bank of japan ’ s summary of the annual review of monetary and economic developments in fiscal 1996 bank of japan, annual review 1997. overview japan ’ s economy followed a moderate recovery trend in fiscal 1996. the pace of recovery began to accelerate at the end of 1995, aided by substantially stimulative monetary and fiscal policy measures, and the recovery continued in fiscal 1996. in the second half of the fiscal year, the economic recovery firmed, particularly in private demand, driven in part by the depreciation of the yen since the previous year. with respect to final demand in the first half of fiscal 1996, net exports declined sharply, reflecting such factors as the appreciation of the yen until the middle of 1995 and the increase in imports of manufactured goods from japanese affiliates overseas. however, the economic recovery was underpinned by policy - related demand factors, such as the increase in public - sector investment reflecting the economic stimulus package of autumn 1995, and the high level of housing investment induced by low interest rates. in the middle of fiscal 1996, public - sector investment began to decline gradually from its peak, while net exports, which had been restraining the economic recovery, started to rise, partly reflecting the depreciation of the yen. regarding private demand, business fixed investment increased steadily throughout the fiscal year, reflecting recovery in corporate profits, progress in stock adjustments, and a rise in autonomous investment, such as in information technology, and the increase spread across industries from large manufacturing firms to small nonmanufacturing firms. personal consumption followed a moderate recovery trend in line with a recovery in compensation of employees despite fluctuations caused by factors such as the weather. from autumn 1996, automobile sales, which have a large influence on production, accelerated. housing investment remained high, owing both to the increase in demand ahead of the rise in the consumption tax rate, implemented in april 1997, and to low interest rates. industrial production remained virtually unchanged until the middle of 1996, reflecting the decrease in net exports, and adjustments in the excessive inventories of some producer goods. however, growth in production has gradually gathered pace since the middle of the year, as private demand has increased steadily, net exports have begun to increase, and the increase in final demand has led more directly to a rise in production because of progress in inventory adjustments. at the end of the fiscal year, both industrial production and shipments recovered to the levels recorded at the previous peak in the economic cycle reflecting the increase in demand before the rise in the consumption tax

the pace of recovery may decelerate temporarily. this expectation is based on the fact that the positive cycle of production and consumption has not been deterred by the reaction to the increase in demand ahead of the consumption tax rate rise. despite the continued economic recovery, the private sector has not gained sufficient confidence in its future growth, reflecting persistent uncertainty about structural adjustments. under the structural adjustment pressures, expected growth rates are unlikely to rise at the same pace in different industries and firms. however, from a long - term perspective, the establishment of a new industrial structure based on the principle of comparative advantage can be expected to enhance growth by promoting the efficiency of resource allocation. in order for japan ’ s economy to achieve sustainable growth, it is vital to create investment opportunities and raise expected growth rates of economic entities through effective reforms of the economic structure. such efforts are essential in adapting to the medium - to long - term changes in economic environment, including increasing global competitive pressures, and the further aging of the population, and in maintaining japan ’ s economic strength. considering the important role that the financial sector must play in the reforms of the economic structure, it will be necessary to continue implementing measures to stabilize the japanese financial system, and increase domestic and overseas confidence in the system. at the same time, the financial system must be reorganized to enhance its functions and competitiveness, by improving the infrastructure in order to promote competition in accordance with the japanese “ big bang ” deregulation package.