dropped slightly against the u. s. dollar mainly due to the widening gap between the u. s. and japanese economic outlook. with regard to corporate finance, private banks are becoming more cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue - chip companies. the lending attitudes of financial institutions as perceived by firms are gradually becoming more severe. in corporate bonds and cp markets, the fund - raising conditions are generally favorable particularly for firms with high credit ratings as seen in a slight decline in cp issuance rates, but the issuing environment for those with low credit ratings continues to be severe on the whole. credit demand in the private sector continues to follow a downtrend mainly because firms are decreasing their business fixed investment while continuously reducing their debts. amid these developments, private banks ’ lending continues to decline at about 2 percent on a yearon - year basis. as for the amount outstanding of corporate bonds issued, the year - on - year growth rate has been slowing since the issuance of corporate bonds with low credit ratings is sluggish. the yearon - year growth rate of the amount outstanding of cp issued is declining, although the amount is still well above the previous year ’ s level. the year - on - year growth rate of monetary base has increased further. the year - on - year growth rate of money stock ( m2 + cds ) continues to be around three to four percent. funding costs for firms continue to be at extremely low levels on the whole, although market funding costs for some firms and the long - term prime lending rate are rising somewhat. overall, the recent financial environment remains extremely easy on the whole in terms of money market conditions and interest rate levels. however, the fund - raising conditions of firms with high credit risks, especially of small firms, are becoming severe as private banks and investors are becoming more cautious in taking credit risks against the background of a growing number of corporate bankruptcies. hence, the developments in the behavior of financial institutions and corporate financing need closer monitoring.

risk of a deflationary spiral. in a low - inflation environment, nominal interest rates are typically low and are thus more probable to be constrained by the zero bound. because nominal interest rates cannot be lowered below zero, real interest rates are likely to become higher than the optimal level for the economy when prices fall. that increases the risk of the economy falling into a vicious cycle of declining prices and deteriorating economic activity. in japan, such a risk has been a matter of strong concern since the end of the 1990s. at present, this risk has become low, since the japanese financial system has restored its stability and firms have now resolved excesses in production capacity, employment, and debt. on the other hand, when economic activity is picking up as a result of an unprecedented monetary easing against severe economic conditions with low inflation, a central bank is required to carry out monetary policy adroitly to adjust monetary accommodation by assessing upside risks. for example, since the inflation rate tends to exhibit strong inertia, even if the supply - demand conditions in the economy become tighter, the observed rate of inflation and inflation expectations are likely to remain anchored at a low level. in such a situation, maintaining an excessively accommodative monetary condition entails a risk of causing temporary overheating of the economy and a subsequent downturn, thereby resulting in larger swings in economic activity. the sensitivity of the rate of inflation to changes in the output gap has tended to become weaker not only in japan but also abroad in recent years, reflecting structural changes such as deregulation, advances in information and telecommunication technology, and the deepening of economic globalization. since prices are becoming less sensitive in the short term, central banks are required to take appropriate measures by examining medium - to long - term risks to the economy. this suggests the need to take a forward - looking approach in the conduct of monetary policy. vii. a stable economic and price environment a stable economic and price environment, once achieved by the appropriate conduct of monetary policy with a view to medium - to long - term risks, allows firms and households to make decisions more smoothly. as a result, the allocation of resources in the economy as a whole will be more efficient, and not only will short - term economic fluctuations be reduced but also the medium - to long - term growth path will be pushed up. looking back at real gdp trends in japan and the united states over the past 25 years or so, we see that economies often achieve higher growth when