but also spread over to major southern european countries, including spain and italy. in those countries, due to a rise in government bond yields, namely, a decline in government bond prices, financial institutions ’ assets have deteriorated, which has led to a rise in funding costs and instability of financial positions. as a result, financial conditions surrounding firms and households have worsened, posing pressure to suppress economic activity. such deterioration in the real economy and concern over the financial systems have been fed back to the fiscal problem through a decline in revenue and an increase in support for financial institutions. in such a way, in europe, a vicious cycle of public finance, the financial system, and the real economy has been at work, mainly in peripheral countries. therefore, the stagnation in the european economy has been protracted, and that has recently been spread to core countries, including germany, mainly in terms of business sentiment. the growth rate of the euro area economy has been negative for three consecutive quarters. in the meantime, the european authorities have been taking various policy measures. in july, a financial support measure to inject public funds into spanish financial institutions was compiled, and in the beginning of september, the european central bank ( ecb ) introduced a new program to purchase government bonds with a maturity of between one and three years, with no ex ante quantitative limits on the size of purchases. however, in starting purchases of government bonds, the ecb is going to make some conditions. for example, the issuer countries of bonds to be purchased will have to accept monitoring by the eu and the imf on the progress of fiscal consolidation. thanks to those various policy responses, stability has been maintained in interbank funding markets, and investors ’ risk aversion has abated somewhat in international financial and capital markets as a whole. the policy responses by the ecb and other policy authorities are indispensable for containing the vicious cycle of public finance, the financial system, and the real economy. however, in order to resolve the european debt problem fundamentally, it is necessary for countries whose fiscal sustainability has been a cause for concern to make some progress in meeting the challenges such as fiscal consolidation, strengthening medium - to long - term growth potential, and reinforcing the stability of the financial system. in addition, for europe as a whole, integrating fiscal policy and banking supervision of the nations is an unavoidable challenge. none of these challenges is easy to meet and thus it is likely that high uncertainty

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