exports, are expected to have a negative influence on domestic demand gradually and this in turn will possibly prolong the ongoing adjustments. moreover, while the economy continues to be in a fragile state, attention should be paid to the growing risks of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. with regard to prices, import prices are declining mainly reflecting the softening of international commodity prices. domestic wholesale prices are also declining somewhat faster because the effects from the past high crude oil prices and the prior depreciation of the yen have abated, while prices of electrical machinery and materials continue to decrease. consumer prices are weakening owing mainly to the decline in prices of imported products and their substitutes. corporate service prices continue to decrease. this report is based on data and information available at the time of the bank of japan monetary policy meeting held on september 18, 2001. the bank ’ s view of recent economic and financial developments, determined by the policy board at the monetary policy meeting held on september 18 as the basis for monetary policy decisions. as for the conditions surrounding price developments, with the ongoing adjustments in economic activity, 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 follow a gradual declining trend for the time being. moreover, given the high degree of uncertainty regarding 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 declined further and is moving around zero percent as the current - account balances at the bank of japan were increased to around 6 trillion yen due to the changes in the guideline for money market operations decided at the monetary policy meeting held on august 14. interest rates on term instruments are declining further owing to the monetary easing by the bank. the japan premium remains negligible. yields on long - term government bonds are recently moving around 1. 35 percent. the yield spreads between private bonds ( bank debentures and corporate bonds ) and government bonds are mostly unchanged. stock prices are plunging reflecting the drop in u. s. stocks. in the foreign exchange market, the yen is currently being traded in the range of 116 - 119 yen to the

bank of japan ’ s february report of recent economic and financial developments1 bank of japan, 5 february 2004. * * * the bank ’ s view2 japan ’ s economy is recovering gradually. exports are recently increasing substantially and business fixed investment continues a gradual recovery. reflecting these developments, industrial production is also increasing. the decline in household income is gradually coming to a halt and private consumption is virtually flat. meanwhile, housing investment remains sluggish and public investment is declining. as for the outlook, japan ’ s economy is anticipated to continue recovering, albeit at a moderate pace. overseas economies are projected to continue growing relatively fast. based on this projection, it is expected that exports and production will continue increasing and that the recovery trend in business fixed investment will also become more visible. however, given persisting structural factors such as excessive debt, the increase in business fixed investment is expected to remain moderate. private consumption is likely to remain virtually flat for some time, since the employment and income situations are unlikely to improve markedly. meanwhile, public investment is projected to follow a declining trend. on the price front, domestic corporate goods prices have been firm, due to the rise in rice prices and the strengthening of overseas and domestic commodity prices. the year - on - year rate of change in consumer prices ( excluding fresh food ) has been close to zero percent, while temporary factors such as the rise in rice prices have exerted upward pressure on prices. turning to the outlook, domestic corporate goods prices are expected to remain firm for the immediate future. as for consumer prices, the year - on - year rate of change is likely to be around zero percent for the time being due partly to the rise in rice prices. however, they are basically projected to continue falling slightly, since the imbalance between supply and demand in the economy still remains considerable despite its gradual improvement. as for the financial environment, the environment for corporate finance is becoming somewhat more accommodative on the whole, although it is still severe for firms with high credit risks. the issuing environment for cp and corporate bonds is favorable on the whole, especially for firms with high credit ratings. also, the lending attitudes of private banks have been slightly more accommodative. the pace of decline in credit demand in the private sector is becoming somewhat moderate. under these circumstances, the amount outstanding of cp and corporate bonds issued continues to be above the previous year ’ s level, and the rate of decline in lending by private banks is dimini