economy, and in the 1970s entered the ranks of the advanced economies, almost equal in terms of per capita gdp with the advanced economies of europe and the united states. however, by joining the world ’ s leading economies, it lost its latecomer advantage. moreover, around this time the population bonus also started to fade. thus, the conditions that had propelled high - speed growth changed drastically, and with the outbreak of the oil crises and the appreciation of the yen, high - speed growth came to an end. stable growth, however, was maintained thanks to the continued upward trend in the working - age population and the absence of competitors in the production of manufactured goods. in the 1980s, a large proportion of the population was able to enjoy a satisfactory standard of living. at the same time, however, the increased presence of the japanese economy in international markets intensified trade friction, leading to a rising yen after the plaza accord. foreign pressure rose for a wider opening of japanese markets and for financial deregulation. it is against this background that the bubble economy emerged. the 1990s started with the tumbling of the nikkei stock average, which had set a record high at the end of 1989. the bubble had burst, and japan had to contend with the disposal of nonperforming loans ( npls ), slow growth, and the onset of deflation, marking the first lost decade. during this period, critical changes took place that affected japan ’ s growth potential. the first is that the working - age population peaked in 1995 and then started to decline. the decade also saw the globalization of world markets following the end of the cold war, the liberalization of international capital flows, and advances in information and communications technology, paving the way for the rise of emerging economies. taken together, these developments clearly signaled the end of the favorable environment that had supported japan ’ s economic growth. consequently, growth in domestic demand remained weak in the 2000s, even after the disposal of npls had almost been completed. as a result, the lost decade turned into the two lost decades. b. restrengthening japan ’ s economic growth potential as illustrated by what i just described, the cause of the two lost decades appears to have been the vanishing of the favorable conditions that had propelled economic growth. in order to restrengthen japan ’ s economic growth potential, efforts need to be made to create a favorable environment. for example, to reduce the negative effects of the fall in the bis central bankers

bank of japan ’ s august report of recent economic and financial developments bank of japan communication, xx / 8 / 98. the bank ’ s view1 japan ’ s economic conditions continue to deteriorate. with respect to final demand, public investment seems to have bottomed out. net exports have resumed to increase mainly due to a decline in imports. however, business fixed investment has been decreasing significantly, and housing investment has weakened further. private consumption has not yet shown a resumption. against this background of weak final demand, substantial production cutbacks continue. as a result, inventories have decreased somewhat, but the level is still high. with the decline in expenditure and production, corporate profits continue to decrease, and employee income remains below the previous year ’ s level. in addition, the ratio of job offers to applications has dropped to a historically low level, and the unemployment rate has increased further. as a whole, employment and income conditions have worsened. although the above indicates a continued negative interactions of production, income, and expenditure, a further deterioration in the economy is expected to cease gradually from the effects of the comprehensive economic stimulus package including additional public works and the special income tax reduction. given the current considerably low level of economic activities, however, the positive influence of the package on private demand will likely be limited, and the economy ’ s immediate transition to a self - sustained recovery is hardly expected. in these circumstances, the relevant bills have been submitted to the diet to rebuild the stability of the financial system. moreover, the new administration is planning to launch new economic stimulus measures, including additional public investment in the supplementary budget for fiscal 1998 and the reduction in personal income taxes and corporate taxes. the materialization of these policies along with their effects on corporate and household sentiment should be carefully monitored. with regard to prices, wholesale prices are on a downtrend, and consumer prices ( excluding the effects of institutional changes2 ) remain below the previous year ’ s level. with respect to the factors affecting the outlook, the downward pressure on domestic prices induced by the decline in import prices is weakening. in addition, the expansion in the output gap in the economy is expected to slow in line with the implementation of the comprehensive economic stimulus package. nevertheless, reflecting the present large output gap, the downward pressure from domestic factors is unlikely to weaken considerably, and hence, prices are likely to be weak for some time. as for financial markets, yields on long - term government bonds and stock prices rose toward mid