announce revised cpi figures based on a change of the base year from 2005 to 2010, and that as a result the year - on - year rate of change in the cpi may be revised downward. d. upside and downside risks to the baseline scenario of the outlook the baseline scenario i just presented is subject to various upside and downside risks, which warrant attention. first, there is a high degree of uncertainty – both on the upside and on the downside – about the effects of the earthquake on japan ’ s economy. in addition, if firms and households were to maintain an overly pessimistic view regarding the outlook for japan ’ s economy, domestic demand – such as business fixed investment and private consumption – could be restrained over the medium to long term, posing the risk of a decline in the expected growth rate of the economy. further, economic activity might turn out weaker than in the baseline scenario presented in the outlook report if – due to delays in the reconstruction of supply chains, for example – firms accelerate the shift of production and / or parts procurement overseas or the share of japanese products in overseas markets falls, or if the tense situation at the nuclear power plant and electricity supply constraints continue to linger. on the other hand, economic bis central bankers ’ speeches activity in japan might turn out stronger than projected if, due to the damage caused by the earthquake, firms strengthen efforts to establish new production sites in japan and reconfigure supply chains to diversify risks, make new investments aimed at promoting more efficient use of energy, or create new demand by developing new products in response to changes in lifestyles. furthermore, the earthquake has brought into focus a wide range of issues that have been left unaddressed for years. if this can be grasped as a chance to carry out fundamental reforms, then – i would like to think – it may present an opportunity for japan ’ s economy to emerge from its prolonged stagnation. the next risk factor concerns developments in overseas economies. for the u. s. and european economies, downside risks prevail : the u. s. economy is burdened by balancesheet adjustments in the household sector, while in europe sovereign risk problems are lingering in some peripheral countries such as greece, and these problems may act to reduce economic activity through disturbances in financial markets. on the other hand, emerging and commodity - exporting economies for the time being are likely to maintain relatively high growth led mainly by robust domestic demand. however, with concern increasing

outlook, although public investment is expected to increase, distinct narrowing in the output gap is hardly expected toward the first half of 1999, as private demand is likely to remain sluggish. furthermore, the decline in wages and the appreciation of the yen since autumn 1998 are likely to continue exerting downward pressure on prices. hence, prices are expected to remain on a downtrend. this report was written based on data and information available when the bank of japan monetary policy meeting was held on february 12, 1999. the bank ’ s view on recent economic and financial developments, determined by the policy board at the monetary policy meeting held on february 12, as the basis of monetary policy decisions. in the financial markets, the japan premium and euro - yen interest rates ( both on three - month contracts ) remain stable despite the approach of the fiscal year - end. this reflects the abatement of the market ’ s anxiety about liquidity and credit risks of japanese banks against the background of the bank of japan ’ s maintenance of a decisive stance on easy monetary policy as well as the formulation of the framework to restore the stability of japan ’ s financial system. yields on japanese government bonds have risen again reflecting the market ’ s concern over the prospective expansion of fiscal deficits. in the foreign exchange market, the trend has been toward a higher yen. stock prices continue to be weak. considering that these developments can be a hindrance to an economic recovery, their ensuing developments require close attention. with regard to corporate finance, credit demand for economic activities remains weak, as a result of the significant decrease in business fixed investment. firms ’ moves to increase their on - hand liquidity in the face of difficult fund - raising conditions are gradually settling down. although private banks have basically retained their cautious lending stance, they continue to actively utilize the credit guarantee system. as a result, the previously tightened credit conditions are easing somewhat. nevertheless, private banks and capital market participants are still cautious of corporate credit risk, and thus firms with relatively low credit ratings remain under severe fund - raising conditions. the situation continues to warrant careful monitoring, particularly with regard to how corporate finance develops toward the end of the fiscal year. * * *