bank of japan ’ s september report of recent economic and financial developments1 bank of japan, communication, 13 september 1999. * * * the bank ’ s view2 japan ’ s economy has stopped deteriorating, and there are some activities improving such as exports and production. however, clear signs of a self - sustained recovery in private demand have not yet been observed. with regard to final demand, business fixed investment has been on a downward trend. recovery in private consumption continues to be weak on the whole. housing investment, which had been recovering, has recently peaked out. meanwhile, public works have been rising, and net exports ( exports minus imports ) have started growing due to an increase in exports. reflecting such developments in final demand and continued progress in inventory adjustment, industrial production is turning to an increase. against this background, corporate and consumer sentiment has seen an improvement. the improvement in corporate sentiment, however, has not necessarily stimulated business activities, because firms strongly feel that they have excess capacity and employees and their profits remain weak. meanwhile, the improvement in consumer sentiment is underpinning household expenditure even under the worsening employment and income conditions, but is not strong enough to push up overall private consumption. as for the outlook, improvements in the overall financial environment partly due to the monetary easing by the bank, along with a series of economic measures taken by the government, are expected to continue underpinning the economy. moreover, the positive impact on domestic production of the recovery of overseas economies, especially of asian economies, is likely to continue for some time. by contrast, leading indicators suggest a high probability of a moderate decrease in housing investment from this autumn. in addition, under cautious sales plans, firms are implementing further restructuring to improve their profitability. although such corporate restructuring is expected to improve productivity, it is likely, in the short run, to reduce fixed investment and discourage household expenditure through the resulting deterioration in employment and income conditions. moreover, it seems that the recent appreciation of the yen will have an adverse effect on corporate profits in the near term. under such circumstances, it is still difficult to expect an immediate self - sustained recovery in private demand. overall economic developments require careful monitoring in consideration of the above points. it is also important to promote structural reform in order to assure the economy ’ s sustained growth in the medium term. with regard to prices, import prices have recently fallen slightly due to the appreciation of the yen, despite the rise in international commodity prices such as crude oil prices. domestic

british government ’ s declaration in favour of participation, but not for the time being. that would alter and prolong the process. a number of forecasters and political observers have in fact revised their assessments recently in favour of a later date for sweden ’ s probable participation. if and when sweden does opt for participation, the matter will be negotiated with the other eu countries. this will be done on the basis of examinations of the swedish economy by the eu commission and the european central bank ( ecb ). those assessments will be discussed by the finance ministers of the member states, who will then hear the opinions of the eu parliament and the heads of state or of government before arriving at their decision. when that decision has been made, the member states must also agree on the time that sweden should have for completing the necessary preparations. the countries that participated from the start have been given a transitional period of over three years from the euro ’ s introduction in january 1999 until it completely replaces the national currencies not later than june 2002. that a similar arrangement would apply for sweden is, however, not certain. if we consider that our preparations can be completed more quickly, perhaps we could ask for a shorter interval. do we meet the entry criteria? the commission and the ecb will be examining the swedish economy with reference to the criteria that were included in the maastricht treaty. those criteria are for inflation, long - term interest rates, the exchange rate, the government budget balance and government debt. there are also specific requirements as regards central bank legislation. the principle of equal treatment will apply ; that is, the basis for the assessments is to be the same as for the initial group of euro participants. that means that some conclusions can probably be drawn from the examinations in may 1998. compared with the countries that passed the entrance examination at that time, sweden ’ s economy is doing well. we have managed to achieve stable government finances and combine this with persistently low inflation, with the result that long - term interest rates have fallen towards the european level. in the present situation, sweden would have little difficulty with the criteria for inflation, the long - term interest rate and government finances. the budget surplus of around 2 % of gdp is clearly better than the criterion of a deficit of not more than 3 %. government debt is still above the convergence criterion of 60 % but should not constitute an obstacle ; the debt is being rapidly reduced – according to the spring bill by almost 10 percentage points from 1988