bank of japan ’ s november review of monetary and economic trends in japan bank of japan, communication, 26 / 11 / 97. japan ’ s economic growth is decelerating further. although corporate profits, employment and income conditions continue to improve moderately, weak household expenditures since april have gradually begun to affect production, and corporate sentiment is also weakening. with respect to final demand, public - sector investment has been decreasing, and housing investment has also dropped significantly. personal consumption has continued to be weak on the whole, although the impact of the consumption tax hike has gradually begun to subside. on the other hand, net exports have continued to increase and business fixed investment has been rising moderately against the background of the increase in corporate profits. excessive inventories are seen in some industries. owing to weak final demand and inventory adjustments, industrial production has recently declined somewhat. the pace of improvement in employment and income conditions has slowed somewhat. prices have remained stable on the whole, with the exception of wholesale prices which have declined somewhat. the growth of monetary aggregates has recently slowed. personal consumption has continued to be weak on the whole. outlays for travel have been increasing moderately, and there are some signs in the sales of goods which suggest that the impact of the consumption tax hike has gradually begun to subside. however, sales at department stores and supermarkets have been below the previous year ’ s level, while passenger car sales have fallen below the level recorded in the second half of fiscal 1996 when sales surged, and have not even recovered the levels recorded before then. among leading indicators of business fixed investment, machinery orders have continued on an increasing trend since early 1997 after having surged in the second half of 1996. recently, however, orders from non - manufacturing firms have been weak. construction floor area has followed a moderate recovery trend, albeit with some fluctuations. with respect to housing investment, housing starts in terms of the seasonally - adjusted annual rate declined in july to 1. 24 million, the lowest level since september 1985, following the surge in demand in the second half of 1996 ahead of the consumption tax hike. housing starts have since remained weak at around 1. 3 - 1. 35 million. regarding public - sector investment, the amount of public works contracted has followed a decreasing trend reflecting the restrained budget for fiscal 1997. against the background of steady overseas demand and the yen ’ s depreciation to date, real exports remained high in the third quarter 1997, although they decreased somewhat from the second quarter when

the 2 percent target - - question the continuation of strong monetary easing. they claim, for example, that the level of interest rates should be adjusted by taking into consideration financial institutions'profits, among other factors. i will discuss the first opinion in detail later. let me first address the second opinion. at each mpm, the bank decides the guideline for market operations based on a comprehensive consideration of ( 1 ) the possible spillover effects on bank lending rates and issuance rates for corporate bonds, ( 2 ) the impact on economic activity, and ( 3 ) the impact on financial functioning, among other factors. as the bank stated in the comprehensive assessment : developments in economic activity and prices as well as policy effects since the introduction of qqe, released in september 2016, the impact on financial functioning should be taken into consideration when conducting monetary policy. in fact, it warrants attention that financial institutions'lending margins have been shrinking due, for example, to strong monetary easing and intensifying competition among banks. it should be noted, however, that since the 1990s, deposit and lending margins have been on a narrowing trend with low economic growth, and in that sense, this has long been a major challenge for financial institutions. in addition, it is an issue of urgent priority to take measures from a medium - to long - term perspective to respond to fintech and other technological innovations and to changes in the external environment, such as the decline in both population and the number of firms. structural problems - - which will have an impact on financial institutions'business environment - - and the effects of monetary easing should be analyzed and discussed independently of each other. at present, japan's economy has finally reached a state of being no longer in deflation, which is commonly defined as a sustained decline in prices. given this, it is necessary to ensure that the economy fully overcomes deflation. needless to say, the bank does not aim solely at price rises. it is emphasized in the joint statement by the government and the bank released in 2013 that the achievement of the price stability target of 2 percent should be accompanied by the strengthening of the growth potential of the economy. 2 in addition, in a speech delivered in may 2013, the month following the introduction of qqe, then deputy governor hiroshi nakaso said that " [ t ] he price stability target we aim at should be achieved in a virtuous cycle in which the real economy improves in a balanced manner, accompanied by