positive output gap, or the high level of economic activity, will be maintained, and whether firms'stance will shift toward further raising wages and prices under such situation. second is developments in medium - to long - term inflation expectations of firms and households. based on these points, the bank deems that the momentum toward achieving the price stability target has been maintained so far. with the output gap remaining positive, moves to raise selling prices reflecting cost increases have been observed recently in a wide range of firms. as for the outlook, inflation expectations are projected to rise as many of the factors that have been delaying inflation will be resolved gradually and moves to raise prices will spread widely. under these circumstances, the year - on - year rate of change in the cpi is likely to increase gradually toward 2 percent. thus, the bank judges it appropriate to continue with the current monetary policy. however, given that slowdowns in overseas economies have continued to be observed and their downside risks seem to be increasing, it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost. developments in the output gap warrant particular attention. if downside risks to overseas economies materialize, there is a possibility that the growth rate of japan's economy will decelerate substantially through, for example, the prolonged weak exports and firms'investment stance becoming cautious. if this happens, the momentum toward achieving the price stability target could be affected through shrinkage of the output gap. attention also should be paid to the fact that the impact of the so - called adaptive formation mechanism is large in japan, in which the actual inflation rate affects inflation expectations. although crude oil prices temporarily rose somewhat due to increased geopolitical risks, they have declined to some extent from a somewhat longer - term perspective, mainly against the background of the slowdown in overseas economies. if crude oil prices decline further and the actual inflation rate decreases clearly, inflation expectations also may be affected. considering that it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost, the bank will thoroughly reexamine economic and price developments at the next mpm, when it releases the outlook report. it will examine economic and price developments from a broad perspective at the next mpm, based on observations that will be available by the time of the meeting, such as various economic indicators, the reports at the meeting of general managers of the bank's branches, and developments

interest rates receded at a brisk pace between summer and autumn 1996. in these circumstances, the long - term government bond yield has moved at about 2. 3 - 2. 4 per cent since the end of november 1996, but has recently declined to reach a record low of around 2. 2 per cent. with respect to bank lending rates, the short - term prime lending rate has remained at a record low level of 1. 625 per cent since september 1995. the long - term prime lending rate was lowered three times by a total of 0. 8 percentage points since september 1996 in response to developments in the long - term interest rates, and has been moving at the record low of 2. 5 per cent since december 1996. in these circumstances, short - term and long - term average contracted interest rates on new loans and discounts have moved at near record low levels. on the stock exchange, the nikkei 225 stock average plummeted temporarily between the end of 1996 and the beginning of 1997, reflecting the market ’ s concerns about japan ’ s economic outlook and balance - sheet problems. it has since picked up somewhat. in the foreign exchange market, the yen depreciated to reach ¥124 - 125 against the u. s. dollar temporarily in february 1997 owing to such factors as the interest rate differentials between japan and the united states. recently, the yen has moved at around ¥122 - 123 as concerns about the rapid appreciation of the u. s. dollar strengthened somewhat in the market. meanwhile, the yen has been appreciating against the deutsche mark since mid - february and recently moved at around ¥72 - 73.