Bank of Japan's July report of recent economic and financial developments 1 Bank of Japan communication, 21/7/98.
## The Bank's View 2
Final demand remains weak and production has declined significantly. Employment a income conditions continue to deteriorate, and corporate sentiment is weakening further. As Japan's economic conditions have deteriorated.
With respect to final demand, public-sector investment seems to have bottomed out exports, which decreased temporarily in the first quarter of 1998, have resumed to increase mai a sharp decline in imports. Business fixed investment, however, has decreased significantly, a investment remains weak. Private consumption has shown little sign of recovery, althou deterioration has stopped. Against the background of weak final demand, the level of inventorie high, and the decline in industrial production is accelerating. As a result, corporate profit decreased, and employment and income conditions have deteriorated conspicuously as seen in the wages below the previous year's level.
Although the above indicates negative interactions of production, income, expenditure, a further deterioration in the economy is expected to cease as the effec comprehensive economic stimulus package, including additional public works and the special inco reduction, become full scale. However, given the current considerably low level of economic a the positive influence of the package on private demand will likely be limited, and the immediate transition to a self-sustained recovery is hardly expected. In these circumstances, rebuild the stability of the financial system have been devised, and the reform of the taxati expected to be discussed actively. The materialization of these policies along with the corporate and household sentiment should be carefully monitored.
With regard to prices, wholesale prices continue to fall, and consumer prices (ex the effects of institutional changes) have declined slightly below the previous year's level. to the factors affecting the outlook, the downward pressure on domestic prices induced by the import prices is weakening. In addition, the expansion in the output gap in the economy is e slow in line with the implementation of the comprehensive economic stimulus package. Neverth reflecting the present large output gap, the downward pressure from domestic factors is un weaken considerably, and hence, prices are likely to be weak for some time.
As for financial markets, stock prices and yields on long-term government bonds rebounded since mid-June 1998. This may be attributed to a slight recovery in market sen although still weak, responding to the announcement of the Comprehensive Plan for Fina Revitalization, the so-called Total Plan, and to the emergence of expectations for permanent ta
In money markets, with the heightened awareness toward financial problems at a b concerns over credit risks of financial institutions strengthened once again, and upward p interest rates suddenly mounted toward the end of June. However, with the ample provision of the Bank of Japan and the announcement of the Total Plan, market anxieties settled down, upward pressure on interest rates gradually eased.
With respect to monetary aggregates, growth in M 2 +CDs has been slowing, reflecting the sluggish private bank lending. These developments appear to strongly reflect the further decli
1 This report was written based on data and information available when the Bank of Japan Monetary Policy Meeting was held on July 16, 1998.
2 The Bank's view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on July 16, as the basis of monetary policy decisions.
demand of private firms with the worsening of overall economic activities , and the continued cautious attitudes of private banks in extending loans.
Meanwhile, some firms, especially small and medium-sized firms, have been faci difficult financing conditions in terms of both funds availability and fund-raising costs. This the overall economy continues to warrant careful monitoring.