bank of japan's october report of recent economic and financial developments1 bank of japan, 14 october 2003. * * * the bank ’ s view2 the foundation for a gradual recovery in japan ’ s economy is being laid, as the environment for exports and business sentiment have improved. with regard to final demand, housing investment remains sluggish and public investment is declining. private consumption also continues to be weak. meanwhile, business fixed investment is recovering gradually and net exports have recently started to increase somewhat. in response to these developments in final demand, corporate profits are following a moderate uptrend and business sentiment is improving, although industrial production is still basically flat. meanwhile, the number of employees has stopped falling and the pace of decline in wages is gradually slowing. however, the employment and income situation of households overall still remains severe, as the unemployment rate continues to be high, albeit with some fluctuations. turning to the economic outlook, overseas economies are expected to maintain a relatively steady recovery mainly in the united states and in east asia. under these circumstances, it is likely that exports will continue to increase and industrial production will turn up gradually. with respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time since the employment and income situation is unlikely to improve markedly. meanwhile, the recovery trend in business fixed investment is expected to become clearer, mainly in large manufacturing firms, whose investment has been thus far significantly restrained despite the recovery in their profits. overall, with the recovery in overseas economies, exports and production will increase, which in turn will gradually initiate momentum for an economic recovery in japan. however, it is expected to take some more time before a self - sustaining recovery in domestic demand gains momentum, given persisting downward pressures from structural adjustments, such as firms ’ reduction of excess debt and restraint on labor costs. in addition, uncertainty still exists with respect to the outlook for the environment for exports, as the employment situation in the united states continues to be sluggish and the yen exchange rate has been unstable, tending toward appreciation against the u. s. dollar. on the price front, import prices have stopped declining due to the uptrend in international commodity prices, especially crude oil prices, until this summer. under these circumstances, domestic corporate goods prices are more or less flat, which is also partly due to the rise in tobacco tax. meanwhile, corporate services prices continue a year - on - year decrease of slightly over

greater. on the domestic side, stock prices have fallen to a considerably low level. hence, the progress in the disposal of non - performing loans of financial institutions and its effects on stock prices, corporate finance, and the economy, should be carefully monitored. on the price front, import prices are starting to turn up reflecting the rise in oil prices during the summer and into the fall, and the depreciation of the yen. domestic wholesale prices are virtually level since the rise in import prices and the improvement in the balance of supply and demand in the materials industries have almost been offset by the decline in machinery prices and electricity charges. however, consumer prices remain on a gradual downtrend and corporate services prices continue to decline. this report is based on data and information available at the time of the bank of japan monetary policy meeting held on november 18 and 19, 2002. the bank ’ s view of recent economic and financial developments, determined by the policy board at the monetary policy meeting held on november 18 and 19 as the basis for monetary policy decisions. looking at the conditions influencing price developments, import prices are projected to continue firming up for the time being as the effects from the rise in oil prices will remain. however, the overall supply - demand condition is expected to keep exerting downward pressure on prices for a while amid persistently weak domestic demand, although the completion of inventory adjustment and the rise in capacity utilization rates will support prices to some degree. moreover, factors such as the ongoing technological innovations in machinery, deregulation, and the streamlining of distribution channels will continue to restrain prices. under these circumstances, domestic wholesale prices are expected to remain virtually level for a while. consumer prices are expected to stay on a declining trend for the time being at the current gradual pace. while the slower growth in imports of consumer goods is expected to alleviate the downward pressure on prices to some extent, the faster pace of decline in wages may possibly reinforce the ongoing decline in prices, especially for services prices. as for the financial market, the outstanding balance of the current accounts at the bank of japan is recently moving at around 17 - 18 trillion yen, as the bank provides further ample liquidity following the guideline for money market operations decided at the monetary policy meeting held on october 30. under these circumstances, in the short - term money markets, the overnight call rate continues to move at very close to zero percent. meanwhile, tb and fb rates, which declined temporarily after the monetary policy meeting held