low, since the japanese financial system has restored its stability and firms have now resolved excesses in production capacity, employment, and debt. on the other hand, when economic activity is picking up as a result of an unprecedented monetary easing against severe economic conditions with low inflation, a central bank is required to carry out monetary policy adroitly to adjust monetary accommodation by assessing upside risks. for example, since the inflation rate tends to exhibit strong inertia, even if the supply - demand conditions in the economy become tighter, the observed rate of inflation and inflation expectations are likely to remain anchored at a low level. in such a situation, maintaining an excessively accommodative monetary condition entails a risk of causing temporary overheating of the economy and a subsequent downturn, thereby resulting in larger swings in economic activity. the sensitivity of the rate of inflation to changes in the output gap has tended to become weaker not only in japan but also abroad in recent years, reflecting structural changes such as deregulation, advances in information and telecommunication technology, and the deepening of economic globalization. since prices are becoming less sensitive in the short term, central banks are required to take appropriate measures by examining medium - to long - term risks to the economy. this suggests the need to take a forward - looking approach in the conduct of monetary policy. vii. a stable economic and price environment a stable economic and price environment, once achieved by the appropriate conduct of monetary policy with a view to medium - to long - term risks, allows firms and households to make decisions more smoothly. as a result, the allocation of resources in the economy as a whole will be more efficient, and not only will short - term economic fluctuations be reduced but also the medium - to long - term growth path will be pushed up. looking back at real gdp trends in japan and the united states over the past 25 years or so, we see that economies often achieve higher growth when

the manufacturing and nonmanufacturing sectors showed robust growth during the january - march quarter of 2006, as shown in the quarterly financial statements statistics of corporations by industry. as for future developments in economic activity, the corporate sector is likely to remain strong. major firms are expected to enjoy continued profit growth in fiscal 2006, which in the manufacturing sector is likely to be particularly strong in the processing industries, such as electrical machinery, general machinery, and automobiles, and in the nonmanufacturing sector in industries related to private consumption, such as retailing and services. various surveys indicate that firms'business fixed investment plans are also relatively strong. we expect that the strength in the corporate sector will continue, but the growth in business fixed investment will gradually slow. i will elaborate on this later. the positive influence of the strength in the corporate sector on the household sector is becoming more evident. as for employment and wages, labor market conditions have been improving on the whole. the unemployment rate has recently declined to around 4 percent from the 5 - 6 percent level in 2003, and the ratio of job offers to applicants has been exceeding 1. 00 for the first time since 1992. in addition to the increase in the number of part - time workers, the number of full - time workers has been increasing recently due to the shortage of labor felt among firms. as for wages, regular payments have started to rise in addition to the increases in overtime and bonus payments. although the pace of increase in wages is moderate partly due to firms'efforts to restrain labor costs, the increase is likely to continue. with the increase not only in temporary income but also in the more permanent part of income, private consumption is likely to remain strong. turning to prices, domestic corporate goods prices are rising, due to the surge in the prices of international commodities such as crude oil and nonferrous metals. recently released statistics show that the year - on - year rate of increase in domestic corporate goods prices was 3. 3 percent in may, faster than the 2. 5 percent increase in april. it is likely to remain high for the time being. the year - on - year rate of increase in the cpi was 0. 5 percent in april and continued to be on an uptrend. looking at individual prices for items in the cpi basket, the number of items showing price rises is gradually increasing, and the trend toward price increases is becoming more robust. for example, prices for services, such as those for package tours,