and domestic capital markets via corporate and household confidence. with regard to prices, import prices are mostly unchanged. domestic wholesale prices are weak mainly due to the decrease in prices of electrical machinery and materials. consumer prices continue to be somewhat weak owing to the decline in prices of imported products and their substitutes. corporate service prices continue to decrease. as for the conditions surrounding price developments, the past yen depreciation is exerting upward pressure on prices. however, with the ongoing adjustments in economic activities, the balance between supply and demand in the domestic market is likely to exert downward pressure on prices. furthermore, in addition to the declining trend of machinery prices caused by technological innovations, the decreases in the prices of goods and services reflecting deregulation and the streamlining of distribution channels will continue to restrain price developments. overall, prices are expected to be weak for the time being. moreover, given the high degree of uncertainty regarding this report is based on data and information available at the time of the bank of japan monetary policy meeting held on august 13 and 14, 2001. the bank ’ s view of recent economic and financial developments, determined by the policy board at the monetary policy meeting held on august 13 and 14 as the basis for monetary policy decisions. future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring. in the financial market, the overnight call rate is basically moving around zero percent under the guideline for money market operations to maintain the current - account balance at the bank of japan at around 5 trillion yen. interest rates on term instruments are basically level on the whole. the japan premium remains negligible. yields on long - term government bonds rose temporarily to 1. 40 - 1. 45 percent, but are recently moving around the range of 1. 30 - 1. 35 percent. the yield spreads between private bonds ( bank debentures and corporate bonds ) and government bonds are contracting somewhat. stock prices are declining around the lowest level since the start of the year. in the foreign exchange market, the yen is currently being traded in the range of 121 - 124 yen to the u. s. dollar. with regard to corporate finance, private banks continue to be more active in extending loans, mainly to blue - chip companies, while carefully evaluating the credit risks involved. however, there are some signs indicating that the lending attitudes of financial institutions perceived by small firms are becoming slightly more cautious. meanwhile, the fund - raising conditions of firms in

investment. in this situation, businesses and households have been refraining from consumption and making investment, and the economy ’ s vitality has been lost. in order to escape from such a situation, it became necessary to dispel such deflationary expectations entrenched among the public ; namely, to raise their inflation expectations. to this end, the bank, upon making a strong and clear commitment that it would achieve the price stability target of 2 percent with a time horizon of about two years, decided on drastic monetary easing both in terms of quantity and quality to underpin the commitment. by doing so, the qqe aims to drastically change the deflationary expectations of economic entities such as businesses and households. specifically, how do these two routes work on the real economy? i will explain this next. impact on interest rates : logic behind real interest rates while the qqe has a number of transmission channels, what is important above all is to influence real interest rates. real interest rates are calculated by subtracting expected rates of inflation from nominal interest rates. in other words, if businesses and households consider that prices will rise and sales as well as wages will likewise rise in the future, the interest burden in real terms will be smaller than what nominal rates may suggest. as the spending behavior of businesses and households will be greatly influenced by real interest rates, if real rates can be lowered, both private consumption and business investment will be stimulated and the level of economic activity will heighten. as a result, supply and demand balances will tighten in goods and services markets, as well as the labor market, and prices will rise accordingly. it is considered that nominal interest rates, notably long - term interest rates, will be determined according to the outlook for economic activity and prices. therefore, intrinsically, if the real economy and prices improve and inflation expectations increase, nominal interest rates will rise. were nominal interest rates to rise in parallel with a rise in inflation expectations, real interest rates would not change. that is, to lower real interest rates, it is necessary to raise inflation expectations while containing a rise in nominal rates. it is for this reason that the qqe, while lifting the public ’ s inflation expectations by changing their expectations, undertakes market operations to contain a rise in nominal rates as much as possible through the massive purchase of the jgbs. this is a highly difficult policy to conduct, and it requires subtle balancing. bis central bankers ’ speeches interest rate developments after