However, attention should still be paid to the downward pressure on prices stemming from weak demand, although the pressure has weakened given some recovery in private demand. In the financial market, the overnight call rate has generally stayed near zero, and financial institutions have been confident about the availability of overnight funds. The amount outstanding of funds in the call money market increased slightly in late March, and decreased thereafter. Interest rates on term instruments rose slightly toward end-March, the end of the fiscal year, but have weakened somewhat since the beginning of April. The Japan premium remains negligible. Yields on long-term government bonds rose marginally in mid-March and stayed above 1.8%, but declined somewhat from late March and are recently back in the range of 1.7-1.8%. The yield spread between private bonds (bank debentures and corporate bonds) and government bonds continues narrowing, primarily that between private bonds with relatively low credit ratings and government bonds. Stock prices weakened almost to 19,000 yen in mid-March, but then rebounded and are currently moving between 20,000 and 21,000 yen. In the foreign exchange market, the yen strengthened against the US dollar toward the end of March. However, it weakened at the beginning of April and has been traded at around 105 yen since then. With regard to corporate finance, private banks have basically retained their cautious lending attitude. However, constraint that had been caused by severe fund-raising conditions and insufficient capital base has eased considerably.

Two aspects of legal certainty are particularly crucial: Contractual certainty One key element of a stable legal framework is contractual certainty. Systems of contract law that show respect for formal agreements help to drive down commercial risk and therefore to promote the efficient allocation of capital. And uncertainty as to the enforceability of contracts is likely to be particularly damaging to financial markets. Against this background, contracts are becoming longer and more complex as financial innovation continues apace: the documentation for a structured finance product can often run into several hundred pages, thus raising the important issue of “documentation” risk. Legal and regulatory stability Another key element is legal and regulatory stability. This is very important to the financial markets, where the ability to form complex plans with a degree of confidence as to the stability over time of external influences (such as legal rules) impacts directly on risk, price and, ultimately, the efficient allocation of capital. A stable planning environment is conducive to investment and, therefore, market growth. Examples of harmful consequences of ambiguities in legal/regulatory frameworks include uncertainty as to the extent and scope of regulatory obligations or sanctions, and uncertainty as to how old laws will apply to dynamic and fast-changing market practices. The Financial Markets Law Committee (FMLC) In recognition of this, a number of countries have established groups of experts to promote greater legal certainty in financial markets. In the UK, the Financial Markets Law Committee was established in 2002.