bank of japan ’ s october report of recent economic and financial developments1 bank of japan, 15 october 2001 * the bank ’ s view * * adjustments in economic activity are becoming more severe, as the substantial decline in production has a negative influence on employment and income conditions. in addition, the terrorist attacks in the u. s. have further heightened uncertainty in japan ’ s economy. with regard to final demand, net exports ( real exports minus real imports ) continue to decline, reflecting not only a slowdown in overseas economies but also sluggish demand for it - related goods. business fixed investment is also decreasing noticeably while exporting conditions continue to deteriorate. housing investment remains sluggish and public investment is declining. meanwhile, private consumption remains almost flat on the whole, although somewhat weak indicators are increasing recently. industrial production continues to decline considerably, reflecting these developments in final demand and also strong excessiveness in inventories of electronic parts and materials. the decrease in corporate profits, particularly in manufacturing, has become evident and household income weakens gradually. moreover, while such perception is becoming widespread that a further deceleration in overseas economies is inevitable due to the terrorist attacks in the u. s., precautions against the business outlook are intensifying among japanese exporting firms. turning to the outlook, as for exporting conditions, although inventory adjustments in it - related goods worldwide are expected to continue for the time being, the prevailing view is that the adjustments will be basically completed by around next spring. however, there exists a risk that the prolonged downturn in u. s. private consumption affected by the terrorist attacks would induce another round of adjustments in the japanese economy, starting from the decline in exports such as of consumer goods. under these circumstances for exports, uncertainty toward the economy is growing further. meanwhile, with respect to domestic demand, business fixed investment is expected to follow a downward trend judged not only from the continuous decline in corporate profits, but also from the successive downward revisions of firms ’ investment plans in the it - related sector. private consumption is likely to weaken gradually along with the deteriorating employment and income conditions. thus, the income - generating mechanism from corporate profits to employment and wages is starting to work adversely, and at the same time government spending is projected to follow a downward trend. consequently, it may take quite a while for overall production activity to stop declining, although the decrease in the production of it - related goods may eventually come to an end. overall, adjustments in

partners is currently fairly weak, therefore, and this has contributed to dampening growth in sweden. on the other hand, demand from swedish households has developed positively. in recent years, household incomes have increased at a good pace and consumption and housing investment have shown strong development. since our previous forecast at the beginning of september, new revised gdp statistics for the second quarter showed a somewhat higher gdp and a somewhat stronger development in consumption and investment than we had reason to expect, given the preliminary statistics. employment has also risen somewhat since the start of the year, and if economic activity strengthens as we are expecting, the demand for labour will rise. then unemployment will fall and the employment rate, that is, employed as a percentage of the population, will attain roughly the same level as before the financial crisis. when the labour market situation improves, we will also see gradually higher wage increases. bis central bankers ’ speeches even if the situation is currently uncertain, we thus see signs that economic activity will gradually strengthen, both in sweden and abroad, and thus companies will have greater scope to raise their prices. however, we believe that one condition for growth, employment and inflation to rise in accordance with the forecasts is that we continue to hold the repo rate at a very low level. this forecast for the repo rate – what we call the repo - rate path – is, however, a highly uncertain forecast, at least with regard to the end of the forecast period. this relates to something as self - evident as the fact that we live in a world full of uncertainty, not least with regard to the preconditions for monetary policy – for example, developments abroad, inflationary pressures, the level of unutilised resources in the economy and coming measures in the field of economic policy. here there are many factors contributing to making our forecasts uncertain and our repo - rate decisions difficult, and i shall touch on some of these problems. unclear international developments – unclear conditions for monetary policy there is greater geopolitical uncertainty in our immediate area than there has been for a long time. the ongoing conflict in ukraine could escalate, trigger more far - reaching sanctions, put further downward pressure on demand in parts of europe and push energy prices up or down. we are monitoring developments closely, taking note of other analysts ’ assessments and working with different scenarios, but it is of course difficult to assess the probability of an escalating conflict and to quantify what potential effects it might have