bank of japan ’ s august report of recent economic and financial developments bank of japan communication, xx / 8 / 98. the bank ’ s view1 japan ’ s economic conditions continue to deteriorate. with respect to final demand, public investment seems to have bottomed out. net exports have resumed to increase mainly due to a decline in imports. however, business fixed investment has been decreasing significantly, and housing investment has weakened further. private consumption has not yet shown a resumption. against this background of weak final demand, 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 continue to decrease, and employee income remains below the previous year ’ s level. in addition, the ratio of job offers to applications has dropped to a historically low level, and the unemployment rate has increased further. as a whole, employment and income conditions have worsened. although the above indicates a continued negative interactions of production, 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 works and the special income tax reduction. given the current considerably low level of economic activities, however, the positive influence of the package on private demand will likely be limited, and the economy ’ s immediate transition to a self - sustained recovery is hardly expected. in these circumstances, the relevant bills have been submitted to the diet to rebuild the stability of the financial system. moreover, the new administration is planning to launch new economic stimulus measures, including additional public investment in the supplementary budget for fiscal 1998 and the reduction in personal income taxes and corporate taxes. the materialization of these policies along with their effects on corporate and household sentiment should be carefully monitored. with regard to prices, wholesale prices are on a downtrend, and consumer prices ( excluding the effects of institutional changes2 ) remain below the previous year ’ s level. with respect to the factors affecting the outlook, the downward pressure on domestic prices induced by the decline in import prices is weakening. in addition, the expansion in the output gap in the economy is expected to slow in line with the implementation of the comprehensive economic stimulus package. nevertheless, reflecting the present large output gap, the downward pressure from domestic factors 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 prices rose toward mid

domestic private demand. another important responsibility of the bank is to ensure financial market stability. as i mentioned at the beginning, strains in short - term u. s. dollar markets heightened from the beginning of may against the backdrop of fiscal problems in some european economies. these developments carry the risk of reducing liquidity in or destabilizing financial markets around the world, including japan. therefore, the bank, in cooperation with other major central banks, has re - established u. s. dollar funds - supplying operations, which had been highly effective during the financial crisis in 2008. the bank has been working to ensure financial market stability by responding flexibly in terms of funds - supplying operations whenever there were grave problems in financial markets. the re - establishment of u. s. dollar funds - supplying operations is one example of the bank ’ s flexible response. not only the current problems in greece, but also many other issues remain in international finance that still warrant attention. the bank, while cooperating with overseas central banks, will continue to make every effort to ensure the stability of financial markets. funds provision to help strengthening the foundations for economic growth as i have explained today, the most important challenge for japan ’ s economy at present is to raise its growth potential, and to this end, promoting innovation is indispensable. moreover, to do so, the role of private financial institutions is also important. taking these points into account, the bank, in addition to its policy of monetary easing and measures to stabilize financial markets explained earlier, has announced its intention to introduce fund - provisioning measures for strengthening the foundations for economic growth. while the specifics of these fund - provisioning measures are being examined through an exchange of views with financial institutions, basically, the bank is considering to provide funds to financial institutions – which through their lending and investment provide the financial resources for strengthening the foundations for economic growth – based on the actual amount of such lending and investment. to support financial institutions ’ efforts in this respect, the bank is thinking about providing loans of longer - term funds at a rate equivalent to the policy rate, which is 0. 1 percent at present, in a manner that enables financial institutions to obtain loans longer than one year. of course, the bank is fully aware that raising the growth potential essentially is something that can only be achieved through the efforts of the private sector, and such efforts will be supported by the government from the institutional side. clearly recognizing this, and taking into account the fact that the