Domestic Economy
In the fiscal year ended March 31, 2004, the Japanese economy generally showed moderate recovery. Following uncertainty at the beginning of the period due to ongoing deflation and deceleration of overseas economies, exports and production gradually increased while corporate earnings improved and capital expenditure turned upward.
    On the demand front, housing investments remained largely unchanged, despite some signs of a turnaround in personal consumption. While public spending continued to decline, private-sector capital investments showed ongoing modest expansion. Despite declining to the United States, exports increased as a whole, largely to Asia and the European Union.
    Industrial production firmed in the second half of the year, driven mainly by exports. Corporate earnings continued to improve in the wake of widespread restructuring efforts, although the magnitude of recovery differed according to sector and scale of operations. The employment situation also improved somewhat, but remained generally severe.
    Compared with the previous fiscal year, consumer and corporate goods prices posted only minimal declines in the period under review. Land prices in the three major metropolitan areas contracted by a smaller margin than in the previous term.

Regional Economy
Despite some bright signs, economic conditions in Wakayama Prefecture remained harsh due to generally flat production.
    On the demand side, conditions remained difficult. Personal consumption again failed to firm, and housing investments stayed mostly unchanged. Public spending declined year-on-year, and corporate capital investment remained cautious amid persistent uncertainty about future prospects.
    Industrial production in the prefecture showed some signs of upturn owing to strong exports. However, local manufacturers again faced difficulties stemming from competition with imported products, and gaps in earnings performance between specific sectors widened.
    Despite evidence of improvement in the local employment situation, conditions remained challenging, and posted land prices also continued to decline.

Financial Sector
Short-term interest rates remained extremely low, as the Bank of Japan continued to maintain the quantitative easing policy and to provide ample liquidity. Long-term rates fell to below 0.5% in June 2003, due to strong demand for bonds among institutional investors, but increased to between 1.2% and 1.5% in the latter half of the year reflecting an improved outlook for Japanese domestic economy.
    Stock prices began the year in a downward trend, but then moved up in the wake of aggressive purchases by overseas investors. The subsequent expectation for economic recovery also spurred major buy orders, pushing the Nikkei Average to ¥11,715 at fiscal year-end.
    On foreign exchange markets, the U.S. dollar generally traded in the range of ¥115—¥121 in the first half of the year, but the yen strengthened thereafter. Heavy intervention to weaken the yen by Japanese financial authorities temporarily brought the rate to ¥112, but by fiscal year-end the yen had appreciated up to ¥103 range.

Tasks Ahead
Despite generally steady economic recovery for the nation as a whole, the outlook for the economies of Wakayama Prefecture and the southern part of Osaka Prefecture, our business heartland, remain unclear. Meanwhile, profitability of regional financial institutions is being watched in the context of trend to improve earnings and make other efforts to restore confidence in the financial system. Meanwhile, regional financial institutions are required to enhance their Relationship Banking functions. To fortify their own operating foundations as well, they need to reinforce initiatives aimed at stimulating regional economies.
    Amid these circumstances, Kiyo Bank intends to further solidify earnings as outlined in its medium-term management plan.
    Consistent with its management reform efforts, the Bank will enhance its performance-based remuneration system for directors and auditors, and also abolish the special bonus system for retiring directors. To further accelerate decision-making, we will also introduce an executive officer system.
    As a regional financial institution, we cannot improve profitability without increasing our customers’ earnings and fostering development of local economies. With this in mind, the directors and employees of the Bank will devote their full energies to achieving the aims outlined above.
    We look forward to the continued support of shareholders and customers as we tackle the challenges of the future.