Bank of Japan's August report of recent economic and financial developments Bank of Japan communication, XX/8/98.
## The Bank's View 1
Japan's economic conditions continue to deteriorate.
With respect to final demand, public investment seems to have bottomed out. exports have resumed to increase mainly due to a decline in imports. However, busines investment has been decreasing significantly, and housing investment has weakened further. consumption has not yet shown a resumption. Against this background of weak final dem substantial production cutbacks continue. As a result , inventories have decreased somewhat, but the level is still high. With the decline in expenditure and production, corporate profits decrease, and employee income remains below the previous year's level. In addition, the ra offers to applications has dropped to a historically low level, and the unemployment increased further. As a whole, employment and income conditions have worsened.
Although the above indicates a continued negative interactions of produc income, and expenditure, a further deterioration in the economy is expected to cease gradually from the effects of the comprehensive economic stimulus package including additional public wo the special income tax reduction. Given the current considerably low level of economic a however, the positive influence of the package on private demand will likely be limited economy's immediate transition to a self-sustained recovery is hardly expected. I circumstances, the relevant bills have been submitted to the Diet to rebuild the stab financial system. Moreover, the new administration is planning to launch new economic st measures, including additional public investment in the supplementary budget for fiscal 199 reduction in personal income taxes and corporate taxes. The materialization of these poli with their effects on corporate and household sentiment should be carefully monitored.
With regard to prices, wholesale prices are on a downtrend, and consumer p (excluding the effects of institutional changes 2 ) remain below the previous year's level. With respec to the factors affecting the outlook, the downward pressure on domestic prices induced decline in import prices is weakening. In addition, the expansion in the output gap in the expected to slow in line with the implementation of the comprehensive economic stimulus pa Nevertheless, reflecting the present large output gap, the downward pressure from domesti is unlikely to weaken considerably, and hence, prices are likely to be weak for some time.
As for financial markets, yields on long-term government bonds and stock price toward mid-July 1998 reflecting growing anticipation for permanent tax cut. However, the declined since then as a wait-and-see posture has prevailed among market participants growing attention to the concrete measures of the new administration's economic po Meanwhile, Euro-yen interest rates and the Japan premium indicate strong market con regarding credit risks of financial institutions and liquidity risks at end-September 199 the first half of fiscal 1998.
With respect to monetary aggregates, growth in M 2 +CDs has been slowing, reflecting the sluggish private bank lending. These developments basically reflect the further decl credit demand of private firms with the worsening of overall economic activities, along continued cautious lending stance of private banks.
1 The Bank's view on recent economic and financial developments, determined by the Policy Board at the Monetary Policy Meeting held on August 11, as the basis of monetary policy decisions.
2 The rise in medical service charges due to the medical insurance system reform of September 1997.
Meanwhile, some firms, especially small and medium-sized firms, have been fac difficult financing conditions in terms of both funds availability and fund-raising influence on the overall economy continues to warrant careful monitoring.