a recovery in private demand. with regard to prices, import prices are declining somewhat due to the appreciation of the yen. domestic wholesale prices, notwithstanding the fall in prices of electric machinery, are flat mainly due to the rise in prices of petroleum and chemical products reflecting an increase in crude oil prices. consumer prices remain unchanged. corporate service prices are still falling slowly. as for the outlook, overall prices are likely to be flat for the time being despite the continued fall expected in this report was written based on data and information available when the bank of japan monetary policy meeting was held on december 17, 1999. the bank ’ s view on recent economic and financial developments, determined by the policy board at the monetary policy meeting held on december 17 as the basis of monetary policy decisions. prices of some machinery. this is because the supply - demand balance is improving gradually, as shown in the decline in inventories, and because the rise in crude oil prices to date will continue to be passed on to prices of other products for a while. however, attention should still be paid to the downward pressure on prices, as clear signs of a self - sustained recovery in private demand have not yet been observed and wages continue to fall. in the financial market, the overnight call rate has stayed at nearly zero, and financial institutions have been confident about the availability of overnight funds. the amount outstanding of funds in the call money market has increased slightly as transactions are becoming active with the year - end approaching. as for interest rates on term instruments, rates maturing beyond the year - end rose until the beginning of december mainly due to the influence of the year 2000 problem, but plunged subsequently as financial institutions made progress in securing year - end funds amid ample funds provision by the bank of japan. the japan premium has almost disappeared even for transactions maturing beyond the year - end. yields on long - term government bonds rose slightly to nearly 1. 9 percent from the middle of to late november reflecting improved confidence in the economy, but then fell back due to the yen ’ s appreciation and other factors, and are presently ranging between 1. 70 - 1. 75 percent. the yield spread between private bonds ( bank debentures and corporate bonds ) and government bonds continues narrowing, primarily that between private bonds with relatively low credit ratings and government bonds. stock prices, after rising in november against the background of improved confidence in the economy and firmness of u. s. stock prices, weakened slightly due to the strengthening of the yen and other

about a possible decline in stock prices triggers the aforementioned fallacy of composition. against such a backdrop, the bank has decided to begin exploring specifically the provision of subordinated loans to the banks that are subject to international capital standards. this measure aims at ensuring the smooth functioning of financial intermediation and the stability of japan ’ s financial system, by enabling japan ’ s banks to maintain sufficient capital bases even in severe financial and economic environments. by the measure taken by the bank, financial institutions are provided with three channels to raise capital ; ( 1 ) capital raising by financial institutions through markets, ( 2 ) capital raising based on the act on special measures for strengthening financial functions, ( 3 ) borrowing subordinated loans from the bank. subordinated loans by the bank will work effectively in conjunction with the other two measures to raise capital. in addition, providing such a safetynet measure would enhance the robustness of japan ’ s financial system and the functioning of financial intermediation even under the stressed conditions. for a central bank, this kind of direct provision of quasi - capital funds is an extremely extraordinary measure. however, considering the future stress scenario of the financial system, the bank has judged that, from the standpoint of a central bank, it is necessary to do its best to maintain the smooth functioning of financial intermediation and ensure the stability of the financial system even by conducting this extraordinary measure. the bank expects financial institutions to grasp the thinking behind the measure and to strive to maintain the smooth functioning of financial intermediation with further efforts of boosting capital bases. needless to say, risk management is extremely important for financial institutions, which cannot be emphasized too much. however, under the current circumstances, as i mentioned above, the surfacing of the risk stemming from the fallacy of composition should be avoided. to that end, it is important for the management of financial institutions, while conducting sound business operations, to boost capital bases with envisioning the consequences for japan's economy. the bank also expects financial institutions to pay due concern for the smooth communication with their client companies to convey business policies and lending stances. it is the basic premise that the stability of the financial system should be ensured in order to return to a sustainable economic growth path under price stability. from the standpoint of a central bank, the bank is determined to make its best effort to secure the stability of the financial system. we would appreciate your continued support and cooperation. thank you.