production. and, in the financial and capital markets in and outside japan, pessimism regarding the future course of the economy and prices has been receding with the rise in stock prices. problems facing japan ’ s economy yet, there remain a host of long - term problems that must be overcome. though the growth of japan ’ s economy has been forced down at a lower rate since the bursting of the bubble, there have, in fact, been several recovery phases. however, these nascent recoveries repeatedly failed to lead to a full - fledged growth path because of recession overseas and concern about financial instability at home. one of the factors responsible is that such structural problems as debt overhang and excess labor have yet to be resolved. for example, when production and corporate earnings increased amid vibrant overseas economies, firms were forced to make, or strategically effected, the repayment of outstanding debt, and there was no expansion of business fixed investment. and, efforts on the part of the corporate sector to shed excess labor kept employment and income conditions severe, thereby restraining personal consumption. in a nutshell, pressures to correct past excesses hampered domestic demand from achieving a self - sustained recovery. but, are these sufficient reasons explaining the prolonged stagnation of japan ’ s economy? looking at past history a little more closely, we have come to realize that the problems are more than just the aftermath of the bursting of the bubble, such as debt overhang and excess labor. we are actually facing more deep - rooted and difficult problems. since the late 1980s, the world economy has witnessed a sea change in the form of globalization and revolution in information and communications technology. thus, before we discuss possible resolutions to the problems facing japan ’ s economy, it may be a useful exercise to put them in a global and historical context. on a global scale, a disinflationary trend is intensifying. for example, the average growth rate of the consumer price index in g7 countries decreased from around 7 percent in the first half of the 1980s to the 3 percent level in the second half, and to a less than 2 percent level between 1996 and 2002. this certainly shows that central banks ’ conduct of monetary policy has successfully contained inflation. more fundamentally, this trend may reflect the impact on price determination of globalization and the revolution in information and communications technology. the transition of emerging countries to market economies has greatly expanded global supply capacity. furthermore, firms with a dominant power in setting prices in various markets segment

##nts in regulatory and tax systems. on the budgetary front, it can promote resource reallocation in the private sector by fundamentally reviewing government expenditure. furthermore, it can assuage future anxieties related to pension and other social security systems. we thus need to promote broad - based reform, covering the socio - economic system at large. last month, the council on economic and fiscal policy decided to adopt “ basic policies for economic and fiscal management and structural reform 2003 ” ( the so - called third main reform guidelines ). i think it vital to accelerate the implementation of reform measures while taking account of these guidelines. as far as monetary policy is concerned, i think the bank of japan has a very important role to play in this process, the details of which i am going to take up later. given that the government and the bank of japan do their best in providing a favorable environment, firms are the main player in constructing a new and dynamic economic system. or, to be more precise, individuals could ultimately be perceived as the main player, since they own and manage firms, they work at firms, and they monitor firms directly or indirectly. what lie at the core of a market economy are the activities of firms and individuals in discovering new value - added demand, and turning such into attractive goods and services and shouldering risks attached. these days, profit opportunities are not something obtained just by following others as in the past, but something created before others do. let me elaborate a little on this. after world war ii, japan ’ s economic policies focused on sustaining high growth and promoting exports, and firms vied for larger sales and higher market share rather than higher profitability. as a result, a low - profit and high - cost structure took hold. then, with the prolonged high - growth period, this structure became so deeply embedded in the economy that firms found it extremely difficult to find ways to correct the high - cost structure and create new competitiveness. and, more recently, the bursting of the bubble economy in the early 1990s led to debt overhang and excess labor, which further increased the burden of such adjustment. we hear anecdotes that the delay in corporate restructuring has kept competent human resources in existing firms, and this is one of the main reasons for the low rate of new business openings in japan. all these are formidable challenges. however, i believe they can be overcome, no matter how difficult they may be, as long as the private sector makes steady efforts to