various fields. under such circumstances, we have to deal with the following three agendas. first, the allocation of resources should be reviewed in light of changes in the economic environment and resources should be invested in more productive areas. in this way, resources would be more efficiently utilized. for example, labor and capital need to be reallocated from the public to the private sector, from low growth to high growth industries, and from less efficient to more efficient firms. such redistribution would certainly be accompanied by pain, but without it we cannot expect the steady development of japan ’ s economy. second, the legal, tax and accounting systems, some of which are outmoded and can be an obstacle to innovation, should be reviewed. while i recognize that it is never easy to review any system, which inevitably entails conflict of vested interest, we should know that we will not be able to take advantage of the power of innovation unless systems are reviewed in response to changes in the economic environment. third, what we really need to see is the emergence of innovators. changes in the economic environment will create a variety of opportunities for making profits. transforming such opportunities into profitable businesses cannot be achieved through a mechanical process. it can only be achieved if innovators are allowed to pursue their entrepreneurial abilities to the full. these three agendas boil down to the problem of how to improve the ability of the economy and society to cope with various changes. such an ability is always needed, but, when technological innovation and economic globalization are rapidly progressing, economies and societies that can respond to such changes have a considerable competitive edge. i think the fact that the united states has recently recorded higher growth than europe and japan reflects a greater ability to cope with changes which can be characterized by flexibility and diversity. at a recent conference sponsored by the federal reserve bank of kansas city, fed chairman greenspan emphasized that the flexible us labor market had contributed to recent high economic growth, by noting the seemingly paradoxical situation of low unemployment despite many layoffs. from these viewpoints, we definitely observe the seeds of changes in the recent development of japan ’ s economy. let me give you some concrete examples of such change. first, the reform of systems is proceeding rapidly. for example, a number of changes have been made in the area of accounting, including mark - to - market valuation, more adequate pension liability accounting, and the review of the relationship between subsidiaries and their parent companies. and, importantly, the level of disclosure

has been greatly improved. by accurately showing the performance of a firm, these changes put strong pressure on corporate managers to pursue restructuring and higher profits. second, corporate managers have become increasingly aware of return on capital. third, the mentality of employees has changed. japan ’ s labor market, which is characterized by lifetime employment and the seniority - based wage system, used to be perceived by many as lacking flexibility. however, recently we have seen gradual changes in the market as large - scale employment adjustment has begun to be observed. fourth, reform of the financial system has been proceeding. since the autumn of 1998, a legal framework for the smooth dissolution of failed financial institutions has been established and public funds have been injected into major banks to strengthen their capital base. although there remain a lot of things to be solved, the condition of japanese financial institutions has significantly improved thanks to the restructuring efforts on the part of financial institutions. related to these positive developments, direct investment into japan has substantially increased in recent years. in the past, inward direct investment was much smaller than outward direct investment. in fact, it was only 200 million dollars in 1996. however, it has been on a rising trend, amounting to 12. 8 billion dollars last year. i have great expectations for a continuing increase in direct investment from abroad as it would stimulate japan ’ s economy through the transfer of managerial resources and business expertise. before closing, if i may summarize, firstly, a stable macroeconomic environment is a prerequisite for sustainable growth, and in this regard, monetary policy plays a very important role. second, to raise the economic growth rate over the medium to long run, structural reform affecting the supply side of the economy is indispensable. i think that the contrast between the us and japanese economies during the past ten to fifteen years exactly proves this point. let me conclude my remarks by quoting the following prayer for “ serenity “ by dr reinhold niebuhr which i cherish whenever i face challenging issues as governor of the bank of japan : god grant me the serenity to accept the things i cannot change, the courage to change the things i can ; and the wisdom to know the difference. thank you very much for your kind attention.