bank of japan ’ s january report of recent economic and financial developments1 bank of japan, communication, 22 january 2001. * the bank ’ s view * * japan ’ s economy continues to recover gradually, but the pace is slowing due to decelerating export growth. with regard to final demand, business fixed investment is on an increasing trend. the recovery in private consumption continues to be weak as a whole through lack of notable improvements in employment and income conditions, but there are somewhat positive signs in some indicators. as for public investment, the pace of decline is slowing. meanwhile, net exports ( real exports minus real imports ) are starting to decrease reflecting a slowdown in overseas economies such as the u. s. and east asia. housing investment is declining gradually. reflecting such developments in final demand, industrial production remains on a rising trend, but the pace is slowing considerably. inventories of some materials and electronics parts, of which demand from overseas is declining significantly, become somewhat excessive, but inventories as a whole still remain at a low level. meanwhile, corporate profits continue to improve. income conditions of households still remain severe but are not deteriorating as employment conditions are on an improving trend and wages are slightly above the previous year ’ s level. as for the outlook, public investment is expected to start increasing with the implementation of the new economic stimulus package by the government. in the corporate sector, firms still strongly feel that they have excess capacity and that they should reduce their debts to restore financial soundness. however, it is very likely that fixed investment in high - growth sectors, including those related to information technology services, will increase as corporate profits continue to recover. moreover, the improvement in corporate profits will increase household income and this in turn is expected to boost private consumption. however, the pace of recovery in household income will be modest for the time being, since firms ’ perceptions of excess employment still persist, and thus significant changes have not been observed in their efforts to reduce personnel expenses. reflecting the overseas slowing economies, a temporary decline in exports seems to be inevitable. imports are projected to continue increasing, particularly those of consumer goods, and capital goods and parts. hence, net exports are expected to decline. mainly due to these developments in exports, industrial production is expected to slow down and remain at around the current level for a while. overall, it is likely that the economy will continue a gradual upward trend led mainly by business fixed investment. in addition, the favorable financial environment created partly by the

late december and is currently being traded in the range of 117 - 120 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. there seem to be no significant changes in the fund - raising conditions of firms in the markets for such instruments as corporate bonds and cp. on the other hand, the improvement in economic activities has not stimulated corporate demand for external funds, since firms ’ cash flow is at a high level in parallel with the recovery in profits. moreover, firms continue to reduce their debts as part of their balance - sheet restructuring measures. as a result, credit demand in the private sector has continued to be basically stagnant. in view of this, the underlying tone of private banks ’ lending remains sluggish, although the expansion in the year - on - year decline is ceasing. meanwhile, the amount outstanding of corporate bonds issued is slightly above the previous year ’ s level. the amount outstanding of cp issued was at a high level as the year - end approached. money stock ( m2 + cds ) continues to grow at around 2 percent on a year - on - year basis. as for funding costs for firms, short - term funding rates basically remain flat but long - term funding rates seem to be declining reflecting the developments in market interest rates. in this financial environment, the lending attitude of financial institutions and corporate financing conditions remain easy. however, the effects of the decline in stock prices on the fund - raising conditions of firms need to be carefully monitored.