bank of japan ’ s may report of recent economic and financial developments1 bank of japan, 21 march 2003. * the bank ’ s view * * economic activity remains flat as a whole, but there is greater uncertainty about the economic outlook. with regard to final demand, business fixed investment is recovering gradually, although one of the leading indicators suggests possible weakness ahead. meanwhile, private consumption continues to be weak, housing investment also remains sluggish, and public investment is declining. while domestic demand has not shown clear signs of recovery, net exports remain virtually level. industrial production is basically level in response to these developments in final demand. as for the employment situation, new job offers are on a gradual rising trend. in addition, the number of employees, which covers various types of employees including non - regular employees such as temporary workers, appears to be declining at a slower pace. however, firms are still maintaining their stance on reducing personnel expenses, and household income continues to decrease with the ongoing decline in wages. the employment and income situation of households overall remains severe. turning to the economic outlook, a widely shared view of the prospect for overseas economies is that the growth rate, especially that of the u. s. economy, will accelerate in the second half of this year with diminishing uncertainty regarding iraq - related developments. for the time being, however, the recovery in the u. s. and european economies is projected to remain very modest. moreover, there is rising concern that the growth of east asian economies, which has been well - sustained so far, may slow at least temporarily, influenced by severe acute respiratory syndrome ( sars ). in this situation, exports and also industrial production are expected to remain virtually level for the time being. 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 due to the severe employment and income situation. business fixed investment is likely to follow a clear uptrend if exports and production increase clearly again, but for the time being, the increase in business investment is expected to remain very modest. overall, assuming that the growth rate of overseas economies accelerates in the second half of this year, the uptrend in exports and production will resume sooner or later, which in turn will initiate the momentum for an economic recovery in japan. however, a self - sustaining recovery in domestic demand is unlikely to gain momentum for some time, since production is expected to be virtually unchanged for the

for the next quarter. in addition, the difference between this di and the correspondent di for input prices is often used as a proxy for profit margins ( chart 10 ). it is known that the di for output prices tends to be downward - biased and the di for input prices tends to be upward - biased, so the interpretation of these indicators needs to take these tendencies into account. 11 the drawback of this approach is that the data are only available for the next quarter, so only very short - term inflation expectations can be measured. the chart shows that there are some signs of an increase in firms ’ inflation expectations based on the di for output prices, but the indicator has leveled off very recently. fortunately, the bank will begin publishing a survey of firms ’ longer - term inflation expectations ( looking one, three, and five years ahead ) beginning with the march 2014 tankan survey. it is expected that this will promote a better understanding of firms ’ inflation expectations and their price - setting behavior. regarding factors contributing to firms ’ inflation expectations, the annual report on the japanese economy and public finance 2013, compiled by the cabinet office, conducted an interesting survey in february 2013. it showed that firms tend to raise their outlook for sales the respondents covered 367 listed firms. approximately 56 percent were nonmanufacturing firms, 41 percent were manufacturing firms, and the remainder were financial institutions. the survey population encompasses about 210, 000 firms ( excluding financial institutions ) that have at least 20 million yen in capital. more than 11, 000 firms are sampled in each survey. see, for example, koichiro kamada and kentaro yoshimura, “ kigyo no kakaku mitoshi no kochokusei : tankan di wo mochiita bunseki ( rigidity in firms ’ price expectations : an analysis based on the bank of japan ’ s tankan [ short - term economic survey of enterprises in japan ] di ), ” bank of japan working paper series, no. 10 - j - 3, 2010 ( available only in japanese ). bis central bankers ’ speeches prices of goods and services over the next year when they project that market prices over the same period will increase. 12 this response was provided by approximately 70 percent of manufacturing respondents and more than 50 percent of nonmanufacturing respondents. in other words, if an increase in demand for goods and services leads to a rise in market prices, this may induce firms to raise their sales prices. this situation is