about a possible decline in stock prices triggers the aforementioned fallacy of composition. against such a backdrop, the bank has decided to begin exploring specifically the provision of subordinated loans to the banks that are subject to international capital standards. this measure aims at ensuring the smooth functioning of financial intermediation and the stability of japan ’ s financial system, by enabling japan ’ s banks to maintain sufficient capital bases even in severe financial and economic environments. by the measure taken by the bank, financial institutions are provided with three channels to raise capital ; ( 1 ) capital raising by financial institutions through markets, ( 2 ) capital raising based on the act on special measures for strengthening financial functions, ( 3 ) borrowing subordinated loans from the bank. subordinated loans by the bank will work effectively in conjunction with the other two measures to raise capital. in addition, providing such a safetynet measure would enhance the robustness of japan ’ s financial system and the functioning of financial intermediation even under the stressed conditions. for a central bank, this kind of direct provision of quasi - capital funds is an extremely extraordinary measure. however, considering the future stress scenario of the financial system, the bank has judged that, from the standpoint of a central bank, it is necessary to do its best to maintain the smooth functioning of financial intermediation and ensure the stability of the financial system even by conducting this extraordinary measure. the bank expects financial institutions to grasp the thinking behind the measure and to strive to maintain the smooth functioning of financial intermediation with further efforts of boosting capital bases. needless to say, risk management is extremely important for financial institutions, which cannot be emphasized too much. however, under the current circumstances, as i mentioned above, the surfacing of the risk stemming from the fallacy of composition should be avoided. to that end, it is important for the management of financial institutions, while conducting sound business operations, to boost capital bases with envisioning the consequences for japan's economy. the bank also expects financial institutions to pay due concern for the smooth communication with their client companies to convey business policies and lending stances. it is the basic premise that the stability of the financial system should be ensured in order to return to a sustainable economic growth path under price stability. from the standpoint of a central bank, the bank is determined to make its best effort to secure the stability of the financial system. we would appreciate your continued support and cooperation. thank you.

toshihiko fukui : recent developments in economic activity in japan summary of a speech by mr toshihiko fukui, governor of the bank of japan, at a meeting with business leaders, osaka, 27 november 2006. * * * today i will explain the bank of japan's view regarding recent developments in economic activity and prices and the basic thinking behind its conduct of monetary policy. in addition, i will touch upon the issues facing japan's financial system. introduction today i will explain the bank of japan's view regarding recent developments in economic activity and prices and the basic thinking behind its conduct of monetary policy. in addition, i will touch upon the issues facing japan's financial system. i. the current situation and the outlook for economic activity and prices japan's economy has been expanding moderately. the current phase of economic recovery began in january 2002. by the end of november, the economy will have experienced a long economic expansion that has lasted for four years and ten months. this sustained period of economic expansion is likely to continue. recent economic indicators have shown mixed developments. for example, while the results of the family income and expenditure survey and machinery orders were weak, the preliminary estimate of real gdp growth turned out to exceed market expectations, recording 2. 0 percent in the julyseptember quarter on an annualized quarter - on - quarter basis. these mixed results seem to have introduced some volatility into market participants'view of the current economic situation. the important point at this juncture is to examine whether these indicators as a whole suggest any changes in the fundamental mechanisms underlying economic activity and prices. in the latest outlook for economic activity and prices ( the outlook report ), which was released at the end of october, the bank made public its projection for the next two years or so. the bank projected that the economy was likely to experience a sustained period of expansion with domestic and external demand increasing and the positive influence of the strength in the corporate sector feeding through into the household sector. although economic indicators have shown mixed developments since the bank released its projection, the bank considers that they do not suggest a change in the mechanisms underlying the economy. the bank will continue to confirm this by carefully assessing various relevant economic indicators as well as microeconomic information. let me touch upon a few important factors in this regard. the first factor is developments in overseas economies, especially the u. s. economy. the pace of u. s. economic growth has been decelerating