bank of japan ’ s august report of recent economic and financial developments1 bank of japan, 11 august 2003. * * * the bank ’ s view economic activity remains virtually flat. with regard to final demand, business fixed investment is on a gradual recovery trend, albeit showing some fluctuations. meanwhile, private consumption continues to be weak, housing investment remains sluggish, and public investment is declining. net exports are virtually flat. industrial production continues to be basically level in response to these developments in final demand. as for the employment situation, the number of employees including non - regular employees such as temporary workers has almost stopped falling, and the pace of decline in wages has also slowed. however, the increase in the overtime hours worked and new job offers has come to a halt, and the number of regular employees continues to decline. thus household income still seems to be on a gradual downtrend on average, and the employment and income situation of households overall remains severe. turning to the economic outlook, it is fairly possible that the growth rate of overseas economies, especially that of the u. s. economy, will accelerate in the second half of this year. however, as for the u. s. economy, although improvements have been observed in some recent economic indicators, careful examination is still required to judge to what extent business fixed investment and employment will increase following these developments. the pace of economic expansion in east asia still remains slow compared to what it was a while ago, although there seem to be signs of recovery. in this situation, both exports and industrial production are projected to remain virtually flat for the immediate future. with respect to domestic demand, public investment is projected to follow a declining trend, and private consumption is likely to remain weak for some time since the employment and income situation is unlikely to improve markedly. meanwhile, the uptrend of business fixed investment is expected to become established in the period ahead, mainly in large manufacturing firms, whose investment has been thus far significantly restrained despite the recovery in their profits. however, the pace of increase in overall business investment is likely to remain modest, as long as uncertainty regarding a recovery in exports and production remains. overall, with the anticipation that the growth rate of overseas economies will accelerate in the second half of this year, the uptrend in exports and production will resume gradually, which in turn will initiate the momentum for an economic recovery in japan. however, a self - sustaining recovery in domestic demand is unlikely to gain momentum for some time, since

##ulating at the same time must in my view therefore be taken into account in the monetary policy decisions. a development that i described earlier can be the consequence if the expansion of demand and credit continue to increase at a high rate. the quantity of money and lending, especially to households, are for instance increasing at present at a rate which is probably not sustainable in the long term. the advantages of simple rules for decision - making are that they are easy to explain which can be especially important when establishing credibility for a low - inflation regime. with simple rules for action, it becomes clear what has guided monetary policy decisions. however, as i have shown, this does not necessarily result in optimal policy in every situation in the sense that macroeconomic stability and longer - term price stability are achieved. the difficulties in assessing when demand and the increase in lending are too strong are certainly considerable although this applies by and large to all the assessments we have to make.