bank of japan ’ s may report of recent economic and financial developments1 bank of japan, may 21, 2001. * the bank ’ s view * * adjustments in economic activities have been under way, as production is declining reflecting a fall in exports. with regard to final demand, the recovery in private consumption continues to be weak as a whole, but there are somewhat positive signs in some indicators. housing investment is declining slightly. public investment is increasing. on the other hand, net exports ( real exports minus real imports ) continue to decrease reflecting a slowdown in overseas economies such as those of the u. s. and east asia. business fixed investment seems to be leveling off while the exporting conditions continue to deteriorate. industrial production is declining sharply, reflecting such developments in final demand and as excessive inventories of electronic parts and some materials are building up. the environment surrounding corporate profits is becoming more severe in line with the decline in exports and production, and business sentiment of firms is worsening particularly in manufacturing. income conditions of households have not yet deteriorated, but the decline in production is starting to affect the household sector mainly through the decrease in hours worked. as for the outlook, public investment is expected to continue increasing for the time being. net exports, however, are likely to continue decreasing for a while, reflecting the ongoing adjustments in overseas economies. business fixed investment is projected to peak out and then to start a downturn, as the effects from the implementation of a backlog of orders sustaining investment dissipates. in addition, inventory adjustments in goods such as electronic parts and materials will continue for the time being. industrial production, therefore, is expected to follow a declining trend. in these circumstances, corporate profits are likely to start decreasing and thus household income is expected to weaken gradually. overall, the adjustments are likely to continue for some time, mainly in production. meanwhile, it is generally thought that overseas economies, particularly the u. s., will follow a gradual recovery trend from the latter half of 2001. in this case, exports, helped also by the depreciation of the yen, are expected to underpin the economy once again. however, attention should still be paid to the possibility of a prolonged deceleration of overseas economies and the risk 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 rising, mainly reflecting the depreciation of the yen. domestic

too long or offering too wide a safety net through the lender - of - last - resort function – that inadvertently add momentum to such developments. we have, undoubtedly, made important progress in the various international fora, including the basel committee, of which nout wellink held the chair until his retirement. still, much work remains, for example the potential for the shadow banking sector to pick up those risks pushed out of the formal banking sector as a result of recent regulatory tightening. i hope that today ’ s discussions will give us fresh ideas on how to take on the many remaining challenges with regard to aligning incentives and practices of financial institutions with socially desirable outcomes. thank you for your kind attention. bis central bankers ’ speeches