reassessment happened first in the united states and was soon followed in other english - speaking countries and then in europe. as usual, the markets were quicker off the mark to raise market interest rates than they needed to be, but they were broadly correct. since mid - year, we have seen the united states, the united kingdom, australia and the ecb tighten monetary policy. i suspect there will be a few more countries to come in the not too distant future. 2. domestic events just as the weakness of the world economy did not come to pass, a similar expectation of weakness in australia failed to materialise. real gdp in australia again grew by over 4 % in the 12 months to the june quarter and will probably still be showing a similar rate in the 12 months to the september quarter. this measure may slip for a time as we drop off some of the high quarterly growth rates from our calculations, but we think growth will remain robust over the next 12 months. similarly, the quite lengthy period during which inflation was undershooting our target seems to have come to an end. the cpi inflation rate would already be a bit over 2 % apart from the government ’ s reduction in the health rebate levy. although some of this result has been due to rises in oil prices, measures of underlying or core inflation, which are largely unaffected by oil prices, have also risen by about 2 % over the past 12 months. thus, the period where the australian economy was experiencing a contractionary impact from abroad and where the outlook was for weaker growth and sub - 2 % inflation has now well and truly passed. the monetary policy that was appropriate for that period is no longer appropriate to the new circumstances that we face. that is the main reason behind the tightening of monetary policy we undertook after our november board meeting. this move was what the flexible inflation targeting framework suggests should happen. there is some confusion, however, on this point and so it is worth spending some time to clarify it. some interpretations of the target imply that the bank is not supposed to contemplate any rise in interest rates until the upper end of the target is threatened. this is equivalent to saying that the most expansionary setting reached during the downward phase of the interest rate cycle should be maintained until such time as a move to a clearly restrictive setting is required, and only then should a move be made. ( that virtually guarantees that such moves will be large. ) it is as though policy has to operate only with settings

bank of japan ’ s monthly report of recent economic and financial developments1 bank of japan, communication, 16 / 02 / 99. the bank ’ s view2 the economic deterioration in japan has become moderate against the background of the increase in public investment. business fixed investment has been declining significantly. as for housing investment, housing starts are bottoming out but remain at a low level. recovery in private consumption has been weak on the whole, although partial improvement in sales of goods has been observed. meanwhile, net exports ( exports minus imports ) basically remain on a gradually increasing trend, and public investment is increasing considerably. reflecting this development of final demand and the continued progress in inventory adjustments, industrial production, which had been on a downtrend, is leveling off. corporate profits continue to decline. employment and household income conditions are still deteriorating as the unemployment rate is at a historically high level, and winter bonuses have decreased significantly. conditions in corporate finance are currently improving, but firms apparently cannot remove their anxiety about the availability of funds in the future. consequently, corporate and household sentiment remains cautious, and a recovery has not yet been observed in private demand. as for the future developments, the increase in public investment is likely to underpin the economy toward the first half of fiscal 1999 with the implementation of the government ’ s economic measures. furthermore, the bank ’ s monetary and financial measures and the government ’ s measures to alleviate the credit crunch will continue to be in effect. nevertheless, an immediate self - sustained recovery in private demand is hardly expected, since corporate profits and household income are still deteriorating and the constraints from corporate finance are likely to persist for some time due to cautious lending attitudes of private banks. moreover, attention should be paid to ( 1 ) the effects of the continued appreciation of the yen since autumn 1998 ; ( 2 ) those of the recent rise in long - term interest rates ; and ( 3 ) the uncertainty in financial and economic developments abroad. to lead japan ’ s economy into a steady recovery, it is important to prepare an environment where firms and households can regain confidence in japan ’ s economic future by, for instance, promptly restoring the stability of the financial system. with regard to prices, reflecting the large output gap, domestic wholesale prices are on a downtrend, and corporate service prices are weakening. consumer prices have increased above the previous year ’ s level due to the rise in prices of perishables. excluding this temporary effect, consumer prices basically remain weak. as for the